The experts of the 1,850 strong Foresight Network from across the globe agree that much stricter regulation, along with new incentive structures, are the very least needed to start to counter the recession. Some members believe that, thereafter, a continuation of the existing monetarist approaches – led by an economically resurgent US after the banking bail-out – will eventually end the downturn. Most members, however, would put their faith in much more radical, globally-led approaches – based on Keynesian principles applied to a multi-polar (G20) world. These will, though, ultimately benefit all, by stimulating growth in the emerging nations; whilst introducing a fairer culture to those in the West.
SUMMARY OF FINDINGS
A couple of decades ago the financial industry landscape changed dramatically, as Margaret Thatcher and Ronald Reagan deregulated it. Over the next decades greed, coupled with government encouraged irresponsibility, led the banks to take ever more risks with their clients’ money. The result was the recent catastrophic crash. By the end of 2007, even before the crash came, our network’s 1,850 members were already debating the causes of it and the possible solutions to it. This paper summarises the 600 contributions which resulted.
A minority of members agreed with the leaders of the financial community – backed by the more conservative legislators – that what is needed is a bail out followed by much the same as before. The majority of members, though, agreed with public opinion in general – and government leaders around the world – that more radical solutions are needed. Both groups agree that the stricter regulation should be much more closely supervised by better managed regulators. Both also agree that incentives and bonuses need to be less aggressive.
The minority see this happening in a continuing (national) monetarist framework; right of centre. The majority looks to Keynesian inspired solutions, leading a general move to left of centre; though as yet detailed actions are unspecified. It also looks to international bodies, in particular the G20, to take the lead over national governments; though the IMF, having failed on all fronts, is seen as a busted flush.
It is important to understand the historical developments which led to the current crises, not least because the media – and politicians – have so tightly focused on what has happened in the past few months; as if the crises had emerged out of nowhere. Nothing could be further from the truth. The origins lie at least quarter of a century ago, a generation ago, which indicates how deep seated are the roots and how difficult it will be to dig them out.
In fact the powerful set of underlying drivers for change goes back even further. Where almost all the analyses of our current crises report events exclusively in terms of economic, and especially financial, drivers, the end of the last (20th) century already had become a tipping point for a number of other major drivers for change:
a) Post-Industrial – this is the continuing, dramatic shift in ‘industrial’ activity from hierarchical assembly lines to collegial offices; from manufacturing to services; and especially, in the context of this paper, to financial services.
b) IT Revolution – by the Millennium the dramatic impact of computerisation had already moved on; to support the emerging knowledge-economy. Fuelled by the Internet/Web, it soon became consolidated across business organisations in general; especially in financial services.
c) Post-Modern – this was the emergence of new lifestyles, in particular the emergence of individualism and its demands for the right to better lives for all; especially for women. This was one element which was though, in the shorter term, swamped by the boom-led opportunism of the elites; especially in the financial sector.
d) Growing Power of Emerging Nations -the long term US economic hegemony (and its philosophy of the property-owning democracy) has been challenged by a multi-polar world; and especially by China.
Any one of these drivers for change would potentially have posed problems for governments around the world. As was reported by think-tanks across the globe, at that time in the run-up to the Millennium, the fact that so many forces were coming together at the same time already posed a unique challenge to governments. It should be noted that they still hold potentially serious impacts for all of us, though the current focus on financial matters has distracted most of us.
Already obvious a decade ago, and reported at that time by a number of think tanks, a massive change in the distribution of global wealth and power was to be seen in the growing impact of the emerging nations; especially China. The evidence even then suggested that such nations, once rather derisively called the ‘third world’ but which account for more than 80% of the world’s population, would ultimately become the dominant economic and political force globally. In practice the early stages of this are to be seen in the reversal of fortunes between the two main players; where the US has moved from the world’s richest nation to its largest debtor, and conversely China – once one of the poorest – has become the world’s largest creditor. Not merely has this shifted the balance of power, creating a multi-polar world, but the resulting financial flows have significantly unbalanced global financial markets.
Despite all the protestations by the bankers, and the politicians, that the crises could not have been predicted, the impacts have in fact been predictable for some time. Thus, an especially well documented example of such a prediction can be found in a survey of 300 MBA students (http://futureobservatory.dyndns.org/7248.htm), published in academic journals a full ten years ago in 1998. The results from this group, who typically held middle management positions in large organisations, showed that two thirds of them already believed that there would eventually be an economic imbalance between the trading blocks (especially between those in the West versus those in the Far East). More significant, though, was that the same survey showed that a similar two thirds mentioned the possibility of economic collapse, predicting it would happen by 2020. We now know they were too optimistic in their dates, but at least they understood what might happen – a decade ahead of the event – where the highly-paid ‘masters of the universe’ in the financial organisations never saw it coming until their world collapsed around their ears!
As was reported at that time, in the late 1990s, this predicted collapse was perhaps a reflection of the dramatic degree to which economists themselves had already downgraded the power which they claimed to hold over the future of economic developments. When Keynesianism dominated economic theory it was generally accepted that governments (advised by wise economists) could intervene to control their national economies; and, indeed, they did so successfully for several decades. The immediate replacement, Monetarism, had soon fallen out of favour to be replaced, after a flirtation with exchange rates (cut short by the ERM fiasco), with a simple reliance on ‘market forces’; and a simple objective – of low rates of consumer-price-inflation, though not of asset-price-inflation which ultimately proved its undoing. Since Keynesianism had been abandoned, the main economic argument had been to the effect that governments could not intervene successfully; and much of the Nobel prize-winning theory of the time (including Rational Expectations) strove to prove, mathematically, this government impotence. As governments became mere bystanders at the economic events which determined their destiny, their economists, paradoxically (since they had initiated the process), also descended from power!
By that time, in the run up to the Millennium, economic theory faced immense difficulties in adapting to the different, often more complex, behaviour of the intangible services which were even then coming to dominate trade. Not least, where economic theory – perhaps correctly dubbed the ‘dismal science’ – still is typically concerned with the rational (price) mechanisms for sharing out the diminishing quantities of scarce (physical) resources, it offered few useful insights into an economy which had become based upon effectively unlimited (and, in economic terms, not quantifiable) resources which were quintessentially intangible, bought by consumers who were often less than (economically) rational in their decision-making.
It is important to note that, as economic theory became a sideshow to the main events, the practical impact of the various schools of theory on the wider world has been progressively limited in form to much simpler, bowdlerized measures. Thus the two camps are now more usually differentiated politically as interventionist (Keynes) versus free market (Friedman). Equally, the practical measures were oversimplified. Thus Keynesianism was ultimately simplified to the Philips ‘J’ Curve (showing a trade-off between inflation and unemployment). When this was proved to be empirically false it nearly destroyed Keynesianism. Equally, after the control of money supply (M1, M2, M3) was shown to be meaningless, and the subsequent focus on exchange rates (which has since driven the IMF) was seen as too narrow, the simplified measure then adopted by monetarists was interest rates. Again there was no real theoretical connection to the core theory, but for a decade or more it worked; especially when it received widespread approval by transferring ‘control’ to ‘independent’ central banks. Of course, as we now know, this latest measure has also failed. Not least the reluctance by the banks (as evidenced by LIBOR, for example) to follow the central banks showed its apparent success had largely been a matter of goodwill. In any case its eventual reduction to below 2% meant that any flexibility in application, and any possibility of using it to control an economy, largely disappeared.
