Nouriel Roubini is not alone in declaring the "Anglo Saxon" model to have failed. Chris Dillow disagrees. He shows that, judging from GDP numbers, the "Anglo Saxon" countries are not doing worse than the others, so news of the instability and death of the Anglo Saxon model may be exaggerated.
But it all depends on how you define "Anglo Saxon". Chris defines it theoretically as "...lightly-regulated financial markets and high debt...". He defines it empirically as UK and US, in comparison to Japan and the Eurozone.
"Lightly-regulated" maybe, but "high debt" is the opposite of what "Anglo Saxon" used to mean, in past episodes of Anglo Saxon bashing. In fact, if we switch to a more traditional definition of "Anglo Saxon", the current crisis shows the stability of the Anglo Saxon model, and the failure of the "Continental" model.
Any financial system has to transfer temporary command over resources from lenders to borrowers, from savers to investors, from households to firms. At its simplest, the transfer can be direct, via a market, or indirect, via a financial intermediary.
The "Anglo Saxon model of finance" used to mean the first: households would lend directly to firms, by buying firms' equity and debt. The "Continental model of finance" used to mean the second: households would lend to banks, and banks would lend to firms. "Anglo Saxon" meant market-finance; "Continental" meant bank-finance. (This is slightly misleading, since bank-finance really means two markets instead of one: first the market for loans from households to banks; and second the market for loans from banks to firms.)
Defined as it used to be, it's the Anglo Saxon model which has low debt, and the Continental model which has high debt. Let me show why:
Suppose firms have $100 in assets. In the Anglo Saxon model, if firms have (say) a 50/50 debt/equity ratio, there is $50 in equity and $50 debt, both held by households. In the Continental model, for the same debt/equity ratio, that $50 debt is held by banks, which the bank finances by (say) $45 deposits (debt) from households. So the Continental model creates an additional $45 of gross debt. And if the bank holds part of the firms' equity as well, and finances it by deposits from households, the amount of gross debt increases still further. At the extreme, where all household savings are channeled via banks, the Continental system creates an additional $100 of gross debt.
So "Anglo Saxon" does not mean "high debt"; just the reverse.
High debt matters because debt can default, but equity cannot. Firms can default on their debt; banks can default on their debt. In the Anglo Saxon model, we worry about firms' default. In the Continental system, we worry about firms' default and banks' default.
In the current financial crisis, we are much more worried about banks' default than about firms' default. Banks are an essential feature of the Continental model of finance, not the Anglo Saxon model.
Bank failure, and the problems of high debt, mean the failure of the Continental model, and the stability of the Anglo Saxon model, as they used to be defined. The Continental model is failing. The problem with "Anglo Saxon" countries is that they imported too much of the Continental model: too much reliance on banks and debt, rather than markets and equity.
When critics used to complain about the short-termism of markets in the Anglo Saxon model and praised the long-sightedness of bank-finance in the Continental model, this is what they meant. Now the problem has changed, so critics have changed the definition of "Anglo Saxon".
The only stable long-term definition of "Anglo Saxon model of finance" is "whatever system I want to bash right now".
Yes, I am (mostly) Anglo Saxon. How did you guess?
"Anglo Saxon" does not mean high debt - just the reverse
Indeed, as we know from Monday, the difference between the Anglo Saxon and Continental models is that in the Anglo Saxon model, total debt is zero, while in the Continental model, total debt is...er, zero.
OK, you did say "gross debt".
I enjoyed this posting. Do Canadians also see themselves as Anglo Saxon? I think it's a classification my fellow Scots would often find reason to put themselves outside of.
This book helps put the debate in context:
"Used as payment and a medium of trade, food was the basis of the Anglo-Saxons' system of finance and administration"
I'll lend you a nice bowl of Scots porridge if you promise to invest it wisely in the Goldilocks economy and pay me back in Beaver Tails within ten years. I suggest you let it cool down first, because I hear "hot money" is a big problem in foreign investment.
Posted by: Leigh Caldwell | February 13, 2009 at 12:32 PM
Hi Leigh! Yes, I did have to catch myself, and say "gross debt".
Only a minority of Canadians would see themselves as Anglo Saxon: those of mostly English descent.
