The message from this global financial crisis is loud and clear; the system that we currently have is flawed, susceptible to produce crises and prone to systemic risk.
As a first step, we will have to fully address the SYSTEMIC RISK and the accumulation of excesses in global the economy that tends to build up during the period of strong growth. The hope is that the market participants, the governments and the regulators around the world have learnt their lessons from the ongoing crisis and will take this as an opportunity to reconstruct the financial system and the way it operates. Although one could argue whether it is safe put your faith in the ability of the market, the governments or the regulators to fix the SYSTEMIC RISK issue. No doubt, they have bungled up in the past and they would probably do it again. But that is not the point. We all make mistakes and learn from it. So we have to give them the benefit of the doubt. I hope we are all done with the blame game. The regulators and politicians were pretty quick to put all the blame on the banks, the investors, the insurance folks, the rating agencies and everybody else but not themselves. How convenient.
Honestly speaking, we are all to blame for this financial crisis including the folks on the main street who happily leveraged themselves not worrying about the shortcomings. In fact some folks on the main street got very comfortable with the idea of living on borrowed money without having the ability or resources to meet their obligations. And the reason for that was simple they figured that was the norm.
In the immediate aftermath of the crisis some politicians are proposing the need for creating an early warning system and let the IMF be at the forefront of it. You know, one can’t help but wonder if it’s nothing more then a wishful thinking considering the fact that IMF itself didn’t see this CRISIS coming. Besides that it is no secret that IMF has screwed up in the past and one cannot with certainty say that they won’t slip-up again. And to expect that the ratings agencies or others won’t make mistakes going forward is probably nothing more then a wishful thinking. That’s the reality.
The economy goes through boom and bust cycles one where we see a decade or more of strong growth a.k.a BOOM TIME followed by a flat or negative growth a.k.a. DOOM TIME. Generally during the boom time the global economy tends to get obese without worrying too much about the excesses it has managed to accumulate. The excesses tend to clog the vital arteries connecting the global economy to the engine of growth. It also makes the market participants complacent about the risk and shortcomings hence the boom and bust cycles become a regular event. We have had Tech and Real Estate Bubble Burst. And now the Governments in the developed world as well as the developing world are busy creating a massive debt bubble through heavy government borrowings which has reached a breaking POINT and there are no guarantees that this bubble won’t burst.
What the ongoing CRISIS has taught us is that the current system is flawed and the time has probably come for us to start looking at ways to reconstruct and upgrade the whole financial system incorporating the realities of today’s world.
This CRISIS will probably be a game changer. Going forward the developing countries will ask for more influence, oversight and control over how the global economy is managed, supervised and operates. The developed countries will have to give away a lot of their influence and control over how the global economy is run. And the multilateral agencies including of the World Bank, IMF will have more representation from the developing world reflecting the reality of the changing world.
We live in a very interlinked world and this is why we need to create a system with cushions and additional growth engines that will complement each other and are able to absorb the systemic shock. The economy will work better if it has multiple engines of growth.
One of the ways to create multiple engines of growth could be through a Common market community (CMC) model. The common markets as a platform will drive growth by incentivising trade removing barriers and making inter-trade between the regional economies operating within the common market easier. The Common markets connected to the mainstream global economy would cushion and insulate the individual economies operating within the common market from a disruptive global economic downturn. It could also provide them a safety net to fall back on in a global recessionary environment.
The common markets may also work as a Distribution Network Operator (DNO) that will not only distribute growth to individual economies but also filter the harmful excesses making sure the vital arteries connecting the growth engines do not get clogged and the overall economy remains healthy.
We are already seeing a rapid increase in the number of regional and bilateral free trade agreements (FTAs) or preferential trade agreements (PTAs) being signed. According to the UNCTAD data the Intraregional trade in a number of regional blocs of developing countries has been growing faster than their extraregional trade. The common markets could be the obvious next step.
There is also ample historical evidence of regional trade. These trades were pretty robust worked well byandlarge resistant to the external disruptive forces without a single common currency or monetary union. So the common markets should work and going forward it will add value.
Besides creating multiple engines of growth through a CMC model, we will also need tools that will allow us to shed the excesses accumulated during the boom time without us having to go through the PAIN of Recession or Depression. The economy needs a growth that is sustainable. A growth that can be managed, supervised and where an excess can easily be removed.
The recent approval by European Commission of an enhanced European financial supervisory framework based on two new pillars: a European Systemic Risk Council (ESRC) which would monitor and assess the risks to the stability of the financial system as a whole (“macro-prudential supervision”), and a European System of Financial Supervisors (ESFS) consisting of a robust network of national financial supervisors working in tandem with new European Supervisory Authorities (“micro-prudential supervision”) is probably a step in the right direction. A good oversight and smart regulation should be welcomed. The concern is that going forward the policy makers could burden the system with excessive regulation which could have detrimental effect.
