How Do Financial Markets Behave in an Increasingly Globalized World?

James Healey, CEO of the investment advisory firm Capra Ibex Advisors, began his presentation by citing Hippocrates: “Desperate times call for desperate measures.”

But despite this woeful statement, Healey and fellow panelists were markedly more optimistic about world financial markets.

“There’s good news and bad news,” said Healey. “But on the whole, I think it’s very, very good news."

Healey’s remarks came at a September 21 panel  on “The Globalization of Financial Markets: China, The Fed, and Future Policy Options.” The event, sponsored by the Center on Global Economic Governance, the SIPA Finance Society, and the International Finance and Economic Policy concentration, also welcomed financial experts Leah Zell of Lizard Investors LLC and Sadeq Sayeed of Metage Capital Limited. CGEG director Jan Svejnar served as moderator.

Zell’s presentation focused on structural issues within the Chinese economy, and specifically its recent slowdown.

“China’s challenges are not new, but rather embedded in their political-economic model, which for lack of a better term, I’m going to call authoritarian capitalism,” Zell said.

She said the financial sector has been a lever through which Chinese leaders maintained the power of the Communist party—calling the financial market’s “the Party’s piggy bank”—and so is skeptical as to whether they will follow through on necessary reforms in the wake of the economic downturn.

“Those who are in charge of fixing the problems have also been the beneficiaries,” she said.

Zell stressed that it was necessary for China to quit “starving private enterprise of necessary growth capital” in favor of state-owned businesses, and to liberalize their financial markets.

“One of the consequences of this summer’s turmoil is that there’s much less confidence in the official Chinese GDP statistics,” said Zell while noting that it makes the environment that much less hospitable to foreign investors in turn.

Such investments are key to building up not only China’s economy, but the world’s.

“The global linkages that did not exist a generation ago mean that China’s issues today have spillover effects on economies and financial markets worldwide,” she said.

But despite her concerns, Zell added on an upbeat note about the future of China.

“Capital flows to those countries and sectors that can embrace and implement structural change. I would place my money on a gradual retreat from globalization in favor of domestically-oriented value creation both in China and abroad.”

Healey was similarly optimistic about the capacity for institutional change in his discussion of the United States Federal Reserve. He said that thanks to the actions of the Fed after the 2008 financial crisis, “the U.S. has evolved a great deal, mainly for the better… I think it’s night and day in terms of [banks’] ability to withstand a shock.”

Presenting a plethora of economic indicators, Healey made clear that the U.S. economy has improved since 2008, thanks mostly to the 25 basis points federal funds rate.

Though the Fed is tasked with the dual mandate of encouring employment and economic growth while also managing inflation, Healey suggested that inflation weighed more heavily on the recent decision by Fed chair Janet Yellen not to raise interest rates. Factors like a lack of wage pressure in the economy, currency impacts abroad, and the price of oil also impacted the decision, he said.

“It would behoove the Fed to normalize rates to avoid distortions,” he added, citing the risk of privileging borrowers over savers, who are more likely to overstretch their capacity.

In his talk, Sadeq Sayeed attempted to synthesize the first two presenters, drawing a connection between what happened in China, how the Fed behaves, and how the markets react to that behavior.

“To what extent are policymakers reacting to markets, and to what extents are markets reacting to how policymakers react to markets?,” he asked.

“It’s not as circular as you might think.” Sayeed added. “Markets trade securities on an assumption that policymakers will behave in certain way. Policymakers ought to know that markets behave on that assumption.”

Despite the consistent decline in Chinese growth rates for the past year, investors assumed that China’s leaders could successfully manage the situation, and so continued to direct their investment there. But when China unexpectedly devalued its currency, Sayeed noted, it was as if you were playing chess, and the knight of all of a sudden no longer acted like a knight.

“You’d have to take a long time to consider your next move,” Sayeed said.

This foresight is essential for preventing economic downturns from happening, Sayeed said. Without it, “it’s very likely we would make important mistakes in anticipating what the future behavior of the economy will look like,” he noted. “Of course, if one were able to foresee a market crash, we’d all be much richer than we are,” he added.

— Lindsay Fuller MPA ’16

Pictured (from left): Jan Svejnar, Sames Healey, Sadeq Sayeed, Leah Zell

Panel discussion featuring Jan Svejnar, Sames Healey, Sadeq Sayeed and Leah Zell considers China, the Federal Reserve, and the future of monetary policymaking.