A Systemic Capital Redirection Strategy Is Our Only Hope

Three years into this epochal crisis and still not much light at the end of the tunnel. The “advanced economies” of the Western world have imploded. The celebrated concept that market forces would balance things out, the “efficient markets hypothesis”, is no longer working and proved to be unsound. Same for the other pillar of most modern economics: the rational expectations theory. It was devastating to believe that globalization would strictly favor the West: the opposite took place. The world has entered uncharted territory and needs new economics. Yet, it has difficulty in admitting it and is resisting necessary and inescapable changes.

Dangerous risk concentration, conflicts of interest, poor risk assessment, asymmetry and mismatching of risk reward dynamics, excessive indebtedness, the whole dressed with “pay as you go politics”, have been an explosive mix. Huge resources have been destroyed and unemployment has become the most sickening modern human disease with almost every household suffering from it. In the three years of this crisis, we have seen a further deterioration of the above factors: more oligopolistic consolidation, higher risk concentration and wider conflicts of interest, bigger moral hazards, more misalignment and tensions between corporate management, shareholders and the general public of consumers and employees.

A huge public rescue narrowly avoided a total catastrophe and so did the other emergency behaviors that frantically followed suit. The whole reaction has been to fight fires without addressing their causes, a continuous and hysterical state of emergency where relief efforts became the norm, but beyond staying afloat, they have not solved the problems. America and Europe keep losing jobs in quantity and quality. The known structural issues remain to be fixed and there are no signs of real recovery.

Big payouts are still being distributed to bankers and CEOs without resolving the Moral Hazard. Governments have used taxpayer’s money to rescue these businesses “too big to fail”. Yet, the cost of this rescue was met by the honest, hard working public and by the real pillar of modern times: the small and medium enterprise. Widespread public spending cuts imposed in most of Europe are mainly affecting those who underwrote the rescue of the banks and go to further depress consumer spending which would instead ignite the possibility of recovery. A resurgence of “black economy” and corruption is spreading out and becoming an epidemic phenomenon, an unbearable burden, dispersing precious resources. The consequences of the most serious financial and human crisis of our times are going to be suffered for generations.

Yet, this can be changed if we fix the structural flaws. The need of a systemic and long term approach could not be more evident. This is a period of deep change: leadership and courage are strongly required qualities.

We call for new comprehensive ideas, competence and proper communication of a general strategy; an original and systemic plan and sets of measures to create a sustainable recovery, as we outlined in our plan: “Operation Direct Growth”. This is the umbrella name definition that I coined to identify a systemic capital redirection policy necessary to reignite a reversal of the current spiral downturn: the new economics instrument to re-establish a sustainable recovery path.

There are ample amounts of “idle” capital seeking, without success, proper long term investments; a wall of liquidity that is instead too often going to inflate the wrong assets, recreating new dangerous bubbles. At the opposite end, there are sound enterprises needing injections of stable capital and the strength of a strong hand. Investment opportunities that are in healthy sectors with growth potential such as: new technologies, renewable energy, sustainable growth, biotechnology, life science, education, IT, creative industries, economic re-conversion, and infrastructure projects.

These were the main macro economic developments inherited from 2010 and that will be the fundamental drivers of future potential scenarios in 2011 and in the next few years.

We now realize how damaging modeling economic theory after theoretical physics was and we should urge governments and regulators to re-establish a level playing field and free market conditions.

New economics are needed, like the above systemic long term capital redirection policy, to recover for capital shortages in the real economy and recreate full employment. Also needed are new risk strategies to put the SME in conditions to “navigate” into the current rough waters, providing the tools to survive uncertainty and turmoil, to face new risks and challenges.

The opportunities generated will be considerable. The results of inaction or lack of coherent action, on these fronts could be fatal. Yet, even in a virtuous scenario, it will take time for the capital and systemic measures to produce their effects. We should still brace for difficult times.