Remember the times to come

Some seven years after the great financial crisis, our response to the meltdown is breeding an unhealthy short-termism

Following the crisis, central banks were forced to step in, attempting to pick up the pieces left behind by policymakers as they abdicated their responsibilities to make meaningful structural reforms. But central banks cannot influence the real world. They have to do it indirectly via unconventional monetary policy.

What began as a temporary crisis solution has become a new norm. Quantitative easing, rock-bottom interest rates and low-bond yields are no longer the exception. Instead, they form an ecosystem overly focused on the short term.

This would be fine if it were administered in moderation, as short-term incentives help drive efficiency. But overdoing it creates long-term instability, and our judgment on what is sustainable finance has become clouded. This leads to increasing pressure on long-term investors, who will eventually have to pick up the tab as zero-interest-rate policies eat into the asset valuation of pension and life insurance funds. Regulation alone won’t be enough to refocus the global financial industry on the longer term – and I’m saying this as a former central banker and regulator. While achieving much good, regulation can also encourage short-termism.

What we need instead is a little humility to step back and remember that we all have collective long-term responsibilities. Besides, regulators as well as the wider financial community didn’t do a very good job preventing the last crisis so it is questionable how they can help prevent the next one.

Piling regulation upon regulation adds to an environment in which the best and the brightest move into the shadows where they cannot be regulated. And then accidents will simply happen where regulators are not watching.

WHOSE RATES ARE THESE?

The ongoing response to the great crisis results in significant market distortions. In some markets, central banks have gone from the lender of last resort to the buyer of last resort. Pre–financial crisis, central banks owned 3% of financial assets; now it is 8%. So we have to ask ourselves: if they are determining short-term interest rates, is this a market-driven rate or a central bank one?

Piling regulation upon regulation adds to an environment in which the best and the Brightest move into the shadowsIt might not have been their wish, but central banks are now major players in the global financial markets and a crucial element in the fiscal taxation that has been imposed on society. Interest rates have a huge impact and it would be healthy for the entire financial community if central bankers engaged in an open discussion on the hard budget constraints of their current policies. At the moment there is none and it won’t be easy to draw that line. But without it, they can do anything they please, regardless of the long-term consequences.

PEOPLE, PLANET AND PROFITS

To save this short-term ecosystem from collapsing, we need to stop thinking about ourselves and remember what finance really is for. People, planet and profits, the triple bottom line, need to become more balanced. The current approach is still focused on profits and cares too little about the people and the planet.

Yet these things can go hand in hand. A lot of free market advocates think sovereign wealth funds are demons, but some of them have delivered excellent returns. This is largely because they adopt a more long-term view, looking at innovations in areas like transport and communication networks that actually enable market forces to function.

When it comes to saving for retirement, radically different approaches are even more vital. With its lack of government pensions, Asia, for example, could become a laboratory for new approaches. The majority of people in the region manage their own assets and, in most cases, that means their homes are their pensions. Now, we have platforms such as Airbnb that can help generate additional income from a property. Tie that up with a reverse mortgage and you have a pension scheme that’s as good as anything.

Ultimately, the question is, what is finance for? Finance must serve real life, yet reality is happening faster than the theories we have to explain what is going on. Nobody has all the answers, but if we ignore the long term, we might be in for a nasty surprise.

Remember the times to come

Some seven years after the great financial crisis, our response to the meltdown is breeding an unhealthy short-termism

Remember the times to come

Some seven years after the great financial crisis, our response to the meltdown is breeding an unhealthy short-termism

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