More specifically in the current context, using as a justification the failure of the end of the (Keynesian) Bretton Woods system in the 1970s, by the year 2000 the financial markets were claimed – by Western governments at least – to be the embodiment of all that made free enterprise an all-conquering ideology. Indeed, in the context of the discussions about the US hegemony, there are those members of the Network who argue that an ‘American Empire’ is a contradiction in terms; it simply doesn’t exist – since the American Dream would not allow such a colonial approach. Alternatively, they argue that there is no ‘collapse’ (instead they call it a ‘hard landing’), with the US merely in a temporary cyclical lull before a period of renewal.
Another approach, also propounded by a minority, argues that the US may only experience a period of gentle relative decline (a ‘soft landing’). In any of these cases, typically adopted by those in the financial industries and right-wing politicians, their supporters will not even consider a collapse of the American Empire; mainly because they do not accept the very concept of collapse. Thus the issue may have failed to become mainstream, at least amongst the key players in the industry itself, precisely because that mainstream does not accept the premises involved; and any debate accordingly is still sidelined.
The majority of our members, however, did believe that there was a very real possibility of such collapse and they were very conscious of the real dangers that – without the correct global actions being taken, the current recession might develop into depression.
Beyond the traditional financial industries, the prevailing myth – of the American Dream – hid another growing industry: that of professional gambling on a global scale. Thus, at the extremes, the pensions of teachers were already being wagered alongside, at the other, the earnings of the multinationals. The scale of operations which the new IT technology allowed meant the resulting surges of money, micro-second by micro-second, backwards and forwards across three continents, came to dominate all money flows. The long term movements originating from the underlying activities that served the real business world, which still existed outside these electronic networks, were puny by comparison and were accordingly swamped. In the global money markets the speculative capital flows came to dominate even the operational flows of money which were needed to finance international trade.
Even more surprising, as was reported by some forecasters as long ago as the beginning of this 21st century, another significant development by then was of the new found freedom to arbitrage over time; ‘derivatives’. The importance of the market was no longer to be where it had previously stood; a rational, measured reflection of the net worth, for example, of quoted stocks and bonds. The new priority was to be on where it would be; albeit in just a few micro-seconds – in which short time the new computerised trading systems would be able to turn a profit. The blinkered focus came to be, in this way, always on trends and never on what underpinned them. All was relative, and nothing was absolute.
The nature of the new markets was, therefore, of vast capital flows surging towards perceived future changes; no longer constrained by any need to reflect actual events. The frequently used analogy of a casino was fully justified; where the obsessive preoccupation of the participants was with predicting how the other players would place their future bets. Keynes described this mentality as ‘animal spirits’. Students of poker might use other terms; and, indeed, Keynes also talked about such behaviour in terms of a financial casino. As mentioned earlier the obvious downside was the possibility of a global financial crash; then expected, by two thirds of individual managers, to occur before 2020 – as it has!
Against the slowly developing impacts of the basic drivers, the impacts of the faster moving financial elements have taken on much greater importance in recent years. The origin of this development, in particular, was the coming together of the fiscally conservative Thatcher government in the UK, and that of Reaganomics in the US, with the new theory emerging from the Chicago School; and from Milton Friedman in particular. The most controversial aspect of this was monetarist theory, though even then it was closer to a political agenda than an economic framework. As explained earlier, its naïve ideas (based on money supply, M1-M3, which ultimately proved unquantifiable) soon failed to work in real life. These basic theories have since had a chequered history; finally being reduced in practice to the simple use of interest rates to control inflation. However, more important was the less publicized adoption of the political philosophy that public ownership was bad and private ownership was good. This led to a spree of privatisation, which reduced the ability of governments to intervene in the economy. More important, in the current context, it also led to widespread moves to deregulate existing industries, in particular banks; which are at the root of the current crises.
However, even by the end of the 1970s, despite the emerging importance to the banks of IT networks, the functions of the banking system were much the same as they had been for decades. More important, they were at that time, for example by law in the UK, typically kept in separate groups:
1) Clearing – the high street banks, each branch ruled by its bank manager who knew all the key customers personally, saw their role as transmitting (clearing) money from one account to another. To a lesser extent they then used the slight amount of gearing they were allowed to lend operating capital to small business.
2) Mortgages – these were almost exclusively the province of the mutual building societies, connecting savers with borrowers.
3) Merchant Banks – these provided large amounts of capital to large corporations, though these corporations typically generated most of their capital for operating (and some for expansion) internally from their profits.
4) Stock Markets – these were almost exclusively the province of the professional investor (including the pension funds) since brokers restricted their client lists.
As the 1970s progressed, though the domestic credit market had expanded rapidly (usually via the clearing banks and especially through their new credit card operations), banking was still strictly controlled.
The big change came after 1987, and the ‘Big Bang’, when Margaret Thatcher deregulated the UK banking industry and the US moved in much the same direction. Their roles then changed, not least as Wall Street bought its way into the City in the UK and the two set up the new global systems:
a) Merchant Banks – these greatly increased the range of their activities moving into domestic business and broking.
b) Clearing Banks – these too moved into new areas, setting up merchant banking and broking offshoots which (despite all the talk at the time of ‘Chinese Walls’) increasingly became integrated with their other businesses.
c) Mortgages – the larger building societies demutualised so that they also could operate in other markets, and switched their sourcing of funds to wholesale money markets which were easier to handle.
d) Stock Markets – these were opened up to much wider participation and expanded their product range to many more ‘instruments’ in the bond markets.
In many respects the most important result of these changes was that the previous rather staid management of the retail banks, who had focused on conservative practices of simple money management, was replaced by a dynamic breed of new entrepreneurs keen to improve profits by entering new markets; and in the process dramatically magnifying the risks involved. Indeed, risk itself was encouraged – indeed heavily promoted – by governments as the new core of successful macho management; and profit – by whatever means – became the only worthwhile measure of success. Even so, when in the 1980s deregulation allowed all the various functions, from retail banking to market speculation, to come together under the same roof, there was much talk of ‘Chinese Walls’ which would keep them apart. There was, however, been much less talk about this in later years; and the actual outcome was too often full integration. Even worse, where banks’ balance sheets were once strictly monitored, their new ability to move funds off balance sheet – as became fashionable in many financial organizations in general, enhanced not least in the case of banks via derivatives – allowed them to avoid such scrutiny. Hidden behind such devices, the vast new dealing rooms were betting clients’ money on ever more risky investments, making ever more profits for their investors and management (and the sales personnel in the dealing rooms themselves) while not alerting their clients to the new risks they would carry. It is easy to see how complex the bank’s dealings became once they crossed these boundaries.
Over the next decades the prevailing political thrust for ever greater profit levels meant the banks were forced, by their owners (including pension funds and trusts), to increase profit by moving into financial trading. This was riskier, but was much more profitable than their traditional retail/wholesale businesses. Unnoticed, it was also beyond the bankers existing experience (since such trading had previously not been allowed for retail banks). However, governments in the US, and especially in the UK, found this new activity attractive, since it painlessly grew a new sector of the economy; which, for example, eventually reached something like 25% in the UK – by itself accounting for almost all of the UK’s growth over the previous decade.
