ECONOMY

The troubling parallels between supply chains and securitisation

Supply chains updates

The writer is an adjunct lecturer at William & Mary

The 2008 US housing crisis revealed the shortcomings of securitisation. The opaque, highly complex, interdependent process that moved slices of Kentucky home loans to buyers such as municipalities in Norway was inherently fragile.

The extreme confidence that enabled it to exist in the first place inherently set it up for failure. When one conveyor belt in the system failed, the entire chain collapsed.

The pandemic era is now raising similar concerns about the just-in-time supply chain model. The shortage of semiconductors from Taiwan, the stranding of the enormous Ever Given in the Suez Canal, and now the dearth of 40-foot metal containers have sent tsunami-like waves through global production. For want of chips, the highly complex, interdependent system of US car production has been badly disrupted.

Overlooked in today’s discussion is the shared history of securitisation and just-in-time supply chain management. Both have their roots in the 1980s pivot towards maximising shareholder value.

Overnight 40 years ago, minimising capital and the use of one’s own balance sheet (while maximising efficiency and the use of others’ money) became requirements for banks and businesses alike.

Paired with advances in technology and the broader movement toward globalism, the securitisation and just-in-time supply chain models flourished. Goldman Sachs was as busy as FedEx as money and goods moved simultaneously overnight from one place to another.

Loans flew like car parts from one fast-moving conveyor belt to another amid parallel systems made up of highly specialised originators, aggregators, underwriters, insurers and brokers. Just as asset-backed securities pooled individual car loans, enormous ships pooled metal containers. In both models, component parts were aggregated as fast as possible and then dispersed around the globe.

Today, in response to shortages, businesses and even governments are shifting to what I call a “just-in-case” business model. They are stockpiling critical supplies, onshoring previously outsourced production and boosting inventories where possible. Just like the banks in the aftermath of the 2008 financial crisis, they are reversing course — cost, capital efficiency and the use of others’ balance sheets be damned.

And businesses are not alone. Consumers are responding, too. Homebuyers, for example, are now demanding oversized pantries. Having been caught short on basic needs early on in the pandemic, many are now keeping more on hand, just in case.

That everyone is addressing the vulnerability they have just experienced is hardly surprising. That is our natural response to traumatic events.

But today’s global production system is different from our financial system. There are no central banks that can quickly flood the market with semiconductors like monetary policymakers did with cash in the wake of the collapse of Lehman Brothers. Chips cannot just be pulled out of thin air. There are no systemic means to boost supply to quell fear and to keep a lid on cost increases.

And there are other important differences from a decade ago. Governments today are acting in a far more self-interested basis. As we have witnessed with Covid-19 vaccines, for example, it is increasingly every man for himself.

Moreover, the mood of the crowd itself has changed. Having already suffered the adverse consequences of the banking crisis, Main Street is in no mood to be the victim yet again of a system they believe unfairly enriched shareholders at their expense. Already, shortages and steep price increases are not being well-received.

If production strains begin to subside, and input supplies normalise, current fears should abate. Still, the return to a more just-in-case supply chain will be an inflationary headwind ahead. Businesses will feel little choice but to try to pass along the higher costs of lower efficiency to consumers.

Policymakers would be wise to keep this in mind. As recent history has shown, finance and industry move together. They are two sides of the same sentiment coin. What is ahead in supply chain management is all but certain to be mirrored by a more cautious financial system. If we are not careful a vicious spiral of rising consumer costs and shrinking credit availability could easily arise leading to further fears of shortages and even greater hoarding.

Much like we saw in the securitisation-driven mortgage market in 2008, what was once a world of overabundance could quickly turn to one of intense scarcity.

Unhedged — Markets, finance and strong opinion

Robert Armstrong dissects the most important market trends and discusses how Wall Street’s best minds respond to them. Sign up here to get the newsletter sent straight to your inbox every weekday

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