Monday, March 21, 2005

Making Houston a global financial hub

An interesting Business Week article based on a Federal Reserve study claims that the rapidly growing US trade deficit may not be as bad a deal as we thought. Their basic argument is that there is a global glut of savings that is being invested in the US, which makes our trade deficit look a lot worse than it really is. Why are foreigners saving so much and why is it coming to the US? They mention the aging and anemic European and Japanese economies with few attractive investments as a primary reason. I would personally add a few others:
  • High consumption taxes abroad, like VAT and sales taxes, that encourage savings (vs. more focus on income taxes here).
  • Well-regulated and safe US securities markets, especially with the addition of new Sarbanes-Oxley regulations (which some believe go too far, but that's another story).
  • Globalization has made American companies into global companies, so investing here is really like investing in their home country, with the added benefits of diversification and the safe/mature securities markets.

This raises the interesting possibility of the US being the financial intermediary for the world. It's an extremely attractive "export" industry for the US, with financial companies accounting for almost a third of S&P500 profits (i.e. it's a very profitable industry, so dominating it globally is more lucrative than dominating something like basic manufacturing or call centers).

At this point you're probably wondering, "What the heck does this have to do with Houston?" Well, obviously it bodes very well for the future of New York City as the financial capital of the world, and financial industry jobs tend to pay very well and inject wonderful vitality into a local economy. Houston's opportunity? To be not just a local center for physical and financial energy trading, but a global one. Chicago managed to get the agricultural commodity trading markets away from New York, and we need to get focused on owning the energy trading markets. Sure, the Enron implosion was a blow, but New York and Chicago have certainly had plenty of financial scandals in their past and did not lose their financial-center status.

The Chronicle recently ran an article on the return of energy trading in Houston, but more needs to be done to nurture this industry cluster like we nurture the physical energy industry and the bio/nanotech industries. Just as a serious securities or investment banking professional knows they need to be in New York, we need to create an environment where any serious energy trader or investment banker knows they need to be in Houston to get a real, intuitive feel for the market. There's a real risk that, while some trading will happen in Houston, much of the market will be dispersed geographically and in cyberspace. It could be too easy to say, "I've got an Internet-connected trading terminal, why do I need to be in Houston?" Organizations like the Greater Houston Partnership and the Houston Technology Center need to build more of the personal networking and event infrastructure that can't be duplicated online: conferences, luncheons, speakers, and training to build a deep talent pool. It might even make sense to create a high-profile exchange with a live trading floor (a little archaic, but it looks good on CNBC...).

Taking this industry for granted is a dangerous approach. The opportunity needs to be aggressively seized before it slips away from neglect.


At 3:28 PM, March 26, 2005, Blogger Tory Gattis said...

A few days later, I came across an interesting quote in a McKinsey report on the trade deficit:

"During the past decade, flows of private foreign savings into US securities have grown at an annual rate of 17 percent. That figure should reassure observers who worry about the growing dependence of the United States on foreign capital. In fact, we believe it is only natural that foreign savers should help finance the expansion of US multinational companies abroad, since those countries also benefit. The United States acts as the world's financial intermediary, gathering up and allocating global savings to companies that then invest them around the world."


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