Sunday, January 31

Ode in Time of Crisis

Looking back the last few months, it is impossible to miss a humbling feeling of being amidst epochal events. Personally, last September was a heady high, a celebration of creation that rendered me well nigh unequal to the task of putting it to words! Time has flown since, each day a nouvelle discovery of wondrous joys, yet occasionally tinged with an undefinable sense of vulnerability. In my thirty-some years on the Planet, this pallete of emotions is sans parallel: cheer and blessing, joie de vivre, if ever!

The world, on the other hand, has been seized with circumstances of a lot less happy nature, best epitomized by episodes a year older. With the global financial system at its epicenter, an unprecedented and unrelenting series of economic upheavals have challenged life as we know it. Without getting into inordinate details of these trying times, suffice it to say that no walk of life nor section of society has been left untouched. Moreover, at least in some cases, things will never be the same again. Equally, though the worst is likely behind us, we are not fully out of the doghouse yet. It is clear that the speed, quality and sustainability of recovery depend on our generation's ability to rebuild the economic edifice. This effort must incorporate lessons from the current turmoil. Likewise, it is incumbent on us to have a sense of urgency lest the events and their aftermath fade from proverbially short public memory post recovery.

So what should constitute the bulwark of the Reset Economy? At the heart of reform must be a robust financial system that can not merely withstand future shock but proactively alert us to impending danger going forward. In fact the latter, curiously and completely missing in the run-up to the Lehman collapse or the events that followed, is the critical test for any proposed structural change. Unfortunately, at least for now, our response appears to me as coming up short. As a first step therefore, let me try and outline today a broad agenda, hoping to see the rest fleshed out in the New Year. (That which springs eternal in the human breast only magnifies early in a new year also a new decade, and when penning one's return blog after an interregnum!)

Firstly, we must recognize the character of the current downturn. Like someone put it, the crisis was a lethal combination of Market turmoil that eventually turned a Banking crisis and finally led to broader Economic consequences. Obviously such a debacle puts into the dock governments, central banks, regulators, banks/ lending institutions as well as corporates. It points directly to lack of coordination between these players, and piecemeal or inadequate appreciation of crisis drivers. Thus, a harmonized non-fragmented response and review is critical to future success.

Next we have the extent of the crisis and the pace of its transmission. For the malaise to spread like it did, the key ingredient was the interconnectedness of financial systems worldwide. This network is directly linked to ever increasing Globalization of world economy; and aided by rapid advances in Information and Communications Technology. In tandem, these ensure an all time high factor mobility, making the butterfly-in-China-shapes-NYC-weather connectedness an extant reality than mere Chaos Theory shibboleth.

Does this mean we turn contrarian to the forces of Globalization? One would think not. Not only is this fungibility not easily reversible, there are clear benefits the world has derived from them. This holds true for Technology too. In fact even contemplating any (even if theoretical) reversal effort suggests a need for a lot more calibration than the opposite - a coordinated global effort at crisis-corrective actions. Hence the near-consensus currently seen in implementation of near term solutions must stay the course for the longer term root cause fixes. With the plethora of stakeholders involved (and assuming you agree with me on the low feasibility for an outside observer to grasp its nuances), governments the world over have the primary onus to navigate through the intricacies of (micro and macro) prudential and accounting policies.

The logical extension to this argument is that we cannot let our focus waver even on exit strategies for the short-medium term policy and market interventions. Harmonizing these globally may be a tougher ask despite broad unanimity on its goals - sustaining the nascent recovery, maintaining financial stability and protecting a global level playing field. Policymakers would do well to use risk of unintended consequences as the touchstone for their formulations than unidimensional desired results. For instance, instead of getting swept off the feet by the obvious, namely increasing capital standards, consequences like drop in capital availability and inefficiency in the banking system, must be factored. (Interestingly, subprime mortage, now such a dirty word, was the output of one such political agenda, namely incentivization of housing ownership, where side-effects were not considered!)

Looking into 2010, the ball, as it does for most largescale change initiatives, is in the court of the Political kind (bureaucracy included by definition, for simplicity). The stakes are enormous, probably never bigger. Is the species up to it?