One day, hopefully sooner rather than later, the current global crisis will become but a memory, albeit an unpleasant one for many of those affected. The current situation is brutal, but it can also teach us how to avoid the same thing happening in the future.
What’s this got to do with Italy? As much as its has got to do with the rest of the crisis-struck world, and it is the Italian situation which got me thinking about how to avoid these unsettling crises.
If the world does not evolve enough in the aftermath of this crisis, the next crisis may well be lurking right around the corner, and the one in progress at the moment is by no means the first. If something is not done to tackle what caused the current crisis, the next corner may well be closer than we think. A future crisis could also be much messier too. Think wars and mass destruction.
Before proposing a way of solving the current crisis which, I hope will also prevent future global economic crises, let’s take a look at the cause of the current mess. On the face of it, that is not an easy question to answer, but boiling everything done to the bare minimum, the cause was simply a case of the visually impaired leading the visually impaired, and leading them in a very risky direction.
Take the so-called credit crunch in the USA. What happened there was largely brought about by a bad decision taken by inept politicians to make it easier for more people to take out loans to buy houses. In granting these loans, every last scrap of income was taken into account to ensure as many borrowers as possibly could be lent as much as possible. This was an inherently risky strategy. What happened then was not exactly unexpected – the loans went bad and the property value bubble created by all the wildcat lending suddenly went pop.
The income levels of those paying back the massive loans fell, er, massively, but the loan payments did not. In the end, by way of example, people with base incomes of $2000 a month had to meet monthly loan payments of $2000. Bye bye house, and bye bye interest for lenders.
Risk is Risky
Some bright spark, who had obviously never heard of something called risk management, but who had realized that lending money to persons whose creditworthiness was suspect is rather risky, came up with the clever idea of selling the risk on these already very risky loans to others, only the level risk proved to be too high. That’s the investment game – high returns come with high risks. The rewards if everything goes well are generous, but there is always that risk factor. In the end, the risk was far too high and all those potentially lucrative investments and gambles on risk levels turned out to be a fast lane towards bankruptcy, not only for the recipients of the loans, but also, as we have seen, for many of the lenders, as well as those who gambled with the passed on risk and lost. Well, that’s risk for you and it’s why it is named as such.
When banks lose money, they stop lending money. Hello credit crunch and the depression which follows. As a consequence of the credit crunch, businesses could no longer obtain credit, so they went bust and left people without jobs. Unsurprisingly, the jobless could not afford pay back their large mortgages. A vicious circle, if ever there was one.
Another reason for the chaos was that the availability easy money led to house prices increasing to form a bubble. Bubbles which grow too big have a nasty tendency of bursting and this one did. House values fell and many buyers were left in properties which were worth less than the loans taken out to pay for them. People opted for forclosure and this meant banks did not obtain the returns on the loans they were expecting.
Someone, it seems, forgot what risk means. Who? In part, the dear politicians who wanted to collect a few more votes at election time, except the grand plan backfired. Then there were the banks which are supposedly run by experts on things like risk, but the banks, in blindly playing follow the political leader, appeared to conveniently forget what risk was.
The rest is history, except it isn’t, as this particular phase of history is not yet over. Not by a long chalk. And the fallout has trickled from the United States of America across the Atlantic and all the way to Europe and beyond.
An End is A Beginning
One day though, the crisis will come to an end, and this solution could help end it.
Once the current crisis has come to an end, one logical question is: How can similar crises be avoided in the future? Well, the answer is actually very simple: you make everybody richer, and this lowers risk.
An across the board increase in wealth can be achieved either by paying people more or by cutting taxes, possibly by doing both. By paying everybody more, the rich will end up with less, at least initially. Then they may well become even more richer than they were before. Why? Simple: the answer lies in consumption. The more people earn, the more they consume, up to a certain point. Even the richest of the rich can only consume a limited amount and the rich are few in number. After all, how many Ferraris can one person drive at the same time? One. No more, no less. Yes, the super rich can own 100 cars, but they can only ever drive one at a time. There is also the fact that to become rich in the first place, generally, but not always, someone has to have consumed lots of something else.
For much higher levels of consumption to exist there needs to be demand and for demand to grow people need raw cash. To earn that cash they need jobs. What creates jobs? Why, demand. The problem at the moment is that many people do not have enough raw cash which means they can’t consume. Not having jobs means they cannot consume either so demand cannot grow, in fact the opposite happens, and demand contracts. This means the rich cannot easily become richer. Yes, they can invest in things, but if businesses are not doing business because demand has contracted, there is a limit to what they can invest in and returns on investments are not going to be high if there is nobody to sell things to. Hence the very nervous stock markets. The rich are losing out but they don’t realise it.
At the moment the crisis is drying up consumption. Something needs to be done to cause consumption to grow once more.
What is the answer?
Simple, where possible, pay more people more, maybe by offering tax incentives to businesses. Wealthy or profitable businesses and individuals then need to be encouraged to invest in other, perhaps struggling, but basically sound businesses. Call it mass angel investment, if you will. The funding would used to encourage the businesses being assisted to employ more people in order to enable consumption to pick up. In other words get people working to make them richer to increase consumption.