The central banks, the government agencies and the market participants will have to get better at spotting the excesses building up in the economy or particular sector in the economy. The Central Banks will also have to widen their target range and may need to get more proactive. The idea is to create a framework which could be used to quickly identify the excesses building up in a particular or specific sector of the overall economy and to remove them by following a swift course of action before they start clogging the vital arteries connecting the global economy. This can be achieved if the central banks, the regulators, the ratings agencies and others get more proactive in monitoring, supervising and managing the global economy. All the parties with vested interest will have to work together.
The folks on the main street will also have to realize that if you keep eating without maintaining a strict regular healthy diet and exercise regime you would most probably end up accumulating excessive fat and there is no point blaming other for it. We know all what pain some folks have to go through to shed the excesses. The question is why go through that pain especially when people are able to maintain a good health by following a regular healthy diet and exercise regime. There has to be a realization that the era of excess is gone.
The consumers (especially the American and British consumers) will have to learn to save more and live within their means. We are beginning to see that folks on the main street are starting to save a little bit more. Which is a good news but in the short term it also means that consumers will tend to hold their cash pretty close to their chest and against this back drop it’s hard to envisage a rapid pick up in consumer spending on the level seen in 06 or 07. But I’ll happily sacrifice a rapid recovery that could easily falter to a sustainable one.
A healthy and sustainable economy will mean more businesses starting-up or expanding, more hiring, increase in trade and the certainty about the future.
You have a most excellent blog. With the world getting crowded and
a larger and larger demand for commodities and clean air and
water I hope the challenge will bring the world together. However,
what I want does not necessarily come be be.
Many thanks Jim.
A very accurate assessment of today’s economy and its short-sighted dietary excesses. Banks’ so called fat cats have been made an easy scapegoat by the media and yet this is not the full story. As correctly mentioned in your article, there is the need to reconcile ourselves with the fact that we all, the common folks, have forgotten the golden rule of living within our means.
I disagree with the idea that Wall Street should simply learn from their mistakes and we should stop blaming them for what is going on in the general economy. Many of the executives as well as the politicians on both sides of the aisle are responsible for this crisis and should be sitting in prison. Greed, plain and simple is what caused our economy to go off the track. Greed will always have this effect and if we learn anything from this crisis it should be that we really need to put back in place the legislation we eliminated in the last days of the Clinton Presidency. A former executive from Goldman Sachs helped with this move on the grounds that Wall Street no longer needed tight regulation. Who benefited the most from this move? Goldman Sachs! Then comes former President and CEO Henry Paulson to Treasury. Think about what happened during his tenure in Washington and particularly what he did with the first draft of the 700 billion dollar TARP, when he said that no one but he should have authority over the money, not even a court of law. Combine that with an excellent article written by Glenn Greenwald in which he writes:
“A Goldman executive as COO of the SEC’s enforcement division. This is all consistent with the observation of Desmond Lachman — previously chief emerging market strategist at Salomon Smith Barney and IMF deputy director — regarding “Goldman Sachs’s seeming lock on high-level U.S. Treasury jobs,” which he cited as but one of the many “parallels between U.S. policymaking and what we see in emerging markets.”
In October of last year, a Goldman Sachs Vice President, Neel Kashkari, was named by former Goldman CEO and then-Treasury Secretary Hank Pauslon to oversee the$700 billion TARP bailout. In January of this year, Tim Geithner hired a former Goldman Sachs lobbyist, Mark Patterson, to be his top aide and Chief of Staff. In March, President Obama nominated Goldman Sachs executive Gary Gensler to head the Commodity Futures Trading Commission, which regulates futures markets, even though (or “because”) Gensler confessed to lax regulation during the Clinton administration over the very derivative instruments that caused the financial crisis. In April, Goldman hired as its top lobbyist Michael Paese, the top aide to Rep. Barney Frank on the House Financial Services Committee which Frank chairs.”
Mr. Greenwald went on to say “According to ABC News in October, 2008, Goldman “spent more than $43 million dollars on lobbying and campaign contributions to cultivate friends and buy influence in Washington, D.C. since 1989” and their “bankers have been the country’s top political campaign contributors this year.” “They are almost in a class by themselves,” said Sheila Krumholz, the executive director for the Center for Responsive Politics. As Michael Moore has been pointing out, Goldman was the number one source of funding for the Obama 2008 presidential campaign. The bailout of AIG — which resulted in massive federal government monies to Goldman — was engineered at a meeting between Paulson, Geithner and Goldman CEO Lloyd Blankfein. Last year, Goldman paid top Obama economics adviser Larry Summers $135,000 for a one-day visit to Goldman.
If this is not corruption at its best I do not know what is. It is obviously not a republican issue or a democratic issue, it is both of them in bed with the top banks while stealing as much of taxpayer money as they can lay their hands on. Look at the criminal charges and the behavior of Bank of America as they try to defraud their way out of the problems they helped create. How many hundreds of thousands of American people have been crushed by these big banks? How many Americans were duped by the hordes of trained Mortgage Brokers hired to convince people they should accept these low mortgage rates and no down payments on houses they could not afford. Stupidity on their part perhaps but duped by criminals looking to make a buck. And you want to give them the “benefit of the Doubt”? They are White Collar Criminals who should all be thrown out of office and jailed.