Falling investor confidence has and will cost us dear

This blog began 2007 with a comment on the fickle nature of investment in medical research.

Citing a recent Tufts University study on the pharmaceutical industry, I commented that rising development costs could not be the only cause for the high attrition rate in drug development. I wanted to turn the direction of causation around and suggest that pharma faces a problem with investor confidence.

After all, the increase in development cost is a long term trend in biomedicine, and the additional cost has been passed on to the consumer, i.e the sick. When an industry focuses so strongly on the risks of investment, is it not time to ask whether investment culture is itself in bad shape?

By July, that same investment culture made headline news when it collectively switched off interbank loans and other forms of short term commercial lending.
The results were immediate and visible across much of the globe; the 2007 liquidity crises was born.

The finger of blame pointed towards risky mortgages in the US. But problems in the mortgage sector cannot explain the ongoing calamity in the financial markets.
The numbers just don't support such a conclusion. So far, declared losses in the banking industry still fall short of the $300B mark that analysts estimate to be the losses for the sub prime mortgage sector.

When and if such losses are realized, $300B just happens to be the amount that banks made as profit in 2006. These kinds of losses shouldn't be a problem. Industries don't normally face mass annihilation when they wipe out the previous year's profit margin in losses.

To come full circle with my January blog, we can frame this situation as a problem in investor confidence and lending. Lenders are placing a high price on risk. Lending has dried up, and with that financial development comes the possibility of years of under-investment in all the industries upon which our prosperity depends.