human comprehension or management
Last month the acknowledged rate of unemployment in the US rose to a 25-year high of over 8 per cent as companies, collapsing under the strain of an acute recession, terminated 651,000 employees. Since the recession started the US economy has shed 4.4 million jobs, with more than half of that number lost in the last four months alone.
In spite of all the attempts being made to restore liquidity into the system it is evident the economy is still failing. The US and Europe are still months away from the recession bottoming out. Nobody can be sure what will happen next given the entanglement between the economy, the environment and our addiction to petrochemicals as our main source of energy. In truth all three global systems are in a state of meltdown. Consequently solutions must adequately address the explicit and implicit dynamics between and within all three systems. Anything else is unthinkable – band-aids on a cancerous wound.
In spite of some industries and lobby groups using their power to convince governments that the economic system is not broken, the global community knows otherwise. We came to that conclusion a while ago. Financial reform is now inevitable. The flow-on effects will change how governance, business and trade works in the most fundamental of ways. What does this mean?
A glimpse of things to come can be seen from the work being undertaken by Willie Smits in restoring Borneo’s natural ecosystems, as opposed to the profit-driven destruction of the Amazon rainforest. The use of permaculture, holistic farming and other forms of ecological sculpting to re-green and sequester carbon in some of the most arid parts of the world, rather than agrarian practices that continue to deplete soils, lower yield and destroy livelihoods. The Hunger Project’s operating framework that aims to liberate women and children in terms of their self-sufficiency, compared to World Vision’s archaic business model that preaches and discriminates in the delivery of aid. The design of new, human-centred, carbon-neutral urban centres in China and the Emirates (along with the re-booting of old cities like Chicago), as an alternative to the dehumanising sprawl and unhealthy smog of the giant urban metropolis. The development of ‘democratic’ energy sources (such as nanosolar for example), rather than the massive energy distribution grids that disfigure our landscapes. Even the advent of new forms of participative democracy (in initiatives ranging from Venezuela's Communal Councils, to Brazil's Participatory Budgeting), rather than the routine elections that epitomize rigidly archaic forms of representative democracy. The list is endless...
Caught up in the web of fear currently gripping the world’s financial systems it is tough to focus clearly on opportunities. The loss of hope can be overwhelming when survival is uppermost in people’s minds. Eventually, of course, markets will turn, as they always do, and then the broader economy. But it will be a while before we begin seeing signs of stability in employment patterns. In the meantime it is critical to comprehend that what we are witnessing is no ordinary downturn. The world is giving birth to a new economic paradigm and the birth pangs are bound to be painful.
Frankly we may be contributing to that pain in ways that are uncalled for. Restoring the current economic system by propping up old industries and denying adequate investment capital to “greener” technologies, for example, is futile. In fact it may simply make matters worse by delaying what is unavoidable. If we can get our heads around the need to embrace fundamental change, instead of hanging on to an obsolescent paradigm at any cost, it just might compel a pace of change and direction that is ultimately less painful. And far less costly.
Optimists point out that the current crisis offers us a miraculous opportunity to design a far more equitable system than currently prevails. Meanwhile the social unrest and cultural dislocation caused by unemployed youth with time on their hands is a ticking time bomb, adding to the fear that fear and despair will give rise to civil disobedience, insurgence and acts of terrorism much faster than we can possibly move to prevent such a scenario.
I believe the global economy is the most fundamental system requiring urgent reinvention. Its malaise, manifest in the accelerating disconnect between the natural world on the one hand and the fabricated world of human invention on the other, is the root cause of our distress. Most other issues (such as global warming, the credit crisis, the rising cost of food, terrorism, drought and poverty, for example) are merely symptoms indicating an economic system in a state of catastrophic distress.
There can be little doubt that the root cause of our predicament is an industrial economic system based upon inequity and debt. A system that is simply unsuitable and unfit to service the needs of the global community. The criteria and assumptions underpinning this system account for why we are able to justify our continued abuse of the natural environment, ignore strategies for a more equitable distribution of wealth, remain addicted to the use of non-renewable resources to provide energy, and routinely turn a blind eye to atrocities, greed, injustice and corruption that do not impact us directly. For these reasons the economic system (including its assumptions, values, structures, outputs and flows) must be at the heart of civilizational renewal.
The waves of paradigmatic change are likely to hit banking early. Over the coming decades, all around the world, financial institutions (particularly investment banks, but quite possibly the Reserve banks as well) will need to transform what they do and how they do it as the global economy adopts a persona driven by different factors. Retail offers too will invariably shift to reflect the primacy of unique customer experiences as alternative imperatives and beliefs emerge across different demographics.
Some changes will be mandated as the management of global financial markets undergoes the most fundamental sea change in the history of the industry. Other changes will be optional, depending on how much a company desires to remain profitable and stay in business. Such discretionary changes will most likely be determined by the levels of customer activism and the tolerance of shareholders relative to the creativity and courage of executives.
