I think it was US President Harry Truman who wanted a one-armed economist so he couldn’t say, “On the one hand, on the other hand …” Paul Donovan from UBS proved himself funnier, and more provocative, than one would expect from at economist during TradeTech.

Hmm, does that sound like damning with faint praise?

He sees causes for optimism in the economic outlook, but don’t get carried away.

“I am optimistic. Clearly not for the next two years, the next two years are awful…for the next couple of years we are going to be looking at a very weak economic outlook.”

That must mean in the long run things will look better. And was it Keynes who said in the long run we are all dead?

So many quotations, so little time.

Over the last 20 years the financial system has lowered risk, although not as intelligently as it thought, and that lowered the price of capital and added to the greater good. New regulation threatens to increase the cost of capital

“As you bring down risk you lower the cost of capital, productivity goes up and trend growth rises with it … Now we are adding risk back into the equation; result is higher cost of capital, less productivity, lower growth, and lower rate of investment.”

Large companies have reduced their debt levels, while smaller firms have increased their exposure. The need is for massive deleveraging to avoid a Japan scenario. He said countries need government spending, tax cuts and low interest rates.

“We need a transfer of wealth from savers to borrowers … this is what is necessary, what we need to see in this environment because people who have debt have to reduce the debt before we can normalise this economy.”
UK mortgage payments are going from £72 billion to 54 and by summer they will reach £35 billion. Handing UK mortgage payer £40 billion a year; this money will be saved, which brings the end game that much closer.

He expects a return to trend growth, but not until 2011.

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