The Global Village Idiot

In 1964, Herbert Marshall McLuhan, a Canadian academic, developed the concept of the Global Village, whereby the advances in electronic communications would create the equivalence of a central nervous system that would allow the planet to become interconnected and act as if it was a single unit. The concept of the global village became prominent with the development of the internet. Advances in transportation and communications allowed goods and services to be cheaply transported to the four corners of the planet, thus erasing regional differences in products and practices. The concept was fully embraced by multinationals during the 1980s and 1990s, as they used their market clout to impose a global system of branding and product domination. This led to greater integration of the global economy and the synchronization of the business cycle. This is not to say that all regional differences disappeared. On the contrary, just as in a village where there is a division of labor, between butcher, baker and candlestick maker, the globe was segmented into areas of specialization, such as high tech design, commodity production and mass manufacturing. By raising the division of labor to a higher level, society was able to extract more efficiency and productivity, which in turn allowed for an improvement in social welfare. Although poverty still abounds, globalization led to more prosperity (for some). However, there was always a problem with the leadership issue. Each village has a leader, but at times it seems like the global village is managed by the local fool.

This is not to disparage any individual, although there are plenty of candidates to fit the bill. However, one of the questions that nag academics and policymakers is how come the global credit crisis took so many people by surprise? The notion that the collapse of the credit bubble was a surprise is a total lie. The fact that the Queen of England may have been caught unawares may not be too shocking. However, there were deep concerns about the state of the housing sector as early as 2005, as lending criteria was eased and debt levels exploded across the U.S. Each day, mail boxes were stuffed with offers for new credit cards, second mortgages and financing opportunities. The dangers of NINJA loans and subprime lending were regularly discussed. The multilaterals warned about the explosive growth of derivatives. Leagues of Cassandra’s were regularly featured on the major financial news networks warning of the dangers that lay ahead. Even the New York Federal Reserve ran simulations of what would be the systemic consequences of a global derivatives crisis. Citigroup’s Chief Executive Chuck Prince’s admission that he had to ‘continue dancing as long as the music was playing,’ was an acknowledgement of the irrationality of his bank’s policies. Therefore, the notion that the global financial crisis was a “surprise” is a complete repudiation of the facts and the historical record. So, why was it that the global leadership allowed the crisis to happen?

It is not true that society does not learn from the past. The Keynesian and monetary lessons of the Great Depression are tattooed into the minds of all fledging economists. They construe the phalanx of policy tools that are regularly deployed by central bankers and finance ministers around the globe. However, the inherent dangers associated with high levels of leverage are a lesson that society refuses to acknowledge. The Crash of ’29 was perpetuated by high levels of domestic and financial-sector debt. This was also what led to the Asian Financial Crisis, Emerging Market crises of the 1990s and the on-going turmoil in the Eurozone. The rapid escalation of U.S. government debt is about to trigger a new round of problems, and the expansion of bank balance sheets across much of the developing world, including China, Turkey, Brazil and Colombia, will eventually herald a new round of financial disasters. Therefore, why does society heed some lessons, while ignoring others? If the world is indeed a homogenous village, with a great deal of specialization and highly interconnected, why can’t it be cohesively managed as well? It is clear that some lessons are learned and others ignored. Some people may point to the problems associated with collective action, but the issue at hand is one of management.

Unfortunately, the poor quality of management on the global stage will only be aggravated by the relative demise of the U.S. Obsessed with its own domestic woes, the U.S. is providing less of a leadership role. As a result, the so-called global village is at risk of unravelling when a new round of leverage-induced crises comes to the forefront. Some things we will never learn.