Despite the disagreeable experience of the recession in the early 90’s, the lessons of this were not learnt. Indeed, the seeds of the current crisis were soon in place again, and these were then exacerbated by the banks move into sub-prime debt. Their interest in the sub-prime markets was, indeed, borne out of the seeds of that (1990’s) recession, when many people lost their homes. The resulting political theory said that they ought to be given another chance, only this time the banks would shift the risk almost entirely to the borrower and simultaneously charge higher rates of interest. On paper this sounded too good to be true; and it was. Thus, regrettably, it once again presumed a rising market as so many adventurous banking products have. It took no account of the impact on ordinary people of once again being in debt during another recession, nor did it consider the reputational risk to the lender of being blamed for doing it to their customers once again.
Accordingly, it took just five years for financial institutions to again open the doors to reckless lending. Before the 1990’s recession loans had been made at up to 110% of value, income multiples often extended to 4-5 times of joint salary, self-certification of income encouraged. Having learnt a painful lesson, during the early 90’s banks returned to more normal policies; restricting loans to no more than 90-95%, reducing multiples to around 3 times and eliminating self-certification. But, as the painful memories faded, the market again loosened the reins. As a result in the 2000s we saw the return to more than 5 times income, self-certification and worse, up to 135% loan to value.
Underlying these moves, a herd instinct can be seen in banking; borne out of fear (“I won’t make my bonus if I don’t follow”) and greed (“I can make a bigger bonus if I take some risks that won’t fall until I’m gone”). In addition, banking became so complex that very few people really understood the systems; otherwise systemic failure might have been avoided.
As a result, greed in terms of bonus payments, fear in terms of missing out on performance targets, and lack of due care in thinking through the consequences drove some institutions to the position they find themselves in today. Smarter boards kept their exposure low but others just let their executives run loose, as – in a particularly obvious example – was the case with some of the UK banks that had previously been mutuals. Not least, it was here the regulators and governments so clearly failed, preferring to let people apply for mortgages to live beyond their means. It wasn’t lack of data that caused this problem but an inability by those in authority to see the consequences from the clear signals presented to them.
Indeed, with the laudable intention of managing risk, the experts at these banks developed the use of ‘derivatives’ – especially of Credit Default Swaps (CDS) – to statistically protect them against one-off risks; though, unfortunately, not against the systemic risk which is at the core of the current global problems. These new instruments were, however, seized upon by traders, not to minimise risk but to offer a new product which would maximise profit; and, as such, they were used in a totally different way to those which they were designed for. The less obvious benefit to the financial institutions was that, where previously they had (for good reason) been strictly regulated, the new off-balance-sheet developments – which came to be seen as the shadow banking system – were opaque; and no potential regulators could see what was actually happening behind the scenes. This opacity, which was moreover also at the heart of the greatly increased number of hedge funds, hid activity from other banks – and hence the current lack of trust which is crippling the wholesale markets. All too often it hid the reality of the emerging threats from the individual banks themselves; which is why it is taking them so long to sort out their business affairs!
Almost overlooked, at the very centre of the credit crunch were the credit rating agencies (Standard & Poor etc). By legitimizing the banks’ risks, these were in truth at the very heart of the problem. The reason why almost nobody has pursued them was they were essentially men of straw. It simply was not worth suing them for bad advice, since in comparison with the losses being suffered they were worth very little indeed. Yet they were the policemen for the whole system, and the supposed real regulators never thought it worthwhile regulating them! If they had queried just a handful of such deals the crash would never have happened; but then neither would the rating agencies’ board members – along with those of their client banks – have made their own massive bonuses.
At the same time, governments found that they could painlessly increase growth in the economy by encouraging credit; which gave the electorate a wealthier feel without recourse to public funds. Accordingly, when the first boom (that of the new dot.com businesses) ran out of steam at the Millennium, Alan Greenspan rescued the markets by reducing the US interest rate to 1%; which was pretty close to free money. In the process he became the hero of the markets; and was celebrated, and his actions emulated, around the world.
The surprising fact was that, despite what should have been seen as the reality of the situation (that the monetary agenda was inherently regressive in its political impact), both the Clinton and Blair governments were so overcome by its easy route to riches they also supported the approach! Of course, the arrival of the Bush administration escalated these trends. Moreover, it can be argued that its profligate (neo-con) tax policies, and then its dramatic increase in military spending on two wars, further destabilised the financial balances globally.
The end result of all these financial gambles is the banking and economic crises which now dominate our lives.
The current crises are normally discussed in terms of financial and economic factors. However, some key factors impacting current developments are sociological in nature. In the run-up to the crash, for example, two key factors predominated. The financial rewards for bankers ensured they turned a blind eye to potential downsides, but beyond that a form of ‘groupthink’, on the largest scale possible, also blinded them to ideas coming from beyond the comfortable group to which they belonged. Indeed, anyone bringing unwelcome news from the world beyond the ‘City’ or Wall Street was inevitably to be seen as an enemy; often to be literally dismissed from their jobs. Pushing the inevitable breakdown back into the future, however, also led to a key example of ‘catastrophe theory’. Instead of a gradual breakdown, the undue optimism meant that – although the boom went on longer than it should – the crash when it came was precipitous.
When that crash came it was inflamed by the well-known phenomenon described by sociologists as the ‘Amplification Spiral’. Bad news is picked up by the media who inflate it in their reports. The population then reacts even more badly, and the situation deteriorates as the media inflate it even further. Where the target is the share prices on which the brokers place their daily bets, and where nobody has ever been able to accurately (and mathematically) explain price movements (even Keynes gave up and called it ‘animal spirits’), the impact is so much worse. The ultimate result is ‘Moral Panic’ where all those involved rush around – in total panic – like headless chickens; exactly as they have done. The only winners are the brokers who cynically bet on calamity; and – by shorting – are rewarded by making millions out of the panic!
Proposed solutions to the CURRENT ECONOMIC CRISES
We now move on to the main part of our, Foresight Network’s, discussion – with 600 separate individual contributions – and the summary of its recommendations on how the short-term problems may be overcome:
As mentioned earlier, in terms of the current banking crisis, the evidence from the contributions to the discussion shows that Foresight Network members, along with most other commentators, look to solutions initially based on better regulation of the financial industry in general. As yet, though, most think of the route to this being by some form of unspecified oversight. There is a consensus that self-regulation (and especially of the asymmetric incentive structures where managements profited but clients took the risks) was at the root of the immediate problems. There is also a strong feeling, shared by the population as a whole, that such damaging incentive structures should be banned in future. However, there is also a suggestion that the failure of the existing national regulatory authorities should rule them out from any similar regulatory role in future; unless this were rigorously supervised by trusted new global institutions. It is recognised, however, that in practice these national agencies are probably the only institutions which can still manage the recovery in the short term; though, as such, they should be subject to immediate limits with their (newly transparent) books open to inspection. Indeed, as mentioned by some of our members, one starting point might simply be to reinstate as many of the earlier regulations as possible.
Even so it was generally agreed the necessary transformation now has to be in a sense revolutionary in nature if it is to succeed. The problem then is in the short term it may then provoke instability. That this line of attack was already being taken on board by governments was a source of wonder to our members; and the possibility that, during the earlier part of the discussion, even a (Bush) Republican government (and a neocon one at that) had already been responsible for the largest nationalization program in history, was almost unbelievable – even if the Republicans have since been rowing back on their commitments from that time.