I suspect most institutions may change with great reluctance; probably at great cost, especially if they are stuck in the conventional quality-cost mind-trap. Bankers are naturally conservative types, avoiding risk wherever possible. If they run true to form many will try to do as little as possible, believing that the wave of reform will pass them by, sanity will prevail and life will eventually return to normal. Some will panic and try a few things that worked in the past. Others will no doubt bury their heads in the sand, naively waiting to be picked off by predators.
We can expect the industry to lobby vigorously, pointing out to anyone who will listen that banking is of immense value to society and reminding politicians that banking is the most profitable industry the world has ever known. Their protestations will be in vain. The world is turning on its dark side and the regulation of capital can probably never be quite the same as before. Get set for a revolution of a different kind – one that is occurring at the intersection of the economy, energy and the natural environment.
Surely others have predicted similar revolutions in the past? So why is change so vital now? Why at this particular moment in history? What changes are likely to occur? What will not happen? How much resistance will there be? Above all what strategies will be implemented to ensure continued growth and profitability across the sector?
The main reason we will witness across-the-board change in the financial services sector is threefold: (i) the current state and rate of deterioration of the global economy; (ii) the affects of a worldwide drought that is lowering yields, forcing food prices upwards, creating scarcity and generating conflict; and (iii) the inability of the capitalist system to solve the most critical issues facing us. In fact the more we examine the evidence the more I conclude the industrial economy is a source of our problems and not the solution.
Of course there are other micro-trends that cannot be discounted. Foremost among these are a growing public distrust, hinging on a perception that the value of major currencies is dictated arbitrarily, coupled with misgivings concerning the motives and competence of the establishments governing those currencies.
The existing economic system emerged during an era when major changes to agriculture, manufacturing, production and transportation instigated profound (albeit mostly unplanned) impacts on social, economic and cultural conditions. The outcome was an industrial financial structure based on easy credit, petrochemicals, energy generated from burning coal and oil and a burgeoning middle class locked into an easy credit – easy consumption mindset.
As we know, this system was remarkably successful. It generated material wealth beyond our wildest dreams. It lifted many people out of poverty. It continues to do so today in places like China and India. But now, as it spreads insatiably into every city and even the most remote villages on the planet, this same financial system is tearing itself apart at the seams. Why?
For one thing we had not figured on the economy having to service the material needs of a global population fast approaching seven billion inhabitants. Nor had we factored in the consequences of such affluence on the planet and, least of all, the tensions this would create between the rich and the poor, the greedy and the envious. Indeed we are just beginning to appreciate what this could mean: a civilization in crisis and the need for urgent systemic renewal on many levels.
Even the continued existence of the US model of capitalism is now in doubt, at least in its current form. So much credibility has been eroded during this most visible moral collapse, many ordinary citizens no longer have faith in the underlying principles of the system. Values that once seemed impervious to change (and consequently went unchallenged for more than three generations) are in a stage of transformation as we try to come to terms with a harsher reality.
In some ways the unthinkable has already happened. If trust and confidence are depleted at the same time core principles, assumptions and practices underpinning the economy shift, it is inevitable that the industry most intimately connected with that economy must also adapt. Such is the lot of financial services - one of a small number of industries that manufactures nothing of value in its own right, yet has come to dominate so comprehensively how we live our lives.
But there is even more distress on the horizon to which adaptation is really the only viable response. We are likely to face at least four simultaneous macroeconomic shocks over the next two decades - unless we can find approximately USD $40,000 billion to avoid some pretty serious consequences. For example:
- The International Energy Agency estimates that the energy sector needs USD $22,000 billion immediately - simply to meet the rising demands for energy around the world
- Lord Nicholas Stern in his oft-quoted review for the British government suggests the need to spend USD $14,000 billion so as to reduce carbon emissions to an acceptable level. However, neither Stern nor the IPCC reports take into account other critical factors - such as the rate at which methane gas is being released in the Arctic, thus accelerating the ice melt and the subsequent rise in ocean levels around the world. If these were taken into account the estimates would most likely be off the scale!
- Almost every traditional economic analyst claims we need an immediate capitalization of the global banking system of around USD $1,000 billion - and probably far more after that
- The United Nations indicates that the Millennium Development Goals require USD $1,100 billion in promised foreign aid and another USD $1,100 billion in newly generated funds to end poverty and related problems over the next seven years - and then considerably more than that after 2015.
Naturally, none of this financing will be possible without significant, undoubtedly painful, global structural adjustments. A failure to address these issues, however, will pose an overwhelming threat to international economic and political stability.
As always there is a silver lining! The current crisis provides the world community with a once-in-a-lifetime chance to redefine the interconnections between energy, the environment and the economy and to undertake a total re-engineering of our regulatory and governance systems. Let us hope we act fast enough to avoid even more needless pain or even the extinction of homo sapiens.
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