Economic and financial stability

The financial crisis is challenging the US and UK "Anglo-Saxon" free market model and laissez-faire capitalism ascendant since the 1980s. The US Congress $700 billion intervention in the financial sector is almost the same percentage of GDP invested in the post WW2 Marshall Aid plan. The UK Government's £500 billion banking bailout is fast turning into further nationalisation (which began with Northern Rock). How can we set the turbulent short term against coherent views of the future?

Socialisation of risk
The UK plan facilitates government intervention in two ways: it has put in place measures for banks that are solvent but possibly illiquid; and where solvency may also be an issue it has looked to recapitalisation of banks or nationalisation. By exchanging the money at risk in return for part or whole ownership, UK taxpayers share in the risk/reward - a socialisation of risk that would otherwise be solely borne by depositors and investors. Penalising savers when at a time of trying to overcome the excesses of an overspend culture would be counterproductive. Whilst executive bonuses are relatively small in terms of the real money at stake, policies to limit excesses do represent a big move to address issues of equality in society.

Towards a new model?
One European head of state has reportedly said: "Some people are trying to see this as a failure of Western values, of capitalism overall. When I met African leaders ... some of them said to me, 'Maybe we should follow the Chinese model instead, authoritarianism seems to work for them.'"

Earlier this year in the Future of the Global Economy to 2030, we entertained a future scenario with more government control in the market over resource allocation - consistent with the government intervention in markets today. Whilst we concluded that the market economy was not going to be replaced by central planning, this increased control over resource allocation is not too dissimilar from the model of capitalism pursued by China.

The current situation owes a great deal to the imbalances in the global economy between the US and China. The same is true for the UK: the past two years have seen personal debt exceed GDP. With the US and UK models looking shaky, is it possible that the mighty US will ask the IMF for a conditional loan?

Though the current crisis makes other models look more appealing, we should not underestimate the ability of the West's model to repair itself. The smooth ascent of China should not be taken for granted. There is also no consensus that more regulation in the financial sector is the solution, an issue at the heart of the Congressional debate on the US rescue package. After the tough lessons learnt from the Sarbanes-Oxley reaction to Enron, a heavy regulatory response does not always make for a competitive solution.

Long term possibilities
If we are heading towards a scenario where there is more State control of the markets, at what level will this be - national or international? Central banks have already demonstrated a renewed appetite to work together in times of crisis by coordinating an interest rate cut. Increased international cooperation may result in long-term benefits. Economist Nicholas Stern certainly thinks so. The concerted global effort to tackle this financial turbulence could also be used for other global challenges like resource availability and climate change. The skeleton in the closet is the alternative beggar thy neighbour protectionist reaction of the 1930s.

Is it likely that the model of capitalism in 20 years will look the same? The possible shifts in ownership of the (not-so) commanding heights of capital, whether from overseas acquisitions or from governments' re-owning their private sectors, may be the first sign of a significant shift from the free markets pursued for the past 30 years.

'''Is this the shock that triggers alternative futures? Alongside the dramatic fall of the Berlin Wall and the Soviet Union, the end of Apartheid and 9/11, the present crisis has made more people think about what the future holds, and to abandon the idea that the unexpected cannot happen.'''

This is part of Outsights 21 Drivers for the 21st Century &trade;, a future-orientated scan of the 21 key forces shaping this century.

Links

 * No, Really, How Much Is $700 Billion?
 * Painful epiphany signals end of America's big idea
 * The Future of the Global Economy to 2030
 * How imbalances led to credit crunch and inflation
 * Personal debt in UK exceeds GDP for second year
 * http://news.bbc.co.uk/1/hi/business/7661956.stm
 * BRICs and emerging powers
 * Taxpayers will fund another run on the casino
 * Stern: Financial crisis could promote clean energy
 * Outsights