My Anglo-Saxon sister, nephew and niece will be visiting from England tomorrow. I plan to take them on the Rideau canal, and feed them beavertails: http://www.razzledazzlerecipes.com/canada/beaver-tails.htm Much tastier than porridge!
Posted by: Nick Rowe | February 13, 2009 at 01:07 PM
I'm currently pushing the idea of narrow/limited banks. Wouldn't that qualify as a return to the Anglo-Saxon model?
Posted by: Don the libertarian Democrat | February 13, 2009 at 01:25 PM
Hi Don! Maybe. If I like it. I'll call it "Anglo Saxon". If not, I'll call it "Continental" ;-)
A narrow bank that has demand deposits as liabilities, and....government bonds (or something very safe and liquid) as assets? How are the rest of household savings going to be channeled to firms? Via stock markets (including mutual funds)? If so, then yes, that sounds "Anglo Saxon".
Narrow Banks...wasn't it Henry Simon(s?) who advocated that in the 1930's?
Posted by: Nick Rowe | February 13, 2009 at 01:44 PM
Don: yes, it was Henry Simons, but in the 1940's. And Milton Friedman seemed at least partly onside as well.
But if you want a really stable financial system, forget narrow bansk. Forget banks altogether. Firms finance their investment with 100% equity (stocks, shares, whatever, or preferred shares if you like). And households own only shares (possibly in a mutual fund). Households do not own demand deposits, but they hold currency and can write cheques on their brokerage accounts. No banks at all. Pure Anglo Saxon model, at its most extreme. Totally stable. Firms cannot default, because they have no debt, and banks cannot default, because there aren't any. (OK, there is a slight risk of default, or rather bouncing a cheque, if my stocks crash between my writing a cheque and it being cashed.)
Posted by: Nick Rowe | February 13, 2009 at 02:28 PM
Ethnic labels for political phenomena are usually kind of silly, anyway.
Posted by: Mandos | February 13, 2009 at 03:33 PM
Mandos: agreed. But it used to be roughly meaningful, in the past, under the old definition. The English-speaking countries did do more finance through the stock market than through banks, I think. About 15-20 years ago I had a map of the world, where the size of countries was weighted by stock market capitalisation. Germany and France were small islands off the coast of the UK. The rest of Asia was a small island off the coasts of Japan and Hong Kong. Wish I still had that map.
Posted by: Nick Rowe | February 13, 2009 at 04:04 PM
Nick:
1) This is very thought-provoking, Nick. Note, in line with your argument, that most EU Continental banks --- at any rate in West Europe --- turn out to be far more highly leveraged than American banks turn out to be. Britain, though, is an exception. Its banks are dangerously leveraged.
......
2)The evidence? There is, please note, a good comparison of the blatantly higher debt problems of EU Continental banks compared to the US on three categories: (i.) Short-term liabilities held by banks as a % of National Debt; (ii) Same liabilities as a percentage of GDP; and (iii.) And leverage ratio of liabilities/equity.
It turns out that the Continental banks --- including Switzerland and Iceland (not members of the EU but following the same regulatory rules and sources of business firms’ capital for investment) --- are far more dangerously exposed on all three categories. The US is low on all three. Britain, alas --- it should be expelled from the Anglo-Saxon country-label --- is very dangerously exposed too.
(Actually, the use of the label is strictly economic, and is continually applied on the Continent of Europe to single out Britain, the US, Australia, New Zealand, and yes, even Ireland (in the Eurozone, but with social spending as a percentage of GDP as low as in the US . . . not to mention its subsidies for multinational implants. As for Canada, in the days of Liberal Party hegemony --- especially with Quebec Prime Ministers --- its economy moved in social spending terms toward a EU welfare-state, though its labor markets, its business models, and its ways of raising capital for investment were largely dependent on equity markets. This has changed in the last few years, beginning even in the Liberal Party era --- but especially in the last few years, n’est-ce pas?)
………
3) The source of the comparisons was a New York Times piece back in October 2008. In case you aren’t a NY Times subscriber, Click here for a table that sets out the exposure of several banks in Europe and the US . . . but not all those that appeared in the NYT original article. If you click on the link right above the table, though, you’ll find the startling data.
I myself was astounded by the figures.. Even the frugal, cluck-clucking Germans --- convinced that Americans are flailing about in a muck of fathomless debt --- turn out to have banks that are dangerously indebted compared to American ones. (I imagine, without having the data, the Canadian banks are maybe even less exposed than their American counterparts.
