Over the last 20 to 40 years world finance has roller coasted repeatedly, it has coincided with the birth of modern terrorism (and the war on terrorism), an escalation of the democracy-push approach, the rise of the new economy, the end of the cold-war, hyper-globalization, a drive for governance and global order, digitalization, the digital divide and internet, climate change, resource depletion, corporations replacing governments…the list is end-less.
But where do or should we stand? In favour of or against it?
Those in favour of this epoch, brandinstability as being beautiful, sustaining that it stimulates openness and creativeness through liberalization. In other words it propels the wealth-being of individuals through the maximisation of performance and providing opportunity for the socially excluded, whatever the costs.
Those against argue, for example, that job security has become a holy grail (and for the few), indeed soon those with a permanent job will be the ‘new rich’ and industrial relations will be replaced by personal relations. The sceptics sustain that we are entering an age where venture is about personal survival, hyper-competition, and much less about societal wealth creation, equity and the sustainable development of society in general.
Whatever side you take it is now apparent to everyone that this is a decade (or maybe more) of change, big change, and no more so than in the world of finance.
The world of finance is currently in the blenderand at the mercy of the speculators. Indeed, since the collapse of the financial markets in 2008 much has been said and, many sustain, little has been done. Moreover, those who were saved are those who paved the way for the crisis in the first place (through reckless financial exuberance as we witnessed with the stock market bubble in the 90s and more recently the subprime crisis in 2007, the consequent salvage of Fannie Mae and Freddie Mac, and the recent attack on the Euro) and yet continue to speculate and make the situation deliberately unstable and…worse.
Furthermore, there has also been an institutionalised financial world metamorphosis where banks are no longer just commercial banks, the continuing rise of the corporations (that are more important and powerful than many national institutions) and where resources of any kind are considered limitless and there to be plundered.
In this we have a paradox, we desire financial equilibrium or financial stability yet reward those who are paid to ensure that instability forces dominate. It is organised and systematic wealth generation not for the masses but for the few, in the hope that such a system will eventually provide benefit (or financial fall out) for those who are at the other end of the financial spectrum, in essence the wider the gap the stronger the fall out. Thus deliberately throwing stones in the current financial pond is not about generating ripples but tsunamis, almost as if it’s not the final net result that counts rather how much energy you get from the waves and for how long you can sustain them. The cyclicity of these waves is key to this concept of exploitation of resources and as is known, cycles are essentially defined by amplitude and frequency.
Stimulating more amplitude and higher frequencies are the symptoms of the opening statement of roller coastingwhile the affects are when the system enters resonance and gets out of control and dangerously oscillate.
The perpetuators of this reasoning sustain that the world has always been subjected to economic cycles and we should view these as being part of the financial landscape. Indeed Kondratiev demonstrated that economic and innovation cycles walk hand-in-hand, but if innovation is a direct consequence of an economic recession or innovation propels an economic boom is debatable. Furthermore when a system enters into uncontrollable resonance the end result is that the system is damaged or destroyed. The higher the damage the more time is needed for recovery and the more difficult it gets for innovation to spur the next economic cycle.
So how and when will it end?
A possible approach is to consider the audience, the actors and their actions, and start by asking ourselves what is the purpose of the financial system not just for today but for tomorrow too. Today the financial markets are there to maximise profit and provide the quickest and highest return for their clients. Loosely defined as being ‘shareholders’ the same clients are the first to abandon ship as soon as things are looking bad while the so called ‘stakeholders’ are the less likely to abandon and, in the end, ironically foot the majority of the bill. The corporations in particular prioritize their clientele, first the shareholders, then their privileged ‘customers’ (read friends), then the stakeholders and finally the planet. So the first step is to realign and prioritize the system i.e. first and foremost align it with those who pay if the investment goes wrong i.e. the stakeholders and their environment then, finally, the shareholders. The idea is to keep growth sustainable and create wealth starting from the bottom not from the top. The second step i.e. the concept of sustainability, is about resources, whether these are natural or financial resources does change the issue or idea. So far the financial markets have done the opposite, first the shareholders and then the stakeholders. Moreover, exploiting the planet’s resources and its stakeholders is a recipe for disaster and when this is mixed with ‘toxic’ products the outcome is certain. The BP oil rig disaster does not (just) have its roots in low grade technology, no back-up solutions and classical finance rather the greed for more, the greed for better performing futures (and oil is one of the many futures). We can say exactly the same for growth, one thing is to improve growth another is to make the growth sustainable, and as consumers know, mindless growth has a price.
In order to re-establish equilibrium and press for stakeholder sustainability ten opening key elements are suggested:
1. 1.Keep the markets as open as possible so to rid the system of the so called toxic products as early as possible by offering alternative or so called distress and non-toxic goods.
2. Think long-term by providing stable and accessible lending, which should be the mission and at the core of all banks. Ensure that enterprises should have access to credit irrespective of the momentarily lack of market and overestimated excessive risk.
3. Ensure that enterprises produce the goods and/or provide the services for which they were/are founded on and not participate in the speculation of products and services that do not belong to their competencies.
4. Promote, if not legally enforce, the ownership of the responsibility from enterprises to banks. This was done in the USA after the ENRON scandal.
5. Stabilizing exchange rates by discouraging short term monetary policies and speculation and favouring long-term geopolitics.
6. Coordinating monetary policies and promoting governance based on shared ethics and solid financial principles. This is especially true at governmental and regional levels.
7. Provide bail-out only to those who are not responsiblefor the financial collapse in the first place (i.e. the victims) and with obligations to economically sanction the aggressors and their supporters. This means that private enterprises and government authorities should be financially supported only if they have not been involved in the very speculation that caused their crisis.
8. Create the conditions for direct access of information, simplified legal contracts and legislation and financial information from authorised ombudsmen. Although it is true that stock markets are often too volatile with respect to the flow of information from enterprises (e.g. enterprise revenues and profits very rarely oscillate over 1 week) the same information could be leveraged to stabilise the oscillation.
9. Promote the concept of Financial Health or healthy finance and minimise financial waste and risk.
10. Develop and transform the concept of financial stability into financial sustainability. Today the Financial Stability Board (FSB) addresses vulnerabilities, developing and implementing strong regulatory, supervisory and other policies in the interest of financial stability but not sustainability. Until this happens we will continue to witness conditions of forced mis-equilibrium where the intent of investor is to guarantee the highest possible return and at whatever social cost while passing on the risks to the weakest link in the chain. This promotes, in the words of the World Bank, ‘persistent risks to economic health include high unemployment and low growth in developed countries and scarce international financing for developing countries’.
Yet, if we promote stabilized growth, and base investments on the minimization of financial waste and risk as well as to focus on the good of the stakeholder and society in general, the result becomes financial sustainability, a sought of ‘green’ finance for the markets. So arrives the call for the birth of financial sustainability based on the exploitation of resources for the better of society not the individual, and as a minimum, the focus is the stakeholder. It is about growth but not ever-increasing growth at any price, rather growth that is sustainable with the resources we have. Only time will tell if this will develop.
Professor David Ward
