Or so some would have us believe. The truth is it was all perfectly predictable because sudden collapses of confidence are built into today’s business cycle, where those with assets to protect try to inflate their value as much as possible before they cash in and leave others high and dry.
Having a business cycle delimited by such extremes is in few peoples’ interests and one of the biggest challenges of building a sustainable economy is ensure that the boom/bust cycle is of net benefit to the majority of businesses.
With that in mind, here are three aspects of the 2008 collapse and the continuing recession-turning-into-depression which need to be learned from to ensure an sustainable economy is built for the future.
There is nothing intrinsically wrong with debt: you borrow from someone, you use those assets, you repay them. Easy.
The trouble is that debt has become something of a way of life. If you look at the state, which should surely be a paragon of virtue, it is permanently in debt and many businesses cannot exist without a variety of credit lines and perpetual bridging loans.
What’s more the debt which is currently being used has been magiced out of the future. There are no tangible assets to back it, just the expectation that there will be one day. Debt is a short term fix, not a long term solution. You cannot really call a business or an economy sustainable if it needs debt to survive.
Debt cannot be allowed to get out of control like this. It is fundamentally unsustainable to keep people, businesses and countries in a permanent state of debt but that has become the economic norm for some reason which I still can’t fathom (other than it makes a small number of people exceedingly wealthy).
It also needs to go back to being underpinned with existing assets and where it isn’t the risk ought to be on the lender not the lendee. Risk, that’s another thing…
Is NOT what drives economic growth. It’s not even what drives innovation and entrepreneurship. Both of these come about through people devising goods and services appropriate to the context and marketing them successfully.
Risk is the icing on the cake, the thing which pushes something from 98 percent to 102 percent. But to take that risk you put on the line so much in terms of stability that it often isn’t worth the, er, risk.
Like debt, the trouble with risk is that’s it’s become commonplace. But when you take a business risk it’s not just the company you’re dealing with, it’s peoples’ livelihoods and families; their jobs, training and self-esteem. Risk is not all about financial returns, it’s about enhancing or destroying peoples’ lives.
The trouble is risk has been seen as the only thing which can drive wealth creation (and, so the finance-orientated world view goes, the economy). It’s not: if it was we would all bet on the horses and live like millionaires.
Risk needs to be put back to what it is: risk, not the foundation or motor of the economy. And if you really want to have responsible investors, a large slice of the financial considerations of business risk need to be replaced with concomitant social and environmental risks.
All of which brings us to the fundamental foundation of a capitalist economy: the investor. An investor has assets which he wants to invest in other people’s enterprises in order that he may increase his assets.
But is the increase in assets all that matters? The prevailing view has been that so long as those assets rise in value everything else does as well. But it doesn’t. Human nature dictates that if you emphasise one thing as a reward more than others then people instinctively go for the more rewarding thing.
So return on investment can no longer be about the simple increase in a particular asset. It needs to be about a basket of assets which are seen as being equally important, whether you’re talking about social, environmental or financial assets.
The mechanism for doing this isn’t to represent everything in financial terms; it’s to respect these non-financial assets for being just that and build the economy around them as well. That way investors from across the board can work together for a balanced and sustainable economy.