Did we deserve the crisis?

The crisis explodes and we rush off to take shelter from the rainstorm. While we do this, the process seeks to find its course as a crisis does not stop but transforms the social and economic dynamics. So big is the fear and confusion that only the daring or those who are best positioned, understand that this is the time to apply energy to channel the situation in one direction or another. What happened and why did it happen? Could the crisis have been avoided? Did blindness precipitate it? What comes next? How do we react? We must ask ourselves whether we want to change; immediately after we will find out whether we will be capable of changing.
The crisis explodes and we rush off to take shelter from the rainstorm. While we do this, the process seeks to find its course as a crisis does not stop but transforms the social and economic dynamics. In this flow of events, powerful interests struggle so that the outcome may turn as much in their favour as possible. So big is the fear and confusion that only the daring or those who are best positioned, understand that this is the time to apply energy to channel the situation in one direction or another.

What happened and why it happened

The diagnosis of why the crisis burst out begins by pointing out that the financial system exhibited a lousy behaviour, and made it possible for sectors without repayment capacity to become indebted. What is not sufficiently elucidated is the reason for such behaviour and the resulting over-indebtedness.

In my opinion, one of the key factors that precipitated the crisis was the mismatch that had occurred between the rate of growth in production supply and the rate of growth of those who absorb that production (effective demand). This was the result of a concentration-oriented growth that led to increasing inequity in almost all world economies. It is worth mentioning that such inequity occurred not only in emerging economies (translated into greater poverty and indigence) but also in central economies having much higher standards of living, and it was there where the present crisis started.

As it turned out, the “organic” growth of the economic system was hurt (a relatively balanced growth of its key variables). Apart from praiseworthy exceptions, analysts in the Northern Hemisphere who operate from the perspective of abundance and growth reproduction as well as those in the south who operate from the perspective of shortage and development promotion, had underestimated the critical role that inequity plays by affecting the foundations of an organic economic growth.

Inequity implies several things. On the one hand, that there exists a certain lag or backwardness in the incomes of middle and low-income sectors (workers, small producers, retirees, the unemployed, marginalized population in large cities, towns and rural areas) in relation to the growth in production and the economy in aggregate terms. This lag translates, in the Southern countries, in extended poverty, while in the Northern countries the relative lag may occur even with an improvement in absolute terms in the general standard of living. There is a gap, a disconnection between the total goods and services that a vibrant productive apparatus is capable of producing and what the demand is capable of absorbing. We are talking about gaps in aggregate terms because sector or territorial gaps are in fact being constantly produced in the economy, but they manage to be absorbed -“resolved”- by trade, migrations, the overall economic dynamics through innovations and permanent restructuring.

Those gaps generate tensions and if the latter acquire a systemic dimension, they can no longer be solved by the sole economic dynamics and require the intervention of regulators and political helmsmen. If these do not react making timely decisions that go beyond the purely functional ones, the functioning of the economic machinery gets blocked and crises break out.

Inequity also involves a growing concentration of savings, that portion of income that is not spent and may be used to finance investment, which is one of the pillars of economic growth. Depending on how savings are channelled, “allocated”, one or another type of investment will result: a more productive investment, or a more financial and speculative one; an investment that is concentrated on large economic players, or a de-concentrated investment that contributes to capital formation among small and medium-sized producers; an investment that threatens the environment, or an investment that safeguards and protects it.

The concentration of savings takes place at the same time that investment opportunities in the real economy diminish as a result of the reduction of the demand with respect to production. This gap gets worse due to the superfluous nature of the consumption of those who concentrate incomes, which is spread through aggressive advertising to the rest of society.

Thus, the concentration of savings and the reduction in investment opportunities in the real economy combine to deviate funds towards financial products that are ever more speculative and, hence, entail higher returns and risks, risks that are sought to be concealed under different types of derivatives. The logic of recycling concentrated savings by luring them with juicy yields and hiding the inherent risk to this type of financial schemes led to a blurring of the ethical limits, giving way to bold or even criminal adventures.

The crisis is avoidable

It is clear that it is possible to prevent the economic functioning from ending in a crisis. This goes beyond regulating the financial markets appropriately, which is certainly necessary to do. When economic forces that hit the borders of the economic system’s sustainability unleash, strengthening the defenses is not enough; it also becomes necessary to deactivate those forces that are social and not natural. It is required to work on an organic growth that avoids the traumatic effects of the inequity produced by concentrating processes; among other factors, try to make the consumers’ genuine income grow hand by hand with the supply of goods and services. This will contribute to a better growth of the economy that, however, will never be exempt from occasional imbalances and turbulences that are inherent to complex systems where millions of players interact. Those tensions can be “absorbed” within the regular functioning of the economic system; that is, without trespassing the functional limits of sustainability and avoiding falling into recurrent crises.

