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The White Swan Formula

The White Swan Formula

James Featherby, next months guest speaker, writing in 2009

The White Swan Formula

The White Swan Formula

James Featherby, next months guest speaker, writing in 2009

James Featherby will be visiting the Chanel Islands later this month to speak at Business Connect hosted events (register here) In the run up we will be serialising his post crash analysis here on the blog

Part One: A humbled model

The Western economic model stands humbled by events.

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. There are widespread redundancies in China and the rest of South East Asia as demand for manufacturing dries up. And we know that amongst all the technicalities there is signifıcant and real personal pain.

The World Bank estimates that the credit crunch will lead to a 50% cut in capital flows to the developing world and a dramatic increase in infant mortality. The Millennium Development Goals have never looked so in jeopardy. According to some sources, fınancial assets worldwide have fallen in value by an extraordinary $50,000 billion, and this is before one counts the cost of what the coming years will bring. Huge and prolonged fıscal defıcits, a worldwide recession, a resurgence in inflation and unhelpful protectionism are all now on the agenda.

Who knows what strategic global challenges will follow from a weakened United States, a reverse in economic liberalisation in China, a correction in trading imbalances between East and West, and a variety of failing states continuing to be locked in poverty?

Not surprisingly, we want to know who is to blame. In fact, few of us are immune from responsibility and it is a mistake to pick out one sector of society as a convenient scapegoat.

Businesses and consumers, particularly in the US and the UK, have indulged in a spending spree of unprecedented proportions on the back of borrowed money we could not afford. To give one example, the amount of UK mortgage borrowing used for purposes other than home buying more than doubled between 2001 and 2007, and by the end of that year stood at signifıcantly more than the total amount used for “Seldom have so many individuals and businesses faced such an uncertain fınancial future” buying homes. In other words, we have been mortgaging our homes to consume and to speculate on buy-to-let properties.

Political careers have advanced on the promise of never-ending growth. Institutional and retail investors have demanded impossible returns without regard to the consequences of doing so. Fund managers have not been diligent. Credit rating agencies have not been fıt for purpose. Accountants have judged form rather than substance. Lawyers have not seen the wood for the trees. Regulators have missed the ships passing in the night. Banks have fuelled irresponsibility on a breathtaking scale.

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.

But in addition to counting the cost we also need to look ahead. We need to 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.

This paper was orgianlly published by the LICC in 2009. You can access the whole paper here

James Featherby

James Featherby

James Featherby has worked in the City for more than 30 years. For most of this time he was a...

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