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    Keynote address by Prof Dominick Salvatore the Official Launch of Mapungubwe Institute, Midrand 17 March 2011.

    Date published:17 March  2011
    Article category: Media

    The importance of strategic thinking to the development of nations and also why the profession was unable to foresee and avert the global economic crisis.

    Prof Dominic Salvatore


    MISTRA has chosen its goal very carefully and I think brilliantly. It wants to make a significant, a critical, contribution to long-term strategic thinking and research.  And also to face the challenges that the democratic Republic of South Africa faces as it tackles the legacy of its past, which means therefore strategic long-term thinking research and not just economics, not just South Africa, but Africa and the World, and not just economics but also the other social sciences, all of the general aspects of development.


    The topic that was assigned to me tonight was “The importance of strategic thinking to the development of nations and also why the profession was unable to foresee and avert the global economic crisis.”


    So what I’ll do is briefly examine the causes of this global economic crisis. Why the profession hasn’t foreseen it, why we could not avert it and what are the policies being prepared and undertaken to avoid a repetition. And then see the lessons that this will offer us for the strategic long-run development of society as a whole.


    First - the causes. As we know, it started in the United States and then spread to advanced countries and to emerging markets. The causes were: American banks gave housing loans, the sub-prime mortgages, to families without any down payment, with variable interest rates, when those interest rates were the lowest in fifty years. One could only expect those rates to rise and families being unable to maintain the loan, default on the loan. The question then is to ask why banks lacked the foresightedness to give those loans. They intended, indeed, they sold those loans to investment banks who combined them with other financial instruments, repackaged them, securitized them and sold them overall in the economy, thinking that spreading the risk would somehow make the risk disappear.


    Then of course there were the rating agencies, paid by the banks, who gave triple-A ratings to all the banks without taking into consideration the great risks and the challenges that they were facing. And then we have the United States Security and Exchange Commission which is supposed to oversee this investment banking sector that was really asleep at the wheel.


    So we could say that the crisis arose in the United States because of inadequate regulation, the lack of application of the regulations that did exist and greed, which means profits at all costs. And then fraud, that Madoff made $65bn disappear, that is $65 thousand million. A few months ago I was in Serbia, a country of 8 million people and the GDP was $44bn and Madoff made $65bn disappear.


    Well, then the crisis spread to Europe - contagion. Europe blames the United States but frankly European banks and the housing sector committed even greater excesses than the United States.


    To give you an example, risk, banking risk as we know, is measured by leverage, the leverage goes from zero to one hundred, the higher the leverage the higher the risk. When Lehman brothers failed its leverage was 31.


    Citigroup, the large bank, which is the weakest of the large American banks, the leverage was 38.  For UBS Swiss the leverage was 42; Deutschbank was 56 and Barclays was 65, the total of the 12 largest American banks the leverage, the weighted average was 20, for European banks it was 35.  Then there was the housing sector, the bubble. We had a big bubble. The only way the housing sector would not have failed us was if housing prices had continued to rise at 10 to 15% which was entirely unsustainable in the medium and long run. 

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