Previously much of the world, even including China, had looked to the US as the dominant leader in economic policy; and thence to its loudly broadcast political message of ‘freedom’, which was in reality code for free markets. Now that those free markets have in effect collapsed, the US message has been all but wiped out. Beyond that, the US will now be so busy sorting out its internal problems that it will have no time or resources for pursuing its dreams of hegemony. Indeed, where it will have to go – cap in hand – to the sovereign funds (especially China) to cover its position, it will now have to dance to their tune.
The most frequent practical suggestions concerned regulating the culture across the whole of the financial industries; by immediately moving from the previous high levels of asymmetric bonuses, typical of risk-driven sales cultures, to much lower levels of bonuses (preferably below 20%) and stock options targeted on long-term (3+ years) growth (with short-term gains capped), more suitable for a transparent resource-management culture. As already demanded of the better regulated financial service industries, all sales and back office staff, along with their management, should be required to undertake certificated training in order that they fully understand their new legal responsibilities.
However, it was pointed out that, so far at least, the people searching for the solution are the same as those who presided over the creation of the mess. That fact won’t be lost on non-US financial markets who will now seek to create a more multi-polar world and reduce its exposure to another US led banking crisis; to the great satisfaction of America’s enemies. Just as bad, where history has a way of repeating itself, because of the greed culture prevalent in some parts of banking and the complexity of its operations, the hugely powerful financial lobbies may still be able to ensure that they milk everything they can from this misfortune, regardless of who it hurts. On the other hand, it was optimistically pointed out by some members that the US might not be hit as badly, since it continues to have the world’s reserve currency; with global nations investing in the safest investments in the world – U.S. Treasury bonds.
A minority of members suggests that the basic approach should initially be to return as much as possible of the industry to basic utility banking; where the most exposed banks have moved most from this role. This means strictly separating conservative money transmission and simple prudent lending in the retail and wholesale sectors, where safety (neutral risk) is the prime consideration, from that of the potentially damaging speculative profit-making, which became so widespread after the 1980s deregulation. The former should once more be limited to something like the traditional (pre-1980s) form of utility banking; then to be seen in high street (clearing) banks as much as in global agencies – with risk additionally limited by wider application of Chapter 11 concepts. In this environment any bonuses should be only paid against exceptional (and safe) performance in traditional money management. In the special case of mortgages, which have become central to the philosophy of a property owning democracy, even stricter scrutiny should be mandatory; and where possible the institutions should once more be mutualised. At the same time, a domestic form of Chapter 11 might again offer a useful fall-back for failures.
In the short term context of the current crisis, the more potentially destructive aspects of market speculation came about where the new managers saw themselves as managing businesses, not banks, and expected to be judged by their increasingly leveraged (and off-balance-sheet) profits rather than as guardians of their clients money. The stock markets had always been seen as something of a casino. Now the whole area of financial markets took on the same character. The vast new dealing rooms were betting banking clients’ money on ever more risky investments, making ever more profits for their investors while not alerting clients to the new risks. This part of the business could perhaps best be quarantined as a more positive form of (stock-market-based) ‘bad bank’ where the as-yet-unknown elements of toxic debt can be traded. Like other forms of gambling, this should be subject to strictly prudent limits on any future credit-funded speculation; with penalties applied to delinquents (including fines and incarceration for the worst offenders who are guilty of culpable negligence).
In addition to banning potentially damaging (zero-sum) instruments, in particular ‘shorting’, the volatility of transactions in these speculative markets could productively be discouraged by the application of the Tobin tax; the receipts from which could be used in part to fund the new G20 institutions and in part development of the poorest nations. One other suggestion was of a debt allowance that is proportionate to fixed assets, above which a tax is levied on both individuals and companies. If a company or an individual borrows more than say 50% of net worth, a tax or other disincentive could come into play, either on it or those who lend to it.
It was also suggested that the degree of bad money in this form of bank which will almost inevitably have to be guaranteed by governments, as indeed it already has in the UK for example, might prove to be less than the media (moral) panic suggests; for the associated costs only arise if these loans are defaulted upon. If correctly structured, and not just subject to panic measures, the necessary investments from the public purse might ultimately prove profitable; when the underlying assets (based on carefully selected investments) are eventually sold. The real cost to governments, therefore, depends upon the prices paid for these ‘investments’; where all the advantage should be with the government rather than the cash-strapped banks. On the other hand, the bankers have so far been able to play an especially perverted form of the game of ‘chicken’; the essence of which is ‘heads we win’ or ‘tails we get a golden handshake’!
The good news, possibly the only good news at present, is that the current ‘depression’ is presenting the irresponsible few (or perhaps the majority) with a very strong lesson. It was interesting that, after the recession at the beginning of the 1990s, the culture did shift to a more responsible position; and indeed Tony Blair’s 1997 win could be seen as a culmination of that shift. Despite Blair’s caring society, however, the returning credit boom slowly won out. Our members hope that the current reversal can be consolidated before yet another boom destroys the lessons!
Some members went further, to bring the full weight of the law to bear on miscreants including:
1) Criminalizing of tax arbitrage and avoidance in tax havens, including those non-cooperative countries and territories black-listed by the US Treasury and many central banks.
2) Regulating and requiring full disclosure of hedge funds, private equity funds, sovereign wealth funds, credit derivatives and “dark pools” of capital. Harmonizing market rules to prevent arbitrage between major securities markets. Changing incentives toward long-term investment goals and limiting compensation by giving shareholders a voice on this and other social, environmental and governance issues now clearly material to stock valuations. Ensuring rating agencies should accept fees from investors, not issuers of securities.
3) Repealing Basel II rules which allowed banks to assess their own risks, the failure of which helped bring on the crisis. Raising capital adequacy and reserve ratios and reducing margins on all transactions. Leveraging standards on banks operating internationally are also needed.
These regulations are needed to re-balance the roles of private and public sectors now that governments have been forced to intervene using taxpayers’ money. The new rules, though, must be by international agreement lest market players skip from state to state “arbitraging” different jurisdictions and tax regimes. In particular, as mentioned above, the practice of ‘shorting’ should be severely restricted, or even made illegal as it is now in many jurisdictions, since it encourages anti-social behavior. Even the World Economic Forum in Davos in January found a consensus of both government and business leaders for such global-level agreements and standards. The UN Principles of Responsible Investment are calling for similar reforms. At last, this global financial crisis brings the opportunities discussed for decades to reform today’s global casino and restore finance to its vital but limited role in facilitating real production and innovation in the world’s real economies.
Members felt that, following the Chicago School/Monetarist drive for deregulation which culminated in Fukayama’s widely accepted boasts about the ‘End of History’, the positive impact of Bretton Woods has largely been lost. With it went the wider elements of Keynesianism, which emerged from the 1930s depression. Thus the hard-learned lessons of fiscal policy which underpinned the post-war boom have been forgotten, to be replaced by the credit-driven right to an unearned better future; as popularly promoted by monetarist governments. Even the post-war ideological power behind the UN and its agencies no longer exists to the same extent. The IMF in particular has lost its way, stultified by its post 1970s history of monetarism; and its effective abandonment of its duty to supervise global markets.