Stop reading, start speaking
Stop translating in your head and start speaking Italian for real with the only audio course that prompt you to speak.
Those who are ‘encouraged’ to invest may kick up a fuss, but it will mean businesses can grow and this will lead to more consumption – the name of the game. The growth in consumption could also help the businesses who agree to invest in other businesses grow, especially if investment choices are made strategically. The encouragement could come in the form of partnerships coupled with tax incentives and sums invested would have to be paid back at some time in the future, maybe with a little interest, or part ownership of the companies involved.
Teams of angel investors (or maybe venture capitalists) could be employed to identify established businesses which would benefit from investment in the initial phase which targets high potential businesses. Once results are seen, the same investors could start looking at other businesses and start-ups, and using funds to help them grow.
The ovveriding aim would be to make many more people wealthier to boost consumption. Consumption is, after all, what makes the capitalist world go round.
Wage Levels to Guarantee Consumption
What does someone need to earn to live, or rather, consume comfortably? I’m not sure, but it’s not that difficult to work out on a country by country basis seeing as most prices are common knowledge. Once the ideal wage is known, in a further phase you simply up the wages of the lower paid so they can afford to consume more. This might mean accepting lower profits, cutting the salaries of senior managers or the huge bonuses of the bankers and other corporate fat cats, but it is not in anyone’s interests for the number of consumers to fall, and if more people consume, profits will rise anyway. As to how all this could be done, well, that’s what politicians are for!
With more consumers, there will be greater demand. Businesses can market to their hearts content as they will be safe in the knowledge that someone somewhere can afford whatever product or service it is they are touting. But this will distort the laws of supply and demand, you may observe. True, it will, but if everybody can afford more, businesses will be able to employ more people to satisfy the increase in demand. Jobs will be created. In fact, so many jobs could be created that people may even have to work less, but this will mean they have more time to spend their money so they will consume more thus keeping demand high.
As the number of consumers grows, companies will sell more and the rich will grow richer once more. Perhaps they would grow even richer than under the current system which tends to limit the number of consumers or actually causes the number of consumers to drop.
Increase the number of consumers globally and crises will become a thing of the past – a distant and ugly memory.
From Tariffs to Price Controls
If attempts by the shortsighted and greedy few are made to push profits to stupid levels to boost what will already be healthy revenues, then governments can step in with price controls to ensure that as many people as possible can still afford to consume. To an extent, before everything went global this is what countries did anyway by introducing import tariffs and then tweaking them to keep their home businesses healthy. This can no longer be done but the current crisis indicates that controls of some form or other are a necessity. Price controls, or caps, would probably only be needed on certain non-luxury goods. The objective, once again, would be to keep the consumption ball rolling.
There would be social benefits of increasing the capacity of more people to consume too, especially if healthcare and education were to be built into the consumption model and pay levels were to be adjusted to reflect this. If people can afford more, they can afford private health treatment, thus taking the weight off welfare systems. The same goes for education. Educating more people is of benefit to society.
With more people working, governments stand to benefit too, as more people will be able to pay taxes.
Ready to Face the Future
A wealthy world would be one which is prepared to face the future. Training people in skills requested by the market would help keep people in jobs. One possibility may be to force some of the over-45 managers to give up their jobs, thus allowing others to be promoted and employed. This would keep innovation levels high as well – younger people often have fresher ideas. The over 45s, instead of consigning them to the scrapheap, would be moved into the public sector where their management skills could be put to good use.
In the long term, keeping people poor does nobody any favors, it is a cost to society and it does not even make the rich richer. On the other hand, making as many people as possible moderately well-off would present many benefits. Mankind could progress and evolve. Crime levels would fall.
Train those Politicians
By the way, another thing the global crisis has brought out into the cold light of day is that many politicians simply do not have the expertise to manage their nations, especially not in a global context. Creating a class of expert administrators would also lower the risk of other crises occurring in the future.
Democracy is all well and good, but we really do need to choose our leaders much, much more carefully. The dithering in Europe over the crisis has clearly demonstrated that run of the mill politicians are well out of their depth. Italy’s Silvio Berlusconi had no idea at all how to handle plunging stock markets and the dreaded spread. In actual fact, he gave the impression he really had no idea what was going on. His famous comment on all of Italy’s restaurants being full clearly demonstrated that he did not possess the skills to cope with a huge international crisis.
Another thing the current crisis has revealed is that the banking system is badly flawed. Banks, perhaps, should become non-profit institutions, then all those fat bonuses for the lucky few could be put to better use for wealth generation on a much larger scale. Again, the objective is to keep consumption permanently high. And before anyone shouts about it, careful consideration does need to be given to preserving our environment. After all, if more people are wealthy, more will have the time and money to be able to appreciate it.
What do you think? A utopian dream or the logical direction towards a better world for one and all? Comments, as always, welcome.
More reading: 2007-2012 Global Financial Crisis – Wikipedia
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