(Excerpt from a speech at the Hilton Hotel, Budapest – March 28)

What lessons can we learn from the financial crisis of the past 5 years? How can we avoid making the same mistakes in the future? Einstein famously quoted, “we cannot solve problems using the same thinking that originally caused the problems.”  How can we think differently about personal and corporate finance in a vulnerable economy. It is also said that money will not solve financial problems  – only alleviate the symptoms for a short time – and that the financial crisis is, at its core, a problem of the human heart, not a technical problem. We need a new way of thinking, both collectively and individually, which changes our behaviour.

But how can we change in the midst of a crisis?  And I think we are still right in the middle.

Last month in Prague, I spoke to Bruno Roche, chief economist of Mars Inc., one of our speakers, recently and asked him what he thinks of the economic recovery we seem to be in and does he think that it will last? His answer: This recovery cannot last. He, and others who he knows, are expecting another downturn. This will most likely occur in 2015. He then went on to say that this next downturn is going to make what happened in 2008 look like peanuts because the world is much more in  debt now than it was then.”

Seldom have our fınancial markets been so close to collapse or our institutions lost so much value and trust. Seldom have so many individuals and businesses faced such an uncertain fınancial future. Seldom have our Governments had to borrow such vast sums to fıght the fear of an economic depression

We know we should not go back to how things were before, although the danger remains that we will. Let us be honest enough to examine the personal shortcomings and structural diffıculties that had locked us into a system that did not deliver. We can no longer allow the system to drive our values. Our values must now drive the system

 It is true that our personal and national fınances have been buffeted before. Stock market crashes are nothing new, and certainly in the UK we have survived a boom and bust economy many times in the past.

There is a feeling though that this time something is different. It is not often that quite so many of us have failed to make the right choices, and seldom have so many failed – quite so comprehensively – the test of both character and competence.

John F. Kennedy is quoted as saying, “When written in Chinese, the word crisis is composed of two characters –one represents danger, and the other represents opportunity. The chief of staff to Obama said in 2008 …  let’s not let a good crisis go to waste. It is an opportunity to do things we have never done before!

We need to look ahead and consider the lessons arising from the crisis and we need to decide how we are now best going to build a prosperous and sustainable future for all of us.

Easy Money

One of the major financial causes has been the creation of ‘easy money’ which has let loose the demon of greed.

What has spread around the world, is the continuing effect of 9/11. The Monday after 9/11, the FED slashed the interest rates to extremely low levels, creating and era of  ‘free money’  –  at least for those wanting to borrow and speculate – cheap loans, easy borrowing and easy mortgages.  This would cause the housing market to explode beyond all economic fundamentals, creating an unprecedented housing and construction boom. This caused house owners to borrow against the rising prices of their homes, creating debt bubbles throughout the economy.  We have is a highly speculative economy.  If He is judging the banks and financial institutions for systematically creating profits from “money transactions” in various forms, without any other “added value attached to it”

Gordon Gecko – said during his famous speech to students in the film Wall Street 2 ….

Someone reminded me the other day that I once said, greed is good. Well it appears greed is not only good, it is legal. We are all drinking the same cool-aid.
But it is greed that makes my bartender buy three houses, he cannot afford with no money down. And it is greed that makes your parents refinance their 200,000 dollar mortgage for 250,000 dollars. Now they take that extra 50,000 dollars and go to the shopping mall so they can buy a new plasma TV, cell phones, computers and an SUV. And hey, why not a second home while we are at it.

Greed is never good, nor does it serve to work any good purpose. Since we will never be able to attain everything we desire, greed offers us dissatisfaction. Our greediness ultimately destroys us as we harden our hearts, ignoring the needs of others. Ultimately, greed motivates us to pursue poor choices that plunge us into destruction

While few of us are millionaires, it is easy to fall victim to greed. When our yearning for another’s possessions takes seed, we produce covetousness. Our materialism becomes insatiable as we attempt to acquire objects that are upgraded or more impressive than our neighbour’s.

Israel’s Jordan River remains a source of life as it flows into the Sea of Galilee and then travels to the Dead Sea. The Sea of Galilee’s gives generous irrigation as well as abundant fishing resources. In contrast, the Dead Sea has no outlet, greedily robbing the arid region of moisture. Both man and animal refuse to drink from its acrid waters

Some of the issues we are all having to deal with form a formidable list of challenges …

• Falling house prices

– mortgage scarcity

– Negative equity after selling a house for less than its cost

• Declining stock values

– Pension decreasing

• Vanishing credit

– Business difficulties

• Failing banks

– Large bonusses

– Anger at greed

– Betrayal of trust

• Job insecurity

• Fear

– Failure

– Will I have enough?

– Future provision

• Anxiety leading to stress

• Burden of debt

• Disappointment of inability to buy

– ‘want it, and want it now!

 

What lessons can we learn from the crisis?

We have learnt some important lessons. Together, these are a profound shock to the philosophical and economic assumptions that have underpinned the West for the last 25 years.

1. .We are more prone to temptation than we thought. If left to our own devices we often do not behave either rationally or well. Deregulation has proved unwise. The ‘invisible hand’  of the market has not guided us so well!

2. We have been unable to deal with greed!

A businessman came to a rabbi asking for advice.  … “look through the window, what do you see? “Well. I see the world … trees, grass, flowers … a beautiful view.”

Now look at this mirror … what do you see now?”

“I see only myself.”

“That’s what happens when your world view is coated with silver …  you see only yourself.”

3.      We have learned that people who are solely focussed on money become narcisistic, and individualistic and greedy.

This greed has alienated us from business leaders who line their own pockets while laying off hundreds of their employees – who receive salaries hundreds of times greater than thru employees.   From bankers who leave unsuccessful banks with large bonuses.  From politicians who choose corruption rather than honesty.

3.      However, we have learned that regulation alone is not suffıcient. Passing more laws does not deliver responsible behaviour any more than it delivers profıtable business.

4.      We are not as clever as we thought. We have created ‘expert’ structures we do not understand and cannot control, and we have realised that the future is more uncertain than we imagined.   Death of the Expert!

Credit Default Swaps, repackaging mortgages – no- one understands what’s going on.  Someone said there are only 75 people in te world who know what all these exotic financier derivates are!

A Greman professor stated that, “our autonomous intelligence is permanently creating systems of such a high degree of complexity, that our learning and controlling capabilities are getting increasingly overstretched.”  He then quipped, ‘man is too stupid for his own intelligence’!!

5.      The prosperity of each of us is more connected to the well-being of others than we thought, rather than money or possessions …  `the pursuit of profit as an end in itself has led to individualism and this by definition  destroys relationships.

6.      Maximisation of shareholder value as a strategy for business has contributed to the problem, not solved it … when focused only on money, people are relegated to the second place, and become eventually means to an end – not the end themselves!

Pope Francis said to the Davos web site ”  ‘Humanity must be served by wealth, not ruled by it’

7.      The market does not protect us from disaster and, when economic shocks do occur, the market will not save us.

These lessons have left us in uncharted waters with no reliable means of navigation. They have ignited, for the fırst time in a generation, real interest in discussing the best principles upon which to base national and international business and fınance.