Despite this, the IMF paradoxically expects to see its power increasing. This is in some respects not unreasonable. It already handles the massive loans to countries, usually amongst the emerging economies, which need rescuing. It also has the biggest infra-structure and the most people who might be needed for the new work. There is just one problem detected by some of our members: it doesn’t even recognize that it has failed. The IMF doesn’t see it should have done something, anything, to defuse the financial crisis long ago, when it became obvious to the rest of us what was happening. It is now boasting that it did mention some worries a few years ago, but it doesn’t seem to have then done anything in response to those ‘worries’. It is, to put not too fine a point on it, smug! In any case, although supervision of the global financial economy is part of its remit, it does not seem to spend much time on this; acting, at best, as a disinterested spectator. For years, indeed, its role seemed to be doling out poor nations in trouble while demanding they follow a one-size-fits-all set of monetarist rules; in much the same way that in earlier time those miscreants entering the poor house had to obey dehumanizing regulations. Even the OECD seems to be locked into a similar time warp.
New cultures and ideas are, therefore, needed to robustly manage the new multi-polar global environment; but – apart from the recent emergence of G20 as a global power in its own right – the relevant institutions of the major Western governments, along with their international equivalents, are still largely saddled with the controversial monetarist ideologies of the 1980s. On the other hand, much to the surprise of members, an almost universal (global) consensus, supporting Keynesian approaches, emerged in just a few weeks; and the indications are that the April 2009 meeting of the G20 will also follow similar Keynesian inspired approaches.
However, we cannot wish new institutions into existence overnight. Our members thought the best solution, therefore, might be to create a new super regulator which abandons single models, such as that of the monetarists, to recognise all of the new competing macroeconomic models; including those of the Free-Market/US supporters, along with those of the Socialist/EU persuasion and the recently successful Market-Marxism/China model. This new level of flexibility is needed to effectively supervise and guide the actions of the existing, currently hide-bound, institutions so they may be changed to deal effectively with the new global realities – especially those driven by the growth in emerging markets. Initially at least, this new agency could comprise just a few key, highly talented, staff; where the quality of these, rather than the bureaucratic number of them, is what matters. However, given a positive degree of trust and reputation, they might still be able to command the actions of the existing global institutions.
A minority of views stressed that, at the same time, the UN and its institutions might – by persuading the Obama administration to withhold its veto – work to reintroduce a more principled approach to international affairs; so that these are not just guided by economic self-interest (and especially not fuelled by credit-based booms) but are Pareto-efficient in terms of the developing and undeveloped nations as well as underpinning long-term infra-structural investments. Such investments could include national electrical, transport and data infrastructures, as well as internationally coordinated development of space (needed to underpin some of the key solutions to the greenhouse crisis and one of the few genuinely global opportunities). In a similar vein, removing one element of uncertainty – where US debt overhangs global finances – it was suggested that a combination of the Dollar and Euro as the new reserve currency might be desirable; though others looked to strengthening national currencies – or even community based approaches – and a viral discussion supporting such moves to localism seems to be under way.
Taking the broadest possible view of macroeconomic theory, it is surprising that the overall debate has not greatly advanced since the bloodletting of the 1980s; by which time Marxist economics had long since been marginalized in the West. Even so, we are still faced with two broad groups of competing theory. On the one hand we have the Keynesians who dominated the field until the 1970s, with their management of aggregate demand. On the other we have since had those focusing on money supply, which have been to the fore since the 1980s. Now, with the credit-crunch recession the position has been reversed in a matter of months.
So what new measure might replace interest-rate management? One possible explanation for the underlying mechanism suggests that interest-rates might – rather than directly leading to any (scientifically explicable) economic impact – have operated as a form of shorthand used to agree a consensus on what future economic activity could be expected. An example of the new developments has been that the UK’s ‘budget’ has now been largely superseded by the ‘pre-budget report’, which is also meant as some form of statement for (consensus) agreement. One major problem, however, is such measures – whilst becoming widely accepted around the globe – are only valid at the national level. The workings of the international monitors, such as the IMF and OECD, regrettably are too closely linked to the previous (monetarist) consensus to be truly effective in this context; and indeed they have largely abandoned any element of supervision. This leaves the G20, which has suddenly emerged as the most powerful body, as possibly the best arena for these ‘measures’ (bringing in GDP growth and employment as well as interest and exchange rates) to be agreed. It is probably also the best forum where the still all-powerful international banks can be tamed by new regulation. Some members also suggested that GDP be redefined so it more accurately measures real progress
In general Foresight Network members’ views reflect those of the wider (national and international) forecaster community. There is strong support for a move to more Keynesian solutions, typically in terms of the widely proposed fiscal stimulus (with the highest possible multipliers and optimisation of long-run outcomes), whilst using lowered rates of interest to provide the monetary stimulus. Keynes especially stressed the importance of automatic stabilizers; in particular social payments to the unemployed – including free health services and related sickness benefits as well as direct unemployment benefits. These would ensure first that the individuals would not suffer too much; but they also mean the economy would not totally lose the purchasing power of these people. On the other hand, though there is mention of the positive impact of these automatic stabilizers, members have not necessarily looked to Keynes’ wider theories of management of aggregate demand; or of strengthening them by more progressive taxes (though President Obama is beginning to move down this rout, albeit from a very low starting point), higher social payments or wider penetration of pension schemes. However, they widely expect the April G20 meeting to successfully detail how these more general philosophies might be applied. Indeed, in fact though the first Communiqué from the G20 leaders was guarded and polite, it went further to clearly signal a new economic order. Thus, a new “Bretton Woods II process” was to be launched on April 2, 2009 in London. Agreements had already been reached, at its December 2008 meeting in Washington, on many needed reforms of the global financial system and the crises the lack of regulation and oversight, excessive greed, risk-taking and leverage have caused.
The European G20 leaders cited the need for new regulatory action to curb speculation, leverage, hedge funds, private pools of capital and derivatives such as the some $60 trillion of credit default swaps which played a key role in the turmoil. Meanwhile, China, Brazil, India, Russia, South Africa and other powerful members of the G-20 are also concerned with “a new international financial order that is fair, just, inclusive and orderly” as stated by China’s President Hu Jintao. On the table at the April 2009 meeting is to be fairer representation of voting power in the IMF, the World Bank and the WTO so as to reflect the new global reality that the USA is no longer the locomotive of the world economy. Indeed, most of today’s global GDP growth (a measure which probably underestimates the scale of the change) is now provided by China, India, Brazil and other emerging economies of the South. Against this the USA, the world’s largest debtor, controls 17% of the votes at the IMF, while China, the world’s largest creditor, controls only 3.66%.
At the other end of the spectrum, the 2009 report of the private Group of 30 elite financiers, chaired by former US Fed Chairman Paul Volcker, conservatively stuck to a familiar list of reforms of global financial architecture: more coordinated, transparent, international regulation, standards, governance and accounting practices, as well as limits on leverage, compensation and perverse incentives for risk-taking. However, this Group of 30 representatives from Citibank, Morgan Stanley, JP Morgan Chase, AIG, Merrill Lynch and other now-humbled firms, has been studying the explosion of exotic derivatives for some two decades but has offered little useful advice other than calling for clearinghouses for over-the-counter contracts such as credit default swaps.
