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