Chinese Shadow Banking System Crisis, Post-Steve Jobs US Leadership Chasm Indicate Storms Ahead

Shadow banking systems don't like the light shining their way. When someone cares about the handshake deal market, it's generally a sign that trouble is brewing. That's why a recent Financial Times post about a storm developing in China's shadow banking world is worth noting.

Kate Mackenzie's piece essentially reports on a Societe Generale report on the fragile state of the real Chinese economy. Essentially, according to Soc Gen economist Wei Yao, it's in tough shape, torn between stunting credit growth to "unworthy" companies while continuing to lend to the stronger firms. The analogy used in Soc Gen's report was fish vs. dragons. The ancient Romans might have characterized the distinction as between Christians and lions.

Telephone Booth, 3 a.m. Rahway, NJ
Photo by George Tice

Why should we care about this report? The Chinese economy is largely viewed as a key driver to lift the developed world from either its ongoing or upcoming recession. The Soc Gen report effectively throws cold water on Chinese businesses running into phone booths and collectively emerging as an economic Superman. Any other suggestions for growth? Europe? Russia? India? Brazil? Mars?

Of course, the American mainstream media have either referred to recession in the past tense or the future perfect tense. Right now, everything in the US has returned to a sort of false financial grooviness. If you're prosperous and don't have to sweat tepid business growth realities, then, yeah baby, the recession was a passing headache. For most Americans, however, contemporary truth is grimmer. The number of Americans on food stamps is at an historically high level. Small businesses in the Land of the Free are largely excluded from the credit markets. The housing market, outside of a handful of desirable, insanely expensive areas, seems reminiscent of shipwreck survivors hopefully clinging to floating debris. The feeling is "things will get better, won't they?"

The bewilderment at the heart of this economic conundrum has produced something of a "deer in the headlights" feeling at high fiscal and political policy levels in the United States. Now that we understand China won't -- and can't -- ride to the rescue, the lack of ideas at the top becomes an even greater cause for profound concern.

David Packard (left) and Bill Hewlett

Well, an obvious "way out" of the predicament is for American firms to make products people around the world want. The most prominent example of this path is Apple. I think that's one reason why so many people felt an emotional sense of loss at Steve Jobs' passing. He created things people wanted. The buzz about Apple had always been "what happens after Jobs?" In a larger sense, who in Silicon Valley, or anywhere else, would be able to hold the torch of tech innovation after Jobs died?  This was an issue that mattered to Jobs, as Wired noted in a recent piece on Apple's former CEO. He particularly admired the sensibilities of Bill Hewlett and David Packard. Jobs regarded HP as the standard bearer for tech firms, their standards and their values; his tenure at HP unquestionably shaped Jobs' own keen interest in developing Apple's corporate culture.

No one really knows who will take the torch Jobs held and in many ways inherited from Hewlett and Packard. That feeling of uncertainty informs part of the post-Jobs tech world and the uniquely American sense of optimism it embodies. That uneasy sensibility underpins much of the sentiment expressed about Jobs in the aftermath of his passing.

The ascent of dogmatic American political ideology, the moral bankruptcy of US business leadership, a diminishing zeal for invention, and the rise in the nearly unquestioned belief that the achievement of "comfort" is the greatest possible good, are all symptoms of an America in decline. The coming financial storm in China will impact the United States, and leave America with few options to address its own crisis.

Fasten your seat belts: it's going to be a bumpy ride.

Rogue Traders

A French court passed sentence today on so-called rogue trader Jerome Kerviel, whose unauthorized trades supposedly put the august French financial institution Societe Generale (Soc Gen) in jeopardy of financial collapse. The former trader was convicted of forgery, breach of trust, and unauthorized use of computer systems. He received a prison sentence and a fine of nearly five billion Euros. That's right -- billion.

The sentence, the fine, the accusation should be considered in light of Soc Gen's reputation as masterful derivative traders, skilled risk takers, and core members of the French power structure. It is extremely unlikely that an institution with a disposition toward firm control, such as Soc Gen, would have let a rogue trader run wild for a couple of years. When things were good for Soc Gen and its rogue, the bank made billions from his trades. When events challenged Soc Gen's business, Kerviel became a convenient fall guy.

The severe fine was precisely levied to send a message to French society: the elite can pretty much get away with anything. This warped ethic is not unique to France. Recently, a judge in the United States (clearly a rogue in his own way) compelled a mortgage company to produce appropriate documentation relating to foreclosures. The firm couldn't do it. The case expanded, and we now understand that the American mortgage business, already battered from the subprime catastrophe, has again displayed a breathtaking embrace of corrupt practices. A significant number of homeowners were booted from their homes, while the court system provided easy, no-questions-asked process that essentially mocked the rights of those whose homes were being foreclosed. Now, thanks to a "rogue" judge, that process has been temporarily halted, with members of Congress now asking the Department of Justice to investigate "irregularities" committed by Ally, J.P. Morgan Chase, and other firms.

The American housing disaster includes many elite institutions where "the best and the brightest" work. The episode should be a source of shame for those trained to lead. Instead, they have been absolutely brilliant at shamelessly exploiting retail customers while arrogantly harming the financial fabric of our country. However, the American elite will soon show their French peers that they, too, can find fall guys for their fiscal folly and their degradation of even minimal moral business standards. After all, people need to get the message that crime doesn't pay.