In reality, an important underlying issue is how capitalism itself must evolve. It is widely believed that the US-led model of economic growth – as measured by money-denominated GDP, the so-called “Washington Consensus” (of free markets and trade, open capital accounts, floating currencies, privatization, all dominated by mostly un-regulated global financial markets) – has now clearly broken down. In fact the new G-20 demands for fairness go much further to include democratization as well as expanding the United Nations Security Council to include permanent membership for Brazil, Japan, India and important countries of the South, such as Indonesia and South Africa, and scrapping the veto still wielded by the old “permanent five” victors of World War II.
Above all, though, our members recognized large parts of the economy are now under public control; in the form of expanded services and recently also of nationalization (not least, against political dogma, of the banks), but also as the subjects of regulation. In particular, in Europe as a whole, some variant of socialism (or at least social democracy) is now to be found at the heart of government. It has often been said that socialism saved capitalism from Marxism, but it may now be that socialism in some form or another will save the rest of the world – but possibly not the US – from capitalism. The socialist web which, rather than right-wing feudalism, now holds our society together may be more robust than that which obtained in the 1930s.
Rather more interesting are the minority of our members’ views. These look to more radical approaches. Not least is the suggestion that, in order to reduce the uncertainty at the heart of the crisis, significantly rekindled levels of trust have to be generated by the emerging agencies, which are to be the new international moderators/regulators of economic/financial activity; ideally under the positive supervision of the G20. Where at the heart of many of the failures was the wholesale to retail deposit ratio, these new agencies should establish a system of key financial indicators and regulations that restrict gearing, and similar measures, and place limits on unsustainable growth. In addition they should tightly regulate the auditors and rating agencies which were also central to the failures. At the very least, any such new agencies clearly need to be untainted by the recent contagions which have affected the global financial markets. Below these, national equivalents (such as the central banks) should at least recognise the limitations of interest rate manipulation and widen their roles to reflect the more general objectives of government; especially employment and growth. Indeed, the arcane theories of simple monetarism have been abandoned surprisingly rapidly by most of our members, though a few still argue for their implementation to the exclusion of Keynesian solutions; and most of the rest are still vague about what ‘Keynesianism’ now means.
The G20 itself, but definitely not the IMF, is widely seen by members to be a positive choice to provide the new framework for these global services. It encompasses those nations which now largely drive the global financial system, and those who are emerging as the new tigers, but also includes representatives of those who are affected proportionately just as badly in the as yet undeveloped world. It is, however, small enough to avoid the gridlock which might bedevil any requirement to consider input from all 192 UN members. Rather than annual reports, to allow the necessary rapid response now needed to meet market movements in the Internet age its directorate should issue control reports/directives monthly, or more frequently, as currently do central banks. Such timeliness should be possible due to the advent of the Internet, which allows major contributors across the world to be brought together online day by day.
The use of the G20, as the prime active focus, should stimulate further development of international collaboration and regulation in the true spirit of Keynes and Bretton Woods. In particular the ‘insurance’ aspect meant to be undertaken by the IMF – against major financial failures – should be bolstered, and preferably replaced, by a much bigger (multi-trillion dollar) facility backed by G20 members.
At present all the key financial models, which depend on the use of lagging indicators, are not only late in detecting major changes – so that the level of the current recession/depression was reported six months or more late (meaning that responses were too little too late) – but their use in predicting future changes are at best erratic. Experience has, in fact, shown that leading indicators, using inputs from organisations such as Shaping Tomorrow Foresight and well-proven techniques such as Scenario Forecasting, may prove more effective in such circumstances.
A minority also suggested that we go further, so well-tried empirical sociological measures should also be used to underpin the more questionable economic theories. In particular those marketing concepts relating to the motivation of groups should also be used to help guide government policy. These might include examples such as the ‘Amplification Spiral’, which can lead to ‘Moral Panic’ (Keynes’, ‘Animal Spirits’) causing chaos in the markets, as has indeed happened, and ‘Groupthink’ which persuades an elite (the bankers) to adopt a culture which diverges dramatically from that of the wider population. More specifically, development of an empirical fusion of economic and sociological approaches (such as is exemplified in the ‘Hypothesis of Aggregated Expectations’) could productively be encouraged.
Reforming the Global Financial Architecture
Much as the 1929 crash reshaped global economics, not least through Keynesianism, the current disaster may reshape our own future. Before the 1990s there were two main bodies of theory; Western Market Economics (including Keynesianism and Monetarism), which explained private markets, and Marxist Economics, which explained the structures of economic society. The latter was destroyed by the fall of Stalinism – encapsulated in Fukayama’s boast about ‘The End of History’.
However, our members think the former may now also be about to destroy itself! So where does that leave us? First of all, in our haste to move on to new pastures, let us not neglect some of the lessons of these two destroyed pillars of economics. Adherents to one or another of these too often claim that it has to be all or nothing. In truth, most philosophies, even the most repugnant or silly, have some lessons to give us. Thus, market economics do give us some insight into markets, which will still represent a key exchange mechanism, and Marxist economics shed light on the structures (such those which are now destroying global finance) which underpin our lives.
It is argued by some members that fundamental changes in thinking now require a complete transformation in the system called capitalism – though this is no longer the capitalism envisioned by Smith in the 1750s; but the more predatory version we are seeing today, born in the US and replicated the world over. This newer system was based largely on a false premise that is at the core of market fundamentalism – that the market is free. Those arguing the most for this have in reality tilted the playing field in their favor through lobbying, subsidies of various sorts and manipulation of the regulators; even though they still call it free market economics. As systems dynamics might predict, those closest to core of this new capitalism are the least likely to see the dysfunction and have most vested in things remaining unchanged (or merely incrementally changed). True transformation will only come about if those in the center of the system feel enough pain to recognize the ‘disease’ they suffer from, much like the addict in denial. Perhaps this present debacle will bring on that pain.
In this context, our members seem to feel that the existing international institutions, most notably the IMF, are no longer suited to the global challenges facing them. Governed by a shared groupthink, located in ideologies which have replaced the general Keynesian ideas which powered Bretton Woods with purely monetary ones which have long since been overtaken by changes in the real world, they are too hidebound to serve the global economy; and especially to regulate the global financial markets. The same is true of their national equivalents and even many of the corporate multinationals, which have seemingly forgotten how to fund themselves from their day-to-day operations.
The long-term need, therefore, is to develop institutions – and in particular cultures – which will work to meet the moral, economic and organizational goals of the modern global economy; and not least to add some depth (including growth and employment targets) beyond the essentially barren single dimension of interest rates. Put more basically, the recent widespread commitment to management of the global economy by central bank interest rates alone has much in common with the story of the emperor’s new clothes; where someone has just called out his nakedness. More specifically, the foolish willingness of decision-makers to hand over control to complex computerised processes which they do not understand, rather than using their own commonsense, has wider lessons for government policy; not least in recognizing that ‘short cons’, such as the three card trick, are best countered by the simple philosophy that “If it seems too good to be true, it probably is!”
