The crisis explained, if not resolved

Diagnosis of the crisis – and a controversial view 

Given the current turmoil with Greece potentially leaving the Eurozone, this blog post may provide some useful insights on the situation.

The Real Instituto Elcano is an independent Spanish based think tank that analyses and debates on international affairs, with somewhat of a closer focus on Spain and Europe.economic crisis They recently published a paper entitled “A new reading of the crisis and the dilemmas of economic policy”. In brief it discusses the financial shock waves that hit the world on August 2011 and calls for a review of the diagnosis of the crisis.

It appears to be an accurate and well written explanation of the crisis (or at least the current status and its challenges).

The broad outline of the article is that:

  • In July 2011, it appeared as if the recession of 2008/2010 was finally easing in the majority of countries
  • Suddenly in August 2011, the markets went into free-fall again after another Eurozone-sparked crisis – and so it became clear that the economic crisis was far from over.
  • The authors then demonstrate that the apparent “end of crisis” had merely been a mirage caused by government economic stimulation.
  • The article then discussed the view of two economists (Reinhart and Rogoff) who after studying 800 years of recessions and crisis, have re-diagnosed the current situation. They describe how we have got here and what are the implications. ( The 4 D’s: Debt. Deficit. Downgrade. Default)
  • The authors then go on to explain how little the vast majority of governments are able to do in terms of economic or fiscal policy – showing how they are basically caught up in a debt trap with conflicting demands (eg to absorb debt and implement austerity measures; versus stimulate growth and create employment).
  • They put forward two possible radical moves, but both of which are fraught with uncertainty, high risks and a good deal of injustice to many players.

Our comments:

First it is a well-written article and, although a little gloomy, is quite factual – and facing the truth may not be comfortable, but is necessary if the situation is going to be sensibly addressed.

Secondly, it seems to us that a more creative approach to solving the crisis must be adopted. Perhaps using  government and banking economists to advise governments, fraught with conflicts of interest (they are bombarded by lobbyists AND would probably like to continue to govern), may not be the best people to come up with a really innovative, system-disrupting solution? Especially as these are the people who must bear at least some of the responsibility for getting us here in the first place!

Furthermore, like any other decision-making team, they are also probably constrained in their outlook by their own perspectives around economic theories and the efficacy of various actions.

We are not saying that there is some obvious silver bullet that is going to fix everything;occupy wall street but it may be that the policy makers who have the task of moving  the world back to economic stability (and perhaps a system that is economically fairer to all participants) should start listening to other inputs and ideas.  And consider other options. For instance, given the majority of jobs (90% of the worlds workforce) are created by small and medium-sized businesses (see infographic) – perhaps if there is any stimulus available, it may be better used in assisting these organisations, rather than doomed construction companies or lobbying-multinational banks!

Who knows, maybe the 15M movement of Spain, or the Occupy movements around the world do have something to add to the debate? At a superficial level, if you can understand what they are saying, it appear that they are making ridiculous demands and ignoring the consequences and realities of such. But are governments and business really listening to them? Are there not suggestions and ideas here that are not so extreme if considered with an open mind. Theories around the wisdom of crowds may be useful here!

In conclusion, we at Genesis do not claim to be expert economists, nor are we necessarily in support of the Occupy / 15M movements. However, we do have significant empathy for those feeling they are being abused by, or at least victims of, a system that does not seem to be fair to all classes of society. We also believe that there may be some truth in the quote that is attributed to Einstein:

“The thinking it took to get us into this mess is not the same thinking that is going to get us out of it.”

 Perhaps, policy makers could use some basic decision-making science and process to consider the issues at hand. Such as: a proper framing of the challenge, making sure the right people are included in the deliberations and using some creative means to come up with options that are not merely an extension of current policies. This may sound overly-simplistic – but perhaps a return to the basics is not a bad way of approaching the complexity!

RIE article – English version

RIE articulo – version Español

Coming soon is an original article directed by Genesis Management Consulting, but compiled from the wisdom of a panel of global experts on taking decisions and managing through the crisis.

If you would like to discuss the implications of the current economic recession and uncertainty on your business, please contact me at sgifford@genesis-esp.com .

 

 

 

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