Wednesday, January 30, 2008

Are we about to lose another Industry?

Given the current global financial crisis, which was created on Wall Street, is it possible that the mighty financial industry could go the way of the US manufacturing industries?

Take a trip back to the East coast and you will see the remnants of a huge industry that the US once dominated. Now only the buildings remain of the textile companies that once employed thousands. The mills were shuttered and the work sent abroad where cheaper labor and less restrictions on businesses allowed better profit margins.

Take another trip to the MidWest and you will see the people and cities that were devastated by the exodus of the auto industry. Competition has taken away an industry that was once dominated by the US and employed even more thousands.

It’s happened before to mighty industries. Who would have ever believed the auto industry would falter to this extent? Good paying jobs were lost forever.

Today, we are witnessing the struggles of yet another powerful industry. The financial services industry has managed to grow incredibly over the last 50 years. At one time, the US was the largest creditor nation in the world and it was only natural that the center of finance was located in New York where the largest suppliers of capital could be found.

That has all changed now. The US is a debtor nation and most of the new capital is coming from Asia and the Middle East. Read any paper and you will see that these new financiers are buying out America.

What has happened to cause this turn of events? Several things have contributed to the current situation.

For starters, government fiscal irresponsibility. Under Bush, the nation's debt has mushroomed. Secondly, the investment banks have gone from private ownership to public allowing risk to be transferred to shareholders.

As a result, the financial institutions were driven to find greater profits and take on riskier sources such as sub prime debt vehicles. In the frenzy, the US financial industry spread billions of dollars in losses around the world shattering it's standing with customers. You lose customers when you sell them junk, just like the auto industry lost its reputation for high quality cars.

Another factor is the devaluing dollar. In the past the dollar was the most stable currency around. It was the standard to measure everything against. Nearly everyone wanted to be paid in US dollars or have their money in US banks. That is no longer the case.

It is very possible that the financial industry, like manufacturing, will be yet another industry lost to foreign competition. In the end, the financial capital could move away, leaving New York a minor role to play and a shadow of it's former self!

Somehow, I don’t think interest rate cuts and tax refunds are the answer….


  1. As far as I understand the introduction of SarbOx also moved some of the investment banking business to London.

  2. That probably did result in moving some firms offshore. The SarbOx Act introduced more oversight, regulations, inspections and disciplining of accounting firms in response to the host of major accounting scandals that took place in early 2000-2 such as Enron, Aldephia, etc.

    If they chose to go to London, does that mean that the UK has more relaxed accounting regulations? I would not have expected that.