Showing restraint to control greed

Top speakers from around the world explored the causes of the global financial crisis and de­bated solutions at a full-day symposium I chaired last week.

The discussion in Nicosia was topical and passionate with views expressed across various perspectives. In particular, two key facilitated panel sessions were highlights of the event sponsored by the EuroMed Research Business Institute.

Touching on the causes of the crisis, Michael Sarris, former Finance Minister at the time of Cyprus’ entry into the EU, pointed to the low interest rate policies in the US and the aggressive encouragement of mortgage and consumer loans that led consumers to pile on the debt. This, Dr Sarris said, was mesmerised by a false sense of prosperity when the underlying dynamics just didn’t support this position.

Coupled with the emergence of complex financial instruments and debt securitisation, this guaranteed that the recklessness would take on global proportions, creating ripple effects across the world’s financial system.

Other noted concerns were the shifts in savings trends, with the US consumer and government both reducing their savings and increasing debt.

Amir Shoham presented an analysis illustrating a drop in the US household savings rate from 10 per cent of GDP in 1982 to a negative one per cent by 2006, when the first signs of crisis became apparent.

This was coupled with a major shift in fiscal policy reflected in the change from a surplus of 1.6 per cent in the final year of the Clinton Administration to a 4.8 per cent deficit as early as 2003 under President George Bush.

Dr Shoham, who lectures at Rutgers EMBA programme and is guest co-editor for a special issue of the Global Economy Journal focused on the Economic and Financial Crisis from the Eye of the Storm, explained the aggressive borrowing precipitated a net credit increase of over 30 per cent annually, financed heavily by countries like China. Cheap credit fostered similar spending binges in a number of Western economies, with declining savings and growing debt by both governments and households, virtually guaranteeing that a crisis would soon follow.

Most interesting was the symposium discussion on the best ways out of the current malaise. Two divergent views emerged, mirroring the differences in policy approaches between the US and much of Europe. With changes to the underlying economic forces, the complexity and systemic implications of any policy are truly daunting.

Despite some of the world’s brightest minds working on the topic, however, we remain stuck with a cruel dilemma. At what point will the economy have generated sufficient momentum that governments can shift from spending their way out of trouble to saving to address the underlying, longer term problem?

Shifting too early, as Japan did in the early 1990s, can drive a deflationary spiral, leading to persistent sluggish growth, high unemployment and serious social consequences.

The alternative, driven by what the Americans have dubbed QEII, produces another round of low interest quantitative easing and more deficit spending, which, while solving the short-term problem, also exacerbates the debt crisis.

To make things more interesting, global market trends add additional layers of complexity and interdependence that result in a system that is far more difficult to predict, let alone manage.

With long-term population declines in Western markets and lagging productivity gains, the economic engines required for growth have been weakened.

And whereas past stimuli have generally driven up domestic production, this is no longer the case as expenditures get funnelled into imports, further exacerbating countries’ trade imbalances.

The session left the participants with a poignant question: If, as individuals and societies we cannot behave with enough restraint to temper the greed and self-interest that led us to this crisis, how can we muster the will both to get out of the crisis and to prevent it from reoccurring in the future?

And, given the degree of resistance expected from those who stand to lose by holding back expectations and instituting controls and regulation, what are the odds that politicians will be bold enough to hold the line and grapple with the true underlying issues behind the crisis?

The symposium was a hallmark of EMRBI, which brings together a network of leading academics, business people and PhD student researchers from top business schools to a dynamic forum for the exchange of ideas across disciplines and to generate an engine of collaboration across these traditionally divided domains. It was EMRBI’s third Annual Meeting with more than 250 delegates from over 45 countries.

pier.massa@m2businessframeworks.com

Mr Massa built his consulting experience with The Boston Consulting Group in North America as well as serving, among other posts, as vice president, Marketing Services with CIBC in Canada and a director of business development for Virgin Life Care in the US. He is now the managing Partner of M2 – Business Frameworks, a boutique consulting firm with an international client base.