Foundation Forum 2009 - Reflections on the recession

Weathering the storm

Big solutions must be developed to respond to the global crisis. Governments around the world are searching for the right mix of fiscal and monetary policy to stimulate the economy and to prevent a deepening of the recession. Among the most controversial issues is the future of the financial sector. Its malfunctioning is blamed for causing the crisis, rebuilding it is seen as a prerequisite for a return to growth.

But is helping the banks get back on their feet the right way to proceed? Are the spending cuts and tax hikes that finance bank bail-outs justifiable? Is public money not better spent on active labour market policies and job creation measures to prevent the economic crisis developing into an employment crisis? And if banks and investment companies receive support from government coffers, what new global standards must be set to ensure that risks are minimised and longer-term interests are also taken into account?

Ami Domini, Domini Investments

‘Current economic predictions say that the world is valued in total at $44trn yet financial sector investments are valued at $660trn,’ according to Amy Domini, founder and chief executive officer of Domini Social Investments and a leading proponent of socially responsible investing. ‘This shows how important the financial sector is to the world.

‘I believe the contract between the fiduciary agent and the beneficiary has been perverted and there needs to be a radical overhaul of the rules for investments. In much fiduciary law and previous practice it is stated that the fiduciary must act in the best interest of the beneficiary, but the interpretation of that phrase has been changed and corrupted.

The role of government is key, vital, but let’s recall: government did not create this crisis. The financial services industry created this crisis. An important role for governments going forward is to clip those wings, to make certain that a few people making a lot of money cannot bring down millions of people globally, ever again.
It is essential that we challenge some of the premises upon which we have been allowing the financial system to work. One, we have been allowing perversion, in my opinion, of the relationship between the person managing the money and the beneficiary of that money. We have been saying that making money is enough. I would argue that’s a person and not a wallet. And we need to dramatically alter our thinking about what is a successful way of managing financial assets. I would argue that the management of financial assess should be done in a way that meets the goals of financial assets, that is to make life better for more people.

By bringing voices together you have an opportunity hear each other's point of view and maybe come to common ground. Nothing effective happens unless you have the enemy in the room with you. They don’t necessarily have to be at odds with you, but you do need to hear somebody who feels violently differently from than the way you feel, in order to get to a resolution to an issue, especially an issue as important as rescuing the economy after this devastating financial blow we had.’

Maria Joao Rodrigues

As well as being a special adviser on the Lisbon Agenda, Ms Rodrigues is also professor of European economic policies at the Université Libre in Brussels. Although she agreed that better regulation was needed she also urged a more international response to the current difficulties such as better co-ordination in the European Union and through the Members of the G20. The European model may be the most balanced in the world, but we completely underestimated the changes driven by short term growth, she admitted.

‘The problem then leaves us with a choice and we are facing a dilemma as we to whether we co-ordinate our policies or not. To not to do so I believe would undermine the aquis general. I suggest we need more Europe, a co-ordination of policies, firstly and particularly on industrial policy. We should promote structural change for better growth, a low carbon growth.

This is the first global crisis and it also needs global co-ordination. There is huge amount of turmoil in the system, which has caused a financial crisis, a social crisis. When this crisis will be finally over is difficult to say, but before then we need much more international co-ordination. The G20 is very promising forum, as key players are all joining the global financial system. We should encourage this process and discussions.

Obviously there are implications for social policies, but first the EU must focus on the labour supply, labour demand to create new jobs. We must consider new ideas for labour creation and also give more support to people in jobs. While we are facing this recession many people are afraid of being called protectionist. But if we lose jobs now they will be much more difficult to create in the future.

There should be more encouragement for education and training. The EU needs also to refocus on other social policies such as employment insurance rather than unemployment insurance. We also need to be much more active in protecting the European Social Model forming strategic partnerships encouraging a social climate.
It is also very important that we do not withdraw the fiscal stimulus too early. We should also look at tax policies, designing policies that encourage green taxes.’

The professor also made a call for more European solidarity. Such as investments through the European Investment Bank, social policies, other instruments such as the issuing of Eurobonds to enable businesses and companies to expand and therefore take on more labour, and allowing member states to manage their debt. ‘We need to encourage investment in long-term priorities such as education and low carbon growth. Our discussions about the crisis should also be about how we encourage long term growth. We should not lose our focus on the long term.’