In this context the emergence of the G20, to overtake the G7/G8, is a major step forward. It is not beholden to history, and especially not to historical failures, and reflects the multi-polar world we now live in. Thus, it is much better placed to manage the new balance between the EU, China, and the US – especially in terms of the rapidly growing economic (and political) significance of the emerging nations which will soon represent most of the global economy. Fortunately, such is the degree of government desperation around the world, any new regulator which promises to untangle the global financial and economic systems is likely to be met with considerable goodwill. Optimistically, our members hope that this goodwill will be enough to get the job done and create the path to a better future for all parts of the globe.
On the other hand, our members – more pessimistically – thought it unlikely that the US will quietly acquiesce to changes in the global financial architecture that reduce its privileged position. True reform may, therefore, be unlikely without a major crisis of US hegemony and that seems unlikely at present. Our pessimistic guess is there will be a lot of talk, some fiddling with accounting rules and some extensions to the co-ordination of central bank activity: designed to strengthen not replace the existing order. The wild cards are, of course, Europe and China. They are both pursuing policies which might enable them to eventually “break-out” of dollar hegemony.
POSSIBLE TIPPING POINTS
The eventual outcome, in terms of timescales and impact, may depend upon a number of factors. The tipping points associated with the most important of these may be:
1) Positive agreement on the solutions – clearly the proposed solutions must be workable, though that will depend as much upon their psychological effect (especially as influenced by agreement across the G20) on the actors involved as on any quasi-theoretical backing.
2) Level of opposition and partisanship – beyond the actors most involved, the attitude of the various political groupings will be especially important; and probably is the biggest threat to a positive outcome in the short term. It already appears the traditional political opponents will try to opportunistically take advantage of the situation. How important their influence becomes, however, depends on how the wider public view their opposition. If the public are more realistic, about the threats, than partisan the opposition may be ineffective.
3) Level of trust in the solutions – indeed, to be most effective the solutions must be fully accepted by, and trusted by, the wider population.
4) Ability to change the banking/financial services culture – but, above all, those in the financial services industry, and most directly in banking, must accept and implement the new solutions. These must clearly include the new regulations, but – much more challenging – those involved must take on the new spirit as well as the letter of the law.
5) True amount of toxic debt – the biggest unknown is the real size of the overall exposure. If, pessimistically, this amounts to the many trillions of dollars some have reported then the whole financial system might still crash. If, more optimistically as our members believe, the actual amounts of the potential losses (once the assets have been realized) are significantly lower then recovery should start that much faster and, post-recovery, the economy will soon recover lost ground.
6) Short sharp shock or dead cat bounce – although still volatile, the prices of the key assets (on both the financial and housing markets) seem to be stabilizing. If they are actually coming close to the bottom of the market, or reasonably close to it, recovery might start soon. If, though, the apparent stability is merely a dead cat bounce and the markets continue downwards, then a much longer depression may result.
7) Trusted global decisions versus unpopular national ones – even where the promoters of local solutions are not trusted it may be that decisions taken at the global level – where partisanship may be less evident – will be trusted; as will the subsequent implementation of these at local level.
8) Development of bi-partisan cooperation across a multi-polar world – perhaps the most productive outcome could be the emergence of a genuinely workable set of global institutions; starting with a workable replacement for the IMF, or a radically changed IMF itself. But these could also be the basis for lead global bodies in other fields; or, at least, a radical revision of the UN Security Council – including removal of its vetoes.
9) Global cooperation or continuing hostility – there might be an even more important, though perhaps somewhat less likely, outcome. That might be the acceleration of a move to greater global cooperation; and eventually to global government of one form or another. However, as the US neo-cons showed, the reverse could happen despite all the best interests of the participants.
WHAT WILL HAPPEN AFTER THE DEPRESSION?
The current public discussions are focussed on surviving the short-term negative effects of the financial crises. The frantic ideas being promoted sometimes look like ‘grasping at straws’. As is perhaps to be expected in a ‘depression’, the context – the atmosphere which surrounds us – is overwhelmingly negative; indeed at best one of disaster recovery. Foresight Network members, on the other hand, believe we should also be positively looking further into the future; to see what will happen after what must be the inevitable recovery. The new opportunities which will then open up will offer an even better future. Moreover, the process of thinking about that better future should by itself help us to drag ourselves out of depression!
As we saw in the history sections, involved in the excitement of the current crises we have been so focused on our immediate economic futures we have overlooked the wider implications. If we look back to what happened in the 20th century the most important impacts of the 1920s/1930s were not economic. They were the earth shattering leverage that the financial crises had on the emerging socialist movements. Those in the US, under FDR, were important but benign; as were those in most of Europe, including the changes wrought by Labour in the UK. They are, to a large extent, still with us; though we often forget how they came about – and, in the US, the Republicans have since spent decades trying to reverse their impact; with some success over recent years. What was much more, disastrously, significant was the impact on the extreme socialist movements: Stalinism, hiding under the cloak of Marxism, at one extreme and Nazism, which we often forget was National Socialism, at the other. The fulcrum of the crash in the 1930s was the tipping point for both; and subsequently the loss of more than 100 million lives, and the impoverishment of many more, in World War II.
Underneath the current crisis, hidden by the credit crunch, are some of the most powerful drivers for change the world has ever seen. As listed in the ‘History Section’, these include; the continuing move to a post industrial world, especially in terms of the continuing IT/Knowledge Revolution; the increasing (economic and political) power of the emerging nations; the increasing empowerment of the individual, especially women, against the establishment; demographic and environmental changes; rapidly improving levels of education.
The evidence is that – despite the rapidly changing environment – this time the political scene is generally likely to be more benign, and less febrile, across the board; as was reported on the Futures Observatory website (http://futureobservatory.dyndns.org/2018.htm) which covered 25-year-ahead predictions at the Millennium. Indeed, most of the drivers reported at that time related to beneficial lifestyle changes rather than crippling political or economic forces.
Of the minority of predictions which were political in nature the most significant were those associated with globalization in its widest sense. In particular, was the emergence of new global groupings, exactly as has happened in our new multi-polar (G20) world. Where power primarily comes from population (and the associated GDP), the EU is already the most economically powerful Western grouping; though it is happy to hide this fact. But, above all, it is the new kid on the block, driven by 21st century philosophies. As such, its political/administrative structures are quite different from those of its members, which came from previous centuries. In particular, though, its growth strategy is based on a combination of internal growth combined with peaceful expansion of its borders.
Looking at the rest of the list of potential players, Russia has to be considered. But the problems there may not be those posed by its communist history but by the much earlier cultural structures derived from the 19th century ‘Boyar’ traditions. Thus there still is a massive gap between the oligarchs – and their apparatchiks – and the rest of the population (still the serfs).
Indonesia is often overlooked, but it could form the secular core of a massive Islamic block. Japan is probably too small to go it alone, but it is not clear which way it might jump; China or EU? That leaves China itself, whose advance to the world stage has been so rapid we were not even seriously discussing it a decade ago. But, as the Network’s discussions show, it may soon become the world leader. Its special importance, though, is its success, so far at least, in operating Western capitalism within a communist political/ social framework.
