NEW YORK CITY-Even with 2008 long gone, the aftershocks of the last economic downturn are still reverberating through the streets of New York and London. “We are in the middle of a crisis,” said Peter Solomon, founder and chairman of the Peter J. Solomon Company LP at NYU’s Schack Institute of Real Estate’s “Keeping the Global City Competitive” London/New York Dialogue on Tuesday morning.
Solomon, a former investment banker with Lehman Brothers and former deputy mayor for economic policy under Mayor Edward I. Koch, spoke with Tony Travers, director of LSE London of the Greater London Group about the role of the two cities in the stabilization of the global economy during the "New York and London as World Financial Centers, Post Crisis and the Regulatory Environment" panel.
The news, however, was far from rosy. Solomon warned that further declines in the financial services sector are imminent due to its diminished role as an economic engine for New York City and the state. “The banking system is not strong,” Solomon said. “It is extraordinarily weak, undercapitalized and it is going to get worse until the bad loans are taken off the balance sheets.”
Solomon explained that education and healthcare are slowly replacing financial services as the top job creator in New York, which he said could have “a disastrous effect” on the local property tax base due to the losses in revenue. “This has a lot of implications in the city and state because wages in education and healthcare are materially less,” he says, noting that between September of 2008 and 2009, New York City lost 106,300 jobs, 75% of which were financial services related, and the state lost 265,200 jobs, 43% of which were in the financial sector.
And while 9% of the state’s economy and 13% of the city’s employment base is related to finance, Solomon said jobs will eventually leave the financial community, which will have negative impacts on the city budget and the region as a whole. “It is not only an employment issue, but the percent of revenue for the state and city can have a material impact,” he added. “The cuts you are beginning to read about will accelerate. In fact, the banking system in the United States, particularly in New York, has been very reluctant to cut people.”
But after the demise of Glass Steagall, the failure of Gramm Leach Bliley and the collapse of the US banking system in 2007, Solomon explained that much of the pain will take another 10 years before it gets completely straightened out. Some of the fixes will take place through various regulations and new transparency measures, like the regulation of derivatives and other risky investments through the Dodd-Frank Act.
At the same time, Solomon said the Volcker Rule, which prohibits proprietary trading, is “an irrelevancy” to the financial crisis. “It was a desperate attempt by the President was to put in something that sounds dramatic,” he said, noting that in the first three quarters of 2010, 18% of Goldman Sachs’ total revenue was from proprietary trading. “If Goldman and these other firms take proprietary trading out of New York City and out of New York State, it will further effect our employment in the state,” he added, which he described as a double-edged sword. “It is good for the world, but it is probably bad for us. It is an absolute problem of good public policy and a difficult step for the city and state of New York.”
On the London side, Travers took a more optimistic approach and said the banking crisis is more of “an existential challenge” to the global economy. “There will be a need for capital to help the growth across the planet,” he said. The remaining question is: where,” noting growth in emerging markets like Hong Kong and Mumbai.
Travers also cited a need for both London and New York to improve infrastructure despite tax and spending constraints to help boost global competitiveness. “I have realized that as during a boom, it is always possible to see things going up, however, there is always the symmetrical risk of during a slump or a period of austerity to see only bad news,” he said. “But I think it would be na
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