Analysis: Serial shocks forcing world to "think long"

LONDON, Jun Wed Jun 29, 2011 9:44am EDT

An Indian broker reacts while trading at a stock brokerage firm in Mumbai, January 22, 2008. REUTERS/Arko Datta

An Indian broker reacts while trading at a stock brokerage firm in Mumbai, January 22, 2008.

Credit: Reuters/Arko Datta

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LONDON, Jun (Reuters) - Thrown by a mounting series of extreme events over the past four years, global policymakers and investors are being urged to think long and prepare more systematically for the worst.

Futurologists have rarely been taken more seriously by hard-nosed pragmatists managing economies and investment portfolios and it's not hard to understand the sudden disquiet about how unprepared financial and political systems are for the ripple effects from often random shocks.

The complex web of consequences woven by events from a European sovereign default to a natural disaster, commodity price surge, regional power outage or sudden social upheaval are now the stuff of day-to-day conjecture and policy discussion even if the lack of cross-border contingency planning is all too clear.

A UBS survey this week of central bank reserve managers and sovereign fund operators, representing bodies with some $8 trillion in global assets, showed a clear majority saw sovereign default as the biggest risk to the world over the next year.

Over a 25-year horizon, the same respondents listed resource competition, demographics, income inequality and climate change among their biggest worries.

But it is far less clear that anyone is actively modeling, planning and preparing for these risks. For many, an increasingly myopic investment community is almost blind to long-term horizons or even future outcomes not modeled on past data or observations.

Mindful of this vulnerability, the Organization for Economic Cooperation and Development released a report this week on how world leaders should plan and prepare for a world where serial shocks and contagion are almost routine going forward.

"Global leaders are acutely aware that another systemic shock could severely challenge economic recovery, social cohesion and even political stability," the OECD said.

It pointed out that since the report was commissioned in 2009 the world has felt the effects of the credit meltdown; the first declared pandemic in more than 40 years; dramatic political unrest across the Middle East and North Africa; the BP oil spill; the closure of European airspace due to Iceland's volcano; and Japan's earthquake and tsunami.

"Never before have global risks seemed so complex, the stakes so high and the need for international cooperation to deal with them so apparent," it added, outlining a series of proposals for global data-sharing, stress testing, model-building and contingency planning.

HALF-BAKED GLOBALISATION

Part of the problem today is that the latest wave of globalization was led solely by transnational corporations and their interwoven supply chains and by financial markets' 24/7 worldwide blizzard of electronic transactions.

While this greatly facilitated the transmission of shocks worldwide, it was not matched by countervailing global governance and regulation to keep this activity in check or mitigate its most socially- or systemically-threatening aspects.

Crucially, one widely held belief proved spectacularly wide of the mark: that "sophisticated" financial pricing, insurance and hedging in ever-more liquid markets would provide adequate early warning of systemic threats.

Before the credit bubble popped in 2007, no financial pricing came close to reflecting the existential threat to the banking system and world economy that was brewing from huge household credit and the impact on it from an ostensibly "predictable" event such as the drop in U.S. house prices.

If faith in the predictive power of markets has been wounded -- the scale of lax lending to sub-prime U.S. mortgage borrowers or peripheral euro zone sovereigns over the past decade illustrates the short-term focus of finance, at least -- then international government of some sort may have to step in.

The expansion of the Group of Seven club of rich economic powers to a more representative G20 has been part of that glacial process to date, but the latter still lacks a permanent secretariat to allow it to act coherently as an effective governing council beyond loose international agreements.

In any event, identifying potential risks does not necessarily imply solving them.

And perhaps the most insoluble of global risks over the coming decades relates to a rising but aging global population at a time of heavily indebted governments and households in a world of rapidly depleting natural resources and climate change.

No one yet has figured a way to square the obvious limits on economic growth from aging societies and energy or resource scarcity with the imperative of faster growth needed to service colossal and mounting global debts and sovereign liabilities.

Technological advance, so often the savior over the past century, will only likely get us so far.

In a roundabout way, the unforeseen credit crisis may well have been the best early warning signal for these more intractable problems.

If it focuses minds now, it may have served a purpose.

(Reporting by Mike Dolan; Editing by Ruth Pitchford)

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Comments (2)
breezinthru wrote:
Thinking long would require central banks and governments to vigorously prosecute the perpetrators of the greatest financial fraud in the history of the world- the events leading up to the Collapse of 2008 from which the economies of the world are still suffering.

In the long run, it’s the only way to reduce the likelihood of a reoccurrence.

Jun 30, 2011 8:29am EDT  --  Report as abuse
fred5407 wrote:
What you are seeing in Greece will occur in the US unless things are turned around rapidly. Tax breaks for corporations and incentives for creating paper mache jobs will not work. The people of the US are very angry with our central government that has been passing laws and spending to fatten up manufacturers and special interest groups. We may see rioting, some states seceeding from the union, and other not so happy things if things are not done. Hearing some of the Republican congressment and senators only makes me wonder. Could anyone really be that stupid and still breathe.

Jun 30, 2011 1:37pm EDT  --  Report as abuse
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