November 12, 2008 / 12:56 AM / 9 years ago

Crunch predictors proffer radical cures

<p>Andrew Simms, the policy director at Britain's New Economics Foundation (NEF), poses for a portrait in the library of his London office November 4, 2008. In 2003, a group of London-based thinkers was among those who warned of a huge credit crunch and a surge in personal and corporate bankruptcies. Five years on, the crisis is here and the question is whether prophetic minds like those in NEF can persuade a hitherto deaf political mainstream to adopt their proposed solutions. Photo taken November 4, 2008. To match feature FINANCIAL/PROPHETS REUTERS/Suzanne Plunkett (BRITAIN)</p>

LONDON (Reuters) - In 2003, a group of London-based thinkers was among those who warned of a huge credit crunch and a surge in personal and corporate bankruptcies.

Five years on, the crisis is here and the question is whether prophetic minds like those in Britain’s New Economic Foundation (NEF) can persuade a hitherto deaf political mainstream to adopt their proposed solutions.

Founded in 1986 and now fronted by policy director Andrew Simms, a political economist who trained at the London School of Economics, the foundation has described itself as a “think and do tank” with aims that include building an environmentally sustainable as well as socially inclusive economy.

Its ideas have received relatively thin coverage in mainstream financial media -- scientific journalists, whom Simms describes as comparatively “non-doctrinal,” have tended to be more receptive than economic correspondents.

But “change” is the mantra of the moment. And the return to political fashion of the ideas of John Maynard Keynes -- or at least of the simplified notion governments should intervene and invest to stimulate economies in recession -- could help its cause.

Simms and his colleagues have seized the moment, publishing a pamphlet this month which puts forward 20 steps to rebuild a better economy. Its cover depicts a phoenix and it is entitled: “From the ashes of the crash.”

Simms is careful to distinguish the foundation’s views from those of Keynes -- who crafted his theories before climate change needed to be taken into consideration.

But he said some NEF thoughts had a “strongly Keynesian flavor,” albeit adapted to times when the “climate crunch” and the “credit crunch” need to be tackled simultaneously.

Its latest pamphlet in part draws on an earlier NEF paper, “The Green New Deal,” published in July after more than 12 months of consultation with like-minded intellectuals.

That title -- also taken up by the United Nations Environment Program (UNEP) in October -- derives from U.S. President Franklin D. Roosevelt’s New Deal, designed to lead the world out of The Great Depression in the 1930s and also allied to Keynes’ thought.

Just as the New Deal argued for public spending and the UNEP urged “green growth,” the foundation’s new pamphlet says some of the spending needed to kick-start the economy should include environmental investment and the creation of countless “green-collar jobs” -- manufacturing in sustainable industries.

Compared with their response to climate change, governments have responded much more rapidly -- and radically -- to financial crisis, Simms said. For him, tackling climate change is every bit as urgent.

“To find our financial institutions nationalized in a sweep is an ideologically unimaginable leap,” Simms told Reuters in an interview. He was referring to Britain’s part-nationalization of banks although similar steps have been taken globally.

“If they can move that quickly and ditch doctrine almost overnight, why can’t they apply that to climate change?”

20 STEPS

<p>Andrew Simms, the policy director at New Economics Foundation (NEF), poses for a portrait in the library of his London office, November 4, 2008. In 2003, a group of London-based thinkers was among those who warned of a huge credit crunch and a surge in personal and corporate bankruptcies. Five years on, the crisis is here and the question is whether prophetic minds like those in NEF can persuade a hitherto deaf political mainstream to adopt their proposed solutions. Photo taken November 4, 2008. REUTERS/Suzanne Plunkett</p>

The U.N. Climate Panel said last year it would cost up to 0.12 percent of world Gross Domestic Product every year to 2050 to avert the worst of climate change, such as food and water shortages, heatwaves, droughts and rising sea levels.

With world GDP at $54.3 trillion in 2007 according to the World Bank, that would -- even assuming no economic growth at all over the period -- cost roughly $65 billion annually over 43 years, or $2.8 trillion in total.

That sum compares with around $4 trillion so far as the cost of rescuing the financial system.

The U.N. report did not estimate the costs of ignoring climate change, but a 2006 report by former World Bank chief economist Nicholas Stern said it could mean disruptions “on a scale similar to those associated with the great wars and the economic depression of the first half of the 20th century.”

Other cures suggested by “From the Ashes of the Crash” range from establishing a maximum wage as an antidote to huge bank bonuses to setting up a secure, local banking system -- as opposed to a risky global network set to cost world taxpayers trillions of dollars in rescue funds.

<p>Andrew Simms, the policy director at New Economics Foundation (NEF), poses for a portrait in the library of his London office, November 4, 2008. In 2003, a group of London-based thinkers was among those who warned of a huge credit crunch and a surge in personal and corporate bankruptcies. Five years on, the crisis is here and the question is whether prophetic minds like those in NEF can persuade a hitherto deaf political mainstream to adopt their proposed solutions. Photo taken November 4, 2008. REUTERS/Suzanne Plunkett</p>

Following the resurrection of failed credit systems, it argues the logical sequel would be to help ordinary people unable to pay their mortgages: it urges a moratorium on home evictions caused by the credit crunch.

“While the banks, which are at fault, have been bailed out to a previously unimaginable degree by the tax payer, thousands of hard-working home owners face the daily insecurity of potential eviction,” it notes.

Desperate remedies may not have been necessary if governments had listened before.

In 2003, the foundation was among contributors to the Real World Economic Outlook, along with eminent thinkers, notably Nobel prize-winning economist Joseph Stiglitz. That warned of a major financial crisis.

“We’re trying very hard to resist the temptation to say we told them so,” said Simms.

Lines that were then predictions read in hindsight as facts.

“There will be a collapse in the credit system in the rich world, led by the United States, leading to soaring personal and corporate bankruptcies,” the Real World Economic Outlook said.

Another telling phrase was “financial institutions, we contend, no longer act as servants to the real economy, but as its masters.”

Even though the foundation has been proved right about the credit crunch -- and U.S. President-elect Barack Obama has outlined plans that seek to combine economic stimulus with climate-aware investment -- Simms is under no illusion about the obstacles.

The Economist magazine has already dismissed thoughts of a “Green New Deal” as “green, easy and wrong,” and the world’s “financial institution masters” would probably resist much of the NEF’s thinking with all their might.

“What’s going to be interesting is whether the new ownership of the banks has an effect,” said Simms. “What we have not seen is the quid pro quo... The benefits need to be returned to the people.”

Additional reporting by Alister Doyle and Mike Dolan; Editing by Sara Ledwith

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