Helmut K. Anheier on Project Syndicate: Will history show that policymakers heeded the lessons of the financial crisis?
The global financial and economic crisis that began in 2008 was the greatest economic stress-test since the Great Depression, and the greatest challenge to social and political systems since World War II. It not only put financial markets and currencies at risk; it also exposed serious regulatory and governance shortcomings that have yet to be fully addressed.
In fact, the 2008 crisis will most likely be remembered as a watershed moment, but not because it led to reforms that strengthened economic resilience and removed vulnerabilities. On the contrary, leaders’ failure to discern, much less act on, the lessons of the Great Recession may open the way for a series of fresh crises, economic and otherwise, in the coming decades.
However serious those crises turn out to be, historians a century from now will likely despair at our shortsightedness. They will note that analysts and regulators were narrowly focused on fixing the financial system by strengthening national oversight regimes. While this was a worthy goal, historians will point out, it was far from the only imperative.
To prepare the world to confront the challenges posed by globalization and technological development in a way that supports sustainable and equitable growth, governance institutions and regulations at both the national and international levels must be drastically improved. Yet not nearly enough has been invested in this effort. Beyond regional bodies like the European Union, international financial governance has remained largely untouched.
Worse, because the partial fixes to the financial system will enable even more globalization, they will end up making matters worse, as strain on already-inadequate governance and regulatory frameworks increases, not only in finance, but also in other economic and technological fields. Meanwhile, enormous financial investments focused on securing a higher rate of return are likely to fuel technological innovation, further stressing regulatory systems in finance and beyond.
Major technological advances fueled by cheap money can cause markets to change so fast that policy and institutional change cannot keep up. And new markets can emerge that offer huge payoffs for early adopters or investors, who benefit from remaining several steps ahead of national and international regulators.
This is what happened in the run-up to the 2008 crisis. New technology-enabled financial instruments created opportunities for some to make huge amounts of money. But regulators were unable to keep up with the innovations, which ended up generating risks that affected the entire economy.
This points to a fundamental difference between global crises of the twenty-first century and, say, the Great Depression in the 1930s or, indeed, any past stock-market crashes. Because of the financial sector’s growth, more actors benefit from under-regulation and weak governance in the short term, making today’s crises more difficult to prevent.
Complicating matters further, the systems affected by today’s crises extend well beyond any one regulatory body’s jurisdiction. That makes crises far unrulier, and their consequences – including their long-term influence on societies and politics – more difficult to predict.
The next crises – made more likely by rising nationalism and a growing disregard for science and fact-based policymaking – may be financial, but they could also implicate realms as varied as migration, trade, cyberspace, pollution, and climate change. In all of these areas, national and international governance institutions are weak or incomplete, and there are few independent actors, such as watchdog groups, demanding transparency and accountability.
This makes it harder not only to prevent crises – not least because it creates opportunities for actors to game the system and shirk responsibility – but also to respond to them. The 2008 crisis cast a harsh spotlight on just how bad we are at responding quickly to disasters, especially those fueled by fragmented governance.
To be sure, as the Hertie School’s 2018 Governance Report shows, there have been some improvements in preparing for and managing crises. But we must become more alert to how developments in a wide range of fields – from finance to digital technologies and climate change – can elude the governance capacities of national and international institutions. We should be running crisis scenarios and preparing emergency plans for upheaval in all of these fields, and taking stronger steps to mitigate risks, including by managing debt levels, which today remain much higher in the advanced economies than they were before the 2008 crisis.
Moreover, we should ensure that we provide international institutions with the needed resources and responsibilities. And by punishing those who exacerbate risks for the sake of their own interests, we would strengthen the legitimacy of global governance and the institutions that are meant to conduct it.
As it stands, inadequate cross-border coordination and enforcement of international agreements is a major impediment to crisis prevention and management. Yet, far from addressing this weakness, the world is reviving an outdated model of national sovereignty that makes crises of various kinds more likely. Unless we change course soon, the world of 2118 will have much reason to regard us with scorn.
This article was first published on Project Syndicate.