Overall the political framework underpinning the current crises is a positive one, potentially leading to a League of Nations solution rather than fascism. The only major political risk then (in 2000) was how well the US would cope with its loss of world leadership. In the 2000s, under Bush, it coped badly, and we now wait to see how the Obama administration fares; but the fact that even Bush failed to ignite a world war is reassuring. Overall, then, the new tipping point is unlikely to lead to a new world war, or to any truly disastrous outcomes. However, it still potentially remains a world-shattering tipping point
Taking our current predilections first, the most important prediction, most members believe, should be that for some time to come after the eventual recovery from our current crises we will experience a return to a positive economic future; as against the poor outcome of the 1930s. We may have lost ground, but growth will eventually return – as history tells us to expect (if we were not in a state of moral panic) – and, with that lost ground to make up, it will probably be faster than ever. Indeed, our main task in that context may be to remind those in the financial industries in general of the dangers we have previously found in any over-optimistic return to boom cultures.
By then, still at the centre of the crisis, most of the banks will have rid themselves of the largest part of their toxic debts and will be returning to their more traditionally conservative retail banking role. They will be subject to much tighter regulatory control, with international institutions more directly involved, so that a significant element of trust will have returned to the global financial system.
The other potentially good news is their speculative debts, including those involving derivatives, will by then have largely unwound and separated from mainline retail banking. As these debts are asset based, albeit currently of unknown value (though the various markets involved already seem to be close to bottoming out – though that could be a dead cat bounce), they will have some (perhaps significant) remaining value. Moreover, as governments’ stakes will include ownership of some of these, the public sector should begin to see an emerging profit from them. As interest rates should remain relatively low, and the global wholesale markets will once more be functioning, growth should be returning to most sectors of the economy; with government-encouraged infra-structural investments leading the way.
Perhaps the most important outcome of the crisis will be the shift in macroeconomic policies. The pre-eminence of monetary instruments, which dominated the global scene for several decades, has already been replaced with a return to Keynesian ideas; though it is not yet clear to what extent Keynesian solutions will dominate and to what extent new ideas will emerge. Even though the details of a resurgence of (FDR) socialist principles has yet to be worked out, it can already be predicted that a widespread ‘leftwards’ move in government philosophies across the globe will take place. More important, the associated controversies, the continuing battle between Keynes and Friedman, will stimulate the new approaches needed to handle the challenges posed by the ongoing developments of the IT revolution. In particular, the rise of mobile technology, social networking and the internet will all lend itself to the creation of alternative economic systems – and will create room for alternative or complementary currencies and creative and new economic value systems.
Broadly matching the different views of society in general, there are three main versions of the economic model (Marx vs. Keynes vs. Chicago School); though there is no reason that economic models should not be independent of other aspects of society. Again each has interesting ideas. The one which now is least understood in the West is Marxist Economics. Its great idea is that economics is heavily dependent on the structures in society; something that Western Economics does not even recognize. In practice the only structure its communist governments focused on was class; and that was too restrictive. Keynesianism probably offered the most balanced view. Following the current crises, perhaps the least rewarding are the ideas of the Chicago School, where monetarism ultimately proved to be ineffective, but no doubt even this can mined for useful ideas.
With the change in the fortunes of the competing macroeconomic theories, and especially the failure of the market-based micro-economic policies espoused by the financial institutions, business management practice will be able to return to the more pragmatic solutions developing in the 1990s. In particular, widening participation – encapsulated in the idea of the stakeholder economy – was at the heart of developments at the time. Not least there was much made of HRS (Human Resource Strategies) which were needed to address the predicted shortage of educated staff; which will still be the main limitation on growth.
Both Bill Clinton and Tony Blair committed us to this stakeholder development, as a key part of the social leg of their policies Against the predictions of that time, however, what actually emerged, in the 2000s, to dominate the parallel economic leg was an even more asymmetric shift in power and wealth to senior management and sales; especially in the financial sectors – a development for which we are now all paying. The possible reason for this was that both Bill Clinton and Tony Blair accepted (or turned a blind eye to) continuation of this shift (which had been started by Thatcher and Reagan). Thus they both allowed the economic/financial leg of the preceding philosophies to go unchecked; since, everyone then agreed, this was the cost-free solution to funding the social changes. Of course, the resulting Faustian solution proved to offer only illusory benefits. Having learned our lesson the hardest possible way, we can now get on with applying the social policies across the board; including to the economy as a whole.
Accordingly, a balanced economy may now emerge, with the best of both worlds – social values and market forces – enshrined once more in the type of mixed economy which had emerged before the 1980s reversed the pattern. The possibly happy accident of state intervention on a massive scale, in order to rescue the banks from their own foolishness, means that the balance has dramatically shifted from private enterprise, as the only virtuous path, to a widely accepted mixture of this with public control of key elements of the economy. This should allow governments to once more put into practice the principles of the stakeholder balance.
The objectives of organisations, aggressively focused on grossly inflated levels of high-risk profit, should be returning to a more balanced (more ethically attuned, Pareto optimal) participation by all members of society. At the other extreme, consumer attitudes will have been forcibly changed to a focus on savings rather than on credit. With the economy’s growth, sustained by the infra-structural/capital investments, emerging from the end of the crisis – and with the recovering value of the assets taken into public ownership – this reduction in consumer spending will generally be possible without slowing overall growth. It will, however, prove painful for the generation which has grown up in the credit boom; and which has grown used to living beyond its means.
The really big change in the distribution of global wealth, and power, is already to be seen in the growing impact of the emerging nations, especially China. Indeed, the evidence suggests such nations, once rather derisively called the ‘third world’ but which account for 80+% of the world’s population, will ultimately become the dominant economic and political force in global markets. It has long been claimed that there should be a convergence between nations. Quite simply, the poorest – with more to gain – will naturally continue to grow faster than the richest; and the gap between them will narrow. That should be good for all of us!
This paper, compiled by David Mercer, has been produced on behalf of the Shaping Tomorrow Foresight Network (http://shapingtomorrowmain.ning.com/). It summarizes 600 expert submissions to an online discussion by its 1,914 members; who include leading future thinkers, strategists, change agents and policy makers from commercial, not-for-profit and governmental organizations around the world as well as many directors and chief executives. The Network’s overall goals are to help members listen and learn from each other, anticipate change, explore next practice, find new opportunities to collaborate and to co-create the future. However, non-members, including those reviewing trends, innovation and intelligence, as well as marketers, long-range planners, and risk managers, together with others needing to know ‘what’s coming next’, also find the Network a valuable source of open foresight.
The Network has been specifically discussing the possible impacts of the global financial crash, since December 2007; explicitly in terms of the ‘Wall Street Crisis’ but also with reference to the ‘End of the US Empire’. Accordingly this paper summarizes around 600 contributions by members of the Foresight Network which resulted from these discussions. These contributions include, in particular, those from Hazel Henderson, John Renesch, Michael Jackson, Andrew Wynberg, Charles Brass, Chris Middleton, Cindy Frewen Wuellner, Craig Stevenson, Mike Tremblay, Jay Ogilvy, John J. Gottsman, John Trudgian, Kenneth Zimmerman, Manuel Fernandes, Marcus Anthony, Martin Kruse, Mordechai Ben-Menachem, Natalie Dian, Peter Bebb, Manuel Fernandes, Peter Roche, Samuel Souza, Saul Wainwright, Stephen Aguilar-Millan and Tom Atlee. The Foresight Network’s detailed discussions, across a range of subjects, can be found at: http://shapingtomorrowmain.ning.com/forum/
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