Moreover, contrary to the pedaling-it-softly Continental governments and media --- who were claiming back in September and October that the US was falling into a deeper recession than they were --- their countries, as it happens, have also sunk deeper and faster into serious recession than us and you in Canada.
…..
4) One final point. The export-driven economies in the industrial world have fallen faster and deeper into serious recession as well . . . especially compared to the US (can’t say for sure about Canada). South Korea, Taiwan, Singapore, Japan, and Germany are now finding out just how perilously their GDP depended on exports as the main stimulus to GDP growth.
Japan’s and Germany’s domestic consumption, for instance, has hovered somewhere between 56-59% of GDP in this decade down through 2008, compared to the US’s unsustainable 72-73%. By contrast, about 27% of Germany’s domestic production derives from export-oriented firms (not to mention the supplier firms, very numerous if smaller in size), and Japan’s reached as high as 18% during the recovery after 2003 spurred mainly by rapid global growth and a big spurt in Japanese exports.
…..
5) Oh yes, lest we forget --- there's also China, even more dependent on export-oriented growth.
As it happens, its saving rate was an astonishingly high 50% in the mid- and later years of this decade, with its fast economic growth depended for 40% on export-oriented production and high and often unproductive domestic investment . . . and not just unproductive in many sectors, but also dangerously shoddy in infrastructure spending as well as spending on school buildings, and apartment and office buildings. (Net exports --- which include imports --- are, of course, much smaller; but still not negligible: just the contrary.)
Observe quickly in passing.
Chinese national income statistics are fraught with problems and maybe even fraud --- not least the actual inflationary rate applied by its GDP deflator to calculate actual GDP growth. Prime Minister Zhu Rongji started complaining back in the late 1990s that he and his central statistical bureau were receiving phony jacked-up data from all the regional governments. At one point he even tried to have the central statistical bureau by-pass the regional governments; send out their own agents to the provinces and local levels; and have them gather and analyze the data before sending it on. It turned out these bureaucrats from Beijing were hopelessly adrift in those regions, and the experiment was scrapped. Click here for a 2002 study.
…….
Michael Gordon, AKA, the buggy professor
Posted by: the buggy professor | February 14, 2009 at 06:16 PM
Michael: Thanks for your comment. You add good extra information and insights that are strongly complementary to my original post.
I agree with what you say (except on China, see below). "What's the German word for 'Schadenfreude'?" Did you see my post, a few weeks back, comparing Canada and the Eurozone? (Synopsis: Eurozone = Canada minus federal government). With the new of the last couple of days, I am feeling even more pessimistic for the Eurozone.
On China: I need to do a post on this. My current feeling, both on what ought to happen, and what will happen, is that China ought and will be the locomotive. Debt is the consequence of China saving and US FEd being forced to lower interest rates, and therefore dissaving. Now China is forced to dissave, and spend its assets. China stock prices already up strongly.
Posted by: Nick Rowe | February 14, 2009 at 10:15 PM
very interesting post.
I wasn't aware that there was this distinction, but now that I think about it I've had some experience with it. My grandfather started one of the first rock and roll radio stations in Canada in Ajax when he came over from england after the war. He refused to use any debt financing whatsoever, and relied solely on equity, even when it was detrimental to his business. We always figured it was some sort of eccentricity, but I guess he was just following this Anglo-Saxon model.
o/t, but I've still got copies of the original Beatles albums from the station with 80% of the titles scratched out with "DO NOT PLAY" written over. Too racy at the time, apparently.
Posted by: bob | February 15, 2009 at 10:43 AM
A bit of trivia: according to one of the too many documentaries I've watched over the internet, even the so-called "Anglo-Saxons" aren't. Genetic testing shows that 75% of the ancestry of the British and Irish populations is from a small group very early settlers who populated Britain shortly after the ice age, when Britain was still connected to the European mainland. In no region of the UK are less than 60% of the popuplation descended from this early population. The population of the UK & Ireland are most closely related to the populations of western France and northwestern Spain.
The later influxes of Celts, Anglo-Saxons, Danes, Normans, etc. only account for 25% of the ancestry of the British and Irish.
Posted by: Alex Plante | February 17, 2009 at 07:27 AM