Oftentimes, maybe most of the times, markets do not manage to ensure sustained organic growth on their own as diverse factors tend to trigger beyond the proportions required for a relatively balanced growth to occur. It is in those moments when regulating the systemic functioning becomes a must in order to guarantee its efficacy and gear it towards benefiting society as a whole.

Countless policies, mechanisms, and instruments may be used to such end. This battery of measures includes eliminating regressive tax systems and reducing tax evasion; implementing a fairer, more efficient allocation of government spending, a monetary policy that secures price stability, regulates financial intermediation and promotes credit access; channelling national saving so that it may further enable capital formation at the bottom of the productive apparatus; implementing direct actions to support small producers in relation to knowledge, contacts, market access and modern business engineering; promoting equitable linkages between production chain leading firms and suppliers, distributors and clients, so as to exert the leading firms full meso-economic responsibility.

The blindness that precipitates the crisis

Nonetheless, for a long time it was not wanted, possible or simply ignored, to address the challenges that establishing an organic growth entails. In particular, income distribution worsened instead of improving and, to tackle the widening gaps, the solution sought consisted in extending credit instead of generating more genuine income among middle and low-income sectors (the base of the social pyramid).
The approach made it possible for inequity to continue to grow, with the resulting concentration of income, saving and investment. Myopia became an accomplice to avarice and mean-spiritedness. Some warned about the tensions that kept building up under the surface; yet, since “growth” was vigorous and appeared to be sustained, few were willing to believe that such course and way of functioning would end up being unsustainable.

Meanwhile, dissatisfaction was being dodged, postponed, by causing the middle-income, and to a lesser extent, the low-income sectors to become indebted. At that time over-indebtedness raised no concern at all. Why should it worry anyone if, thanks to it, the economic machinery was going through a period of great bonanza? Besides, there was politics, to manage occasional outbursts, and the large media, to homogenize thought and stifle dissent.

The dreadful financial bubbles were thus gradually formed, ever more aloof from the man in the street’s economy. The financial system grew self-centered; financial “products” mobilized huge amounts of money that could be transferred massively and in real time by just being equipped with communication facilities; the returns offered outperformed any other investment choice in the real economy. The conditions were converging for a large systemic crisis to unfold.

The blast and what is to come

And, alas! One fine day, the shockwave of that frenzied speculative allocation of saving began to burst the huge financial bubbles, unveiling, in the first place, the existence of mortgage and credit card over-indebtedness and, as a result of that, impacting in domino-effect fashion on the rest of the markets. Bubbles deflated as quickly as our children or grandchildren’s balloons do.

That over-indebtedness would have produced less harm or maybe a positive impact if it had been directed to more meaningful consumption, away from the superficiality of needs that are not basic which are encouraged and supported by highly effective commercial advertising. Another economic dynamic could have developed –way distanced from financial speculation and with a much more rational allocation of available resources – had we changed the profile of our consumption orienting it instead to one of clean energy, healthy food, preventive medicine, goods that do not encourage further existential alienation and slippery into addictions; a consumption that carries values and not ostentation that exacerbates social differentiation. In other words, the outcome would have been different had consumerism been replaced by responsible consumption

Inequity not only applies to income, it also manifests itself in the existence of knowledge, information, contacts, market and capital access gaps, which jeopardizes personal development and capital formation in small and micro producer sectors that constitute vast majorities in almost all our countries. This does not necessarily have to be this way, as it was assumed in the past when it was taken for granted that economies of scale were an unsurmountable constraint. Today, however, we have access to modern business engineering that is capable of structuring scattered small production into medium-sized organizations capable of accessing higher opportunity thresholds. This is the case of franchise systems, export consortia, centralized service providers, modern production networks led by well-organized enterprises that propel the growth of the entire value chain. However, little of that reaches the bottom of the pyramid, which instead of excellence receives what is left over, or the scrap.

