After mulling over the media flurry of commentaries reflecting on the ten years since the Lehman Brothers downfall, I feel the discussion has missed a key element of system failure: sustainability.
I join the crowd that says almost nothing has changed in the structure of our economy. The group that reminisces on the fact that the methods used to get out of the crisis, were precisely the cause of that same crisis – low interest rates, high debts and many low-yield investments. As it stands today, the financial sector is still too inflated, still too big to fail and is still artificially growing; the entire structure of our financial system has remained safely intact. No need to be a clairvoyant or a cynic to foresee that, unless dramatic renovations are undertaken, we are leading down the path toward a next crisis.
Despite this observation, I have an encouraging message, calling you to action. We must not sit idle and brace for a collapse. We have reconstructed our economic system in the past, and signals today tell us it is time to do it again – this time toward an architecture that is humane, sustainable by nature, and that actively includes all layers of social strata.
Satisfied with the status quo?
The industry’s reflections on the great financial crisis indicate that some progress has been made, and, for part, that is true. Banking has become slightly safer thanks to enhanced supervision and higher capital buffers. Economic growth has been restored. People are employed, governments are no longer in austerity mode, and taxes are no longer increasing.
Policy makers across the globe did not make landmark shifts to achieve this. The consensus of policy makers in 2009, acting nearly as a world government, vanished very soon after the immediate threat was over. From 2010 onward, European politicians were occupied with the euro crisis. And when the euro crisis was finally put to rest with a monetary overdose, President Trump put the US on a path of economic isolation.
It is far-fetched to say that all people are satisfied with the outcomes. Global income inequality has soared in recent years. Environmental and social externalities are generally ignored. And nothing has been done to drastically change the course of our economy.
Renovations from the past
We have successfully repaved our economy before. Let’s start with the industrial revolution. Man-made inventions replaced human work with natural power. Steam, coal and oil became the equivalent of man-power. Agricultural productivity increased dramatically. We invented machines, materials, and new ways of efficiently working together. This led to a spectacular increase in material output, longevity, and quality of life.
In the decades before the Second World War, this highly industrialised model experienced a crisis. Large increases in productivity in the agricultural sector led to high unemployment for rural agricultural workers. This cohort needed new jobs in new sectors, and society as a whole needed new ways to transfer prosperity.
In the 70’s the economic model experienced another crisis, where industries went bankrupt and labour and manufacturing were displaced into low-income countries. The solution was sought in a radical change. After the crisis in the 1930’s, the Second World War followed, ultimately leading to the modernisation of the workforce and economic system, and to an abundant social security network. The transition we experienced in the 80’s was primarily driven by market forces including deregulation, privatisation, globalisation and the transforming of Western economies into service providers of the international economy. These renovations certainly had effect as society grew and flourished.
Though every system change has had limited duration and overshoots. The financial crisis was the overshoot of deregulation and market forces reform of the 80’s. And the current climate crisis is, of course, the overshoot of our industrial model depleting natural resources beyond their finite capacity.
Under new circumstances
Ten years after the crisis, many experts agree that risks in the financial system are increasing. Global debt is higher than ever, and the financial system is especially fragile navigating difficult factors ranging from the “search for yield” due to low interest rates, to automated algorithmic trading.
Additionally, the remarkably fast and wide adoption of passive investment strategies through low-cost exchange-traded funds escalates risks of financial disruption. Passive investment funds, as they cannot buy or sell outside of scheduled re-balancing, semi-artificially prop-up equity values, which essentially eliminates the dynamics of an efficiently functioning market.
Now is the time to accelerate the tightening of monetary policy and international regulations regarding the financial sector and shadow banking system. Furthermore, our addiction to ever increasing economic growth remains unprecedented, while the fruits from this perpetual growth machine end up with the people and firms that have more than their share of the pie.
Yes, we can
Since 2008, not much has changed, though we are far from helpless.
We see both grand policy designs and grassroot movements calling for change. The Paris Climate agreement was a landmark achievement. The UN Sustainable Development Goals gave world leaders a roadmap for a more sustainable society. And we see entrepreneurs and communities, also in the financial sector, acting on this agenda for change.
All we need is courage and capital. The courage to make radical choices, and the capital to mobilise them – financial capital, human capital, intellectual capital, natural capital, social and manufactured capital. We must not be content with merely reducing the collateral damage of our current system. Instead, we must pave the way for a truly feasible long-term value model that initiates the shift towards a sustainable, circular and inclusive society.
This is a shared responsibility of us all; of business, governments and citizens. How we allocate our capital today determines our world for tomorrow.