The way we react and its probable consequences

In the face of a crisis, very different measures are available to mitigate its effects and try to cause the river to return to its course, which would be a crass mistake to make: the river should not return to “that” course, because we would be once again reconstructing the scenario and the dynamics that led to the crisis. Let us not be confused, the king was naked, even if we did not dare to acknowledge that.

The key measures being discussed are intended to underpin the financial system as it, in point of fact, is a part of the nervous system of any economy. Huge amounts of money are devoted to “bail out” banks, insurance companies, mortgage agencies. So many are the billions that the ordinary citizen cannot even retain the figures, let alone figure out what such phenomenal reorientation of resources implies in terms of opportunity costs.

In addition to that, consumption stimulus plans are being presented, as the productive apparatus sees with justified terror that the enormous contraction in demand threatens its subsistence. The market dries up, and so does the destination of its production, although, it must be made clear, not all will be affected in the same way. Those who produce steel, cement, aluminium, oil, equipment, machinery, etc, will depend on new public work programs, which will become the key productive and social investment drivers; those who produce essential goods (food, drugs, communications, etc.), which are indispensable even during a crisis, will have better prospects than those who are devoted to the production of superfluous mass consumer goods (during a crisis, the room for irresponsible consumption is reduced, as urgencies relocate family priorities); with one exception: the production of superfluous goods intended for high-income sectors will survive, because the wealthiest 10% of the planet’s population will maintain their standard of living with very few cutbacks.

But, how can consumption be encouraged among those who see their income drop and unemployment grow? The first reaction is to allocate public funds to the withdrawal of “toxic assets” and the establishment of new finance lines, loosening conditions to access those credits. It is not a question of generating genuine income; that will be done “once the storm has been weathered”. At this point in time the main challenge is deemed to consist in “pump-priming”; bringing the machinery back into operation; causing supply—that supply generated by the existing productive apparatus—to meet a demand that is capable of absorbing its production so that it may then be able to re-generate employment, reducing rampant unemployment, calming the waters, gaining back the “confidence” of all of us in the economic system.

Yet, wouldn’t we then be fixing that particular machinery, that functional logic, that systemic rationality that led us to the crisis? Wouldn’t we be producing another round of over-indebtedness, of consumerism, of income, saving and power concentration, of a frenzied pursuit of benefits, of institutions threatened by privileges, arbitrariness, aggravated criminal systems?

Did we deserve the crisis?

The answer is a categorical “yes”. But we are not talking about deserving the crisis as a punishment but, instead, as a consequence of the way we had become organized as society, the way we functioned. By favouring certain aspects and ignoring others, we established a certain economic order; we set up priorities and oblivions.

It is difficult to steer an economy that rewards mean-spiritedness and avarice as the basis for accumulation. Accumulation is indispensable for economic functioning, but it needs not be aggressively concentration-oriented; there may be accumulation distributed among all layers of the social and economic structure: large, medium and small-sized enterprises. If capital formation grew excessively in large units, we would no doubt be creating an inevitable concentration process, as the very economic dynamics would be taking—as it actually takes— that course.

The challenge lies in thinking of new ways of structuring ourselves and of functioning because that is what we are talking about when we refer to coming out of a crisis stronger. If we are paying such a price for mistakes we have made, let us look for opening new opportunities. We need to establish a different set of prizes and punishment; one that promotes those who add value to the social effort and not those who speculate and profit from the rest; to encourage those who organize production differently, acknowledge what each one contributes to the social functioning: the ordaining and regulating State, responsible entrepreneurs, workers and civil society, including educators, scientists, technological innovators; those that shape values such as social, religious and political leaders, the media, advertising agencies and, in each home, parents or “that significant other”.

An optimistic, though not naïve vision of the human condition would indicate that we will know how to stand tall above our own mistakes, reflect, and grow in terms of experience, take care of one another, exercise our free will acknowledging limits. These are potentialities that speak of doing as well as being, but they do not guarantee per se any given course. We must individually ask ourselves whether we really want to change; immediately after we will find out whether we will be capable of changing.

This year we are celebrating astronomy, and we marvel at the wonders of the universe, its complexity and countless enigmas. Confronted with that enormity, it is awesome that “earthly” matters may also be so highly complex and that, within our own selves and our societies, enigmas are nested just as impenetrable as those remote galaxies and the big bang. We bear a changing and tempestuous mix of needs, interests, values, and emotions. With it, and with our capacity to think and act we can be able to give way to something better for the future that starts today. We deserved the crisis, but what matters now is whether we will know how to transform it into an opportunity.