by Andrew Pickering | Jun 22, 2009 | Economics and development, Global system, North America
As we push on through the recession, one thing that we haven’t seen enough of is solid original thinking about the causes of the crisis and what can be done to stop such a systemic disaster ever happening again. However Duncan Watts, writing in the Boston Globe, has a bold idea. Not only were banks to big to fail but the system as a whole is simply too complex to exist.
Rather than waiting until the next cascade is imminent, and then following the usual modus operandi of propping up the handful of firms that seem to pose the greatest threat, it may be time for a new approach: preventing the system from becoming overly complex in the first place.
It’s well known that few in the financial sector (let alone regulators) understood the instruments that were being used. Risk assessors refused to believe that a firm like Lehman Brothers could ever fall so easily and as a result, the consequences of such a collapse were not accounted for in risk models. In an ever more interlinked world, the danger of contagion effects means that everyone has an interest in the way the system works. If only a few people understand it, so much the worse for the rest of us.
An alternate approach is to deal with the problem before crises emerge. On a routine basis, regulators could review the largest and most connected firms in each industry, and ask themselves essentially the same question that crisis situations already force them to answer: “Would the sudden failure of this company generate intolerable knock-on effects for the wider economy?” If the answer is “yes,” the firm could be required to downsize, or shed business lines in an orderly manner until regulators are satisfied that it no longer poses a serious systemic risk. Correspondingly, proposed mergers and acquisitions could be reviewed for their potential to create an entity that could not then be permitted to fail… Perhaps what we need is an “anti-systemic risk” law that would aim to avert systemic risk before it is too late.
Watts concedes that this degree of intervention in the market is concerning, but one thing that everyone seems to agree on is that the era of market fundamentalism is over. If we’re willing to allow the state to intervene in bailing out failed banks, why not intervene to prevent them becoming unmanageable in the first place? Think of it as bonsai banking. As E.F. Schumacher said, ‘small is beautiful’.
by Alex Evans | Jun 22, 2009 | Economics and development, Global Dashboard
Ever since the London Summit, there’s been much back-slapping between leaders about how they’ve successfuly headed off the risk of a 1930s-style lapse into tit-for-tat protectionism.
However, as the World Bank will today underline, while that may be true in the strict sense – of tariffs, quotas and so on – it’s certainly not the case once you take finance into account too. The Bank’s Global Development Finance report, due to be published later today but already briefed to the FT,
expects private capital flows to developing countries to fall almost three-quarters this year to $363bn (€260bn, £220bn) from a $1,200bn peak in 2007.
This is in line with figures published by the Institute of International Finance earlier this month (pdf), which found that,
With almost half the year over, it is clear that net private capital flows to emerging economies in 2009 will be down substantially from 2008. Net flows are now projected to be about $141 billion for the year as a whole, less than half of the $392 billion estimated for 2008, and far below the record level of $890 billion in 2007. Our new estimate for 2009 is down somewhat from the last one in January, which was for $165 billion.
These are precipitous declines – and the reason that they constitute protectionism is because developed country policymakers have been putting pressure on their banks to curtail to poorer countries, which are seen as riskier investments. As Hans Timmer at the Bank notes, though,
It is a very, very short-sighted policy. There is self-interest in protecting emerging and developing markets.
And that’s not because of some vague sense in which stability in fragile states depends on shared economic prosperity; it’s because (as the FT’s Chris Giles puts it), “the drop in credit flows will undermine investment in emerging and developing economies … with a consequent hit on rich country exports of capital-intensive goods”.
In all, the Bank estimates that the collapse in private sector lending will, together with current account deficits and the need to refinance maturing debt, leave developing and emerging countries in need of up to $635 billion – which will either have to come from official aid (which was less than a sixth of that level last year, and that was before the credit crunch hit public sector budgets), or countries with large foreign exchange reserves.
As with the 1930s, the underlying issue is whether policymakers and publics can manage to think in terms of a larger ‘us’ – not for reasons of altruism, but because of a more sophisticated appreciation of self-interest. So far, the jury’s still out on this – as indeed on prospects for whether this becomes another lost decade for development.
by Peter Hodge | Jun 22, 2009 | Conflict and security, Cooperation and coherence
What do you do if you’re fighting a counterinsurgency campaign and you run out of troops, western troops that is?
According to David Kilcullen in The Accidental Guerrilla (pp 269-71), the answer is to enlist villagers in “local security forces such as neighborhood watch organizations, concerned citizens groups, local security guard forces, auxiliary police and the like”. Use these local security units to do the vital but labour intensive work of protecting communities from insurgents, with support and backup from western troops.
Kilcullen uses the Iraq “surge” of 2007-08 to support this argument. The success of the surge was due to the large number of Iraqis (“mostly former Sunni insurgents or former members of local community or tribal militias”) who were recruited to local security units. This approach put a large number of people, who had expert local knowledge, to work patrolling their communities. There was no need for large headquarters and forward operating bases, line of communication troops and logistics support “since all these recruits live and work out on the ground”. And recruiting Iraqis to the government’s cause had a major impact on the insurgents’ ability to recruit and field fighters.
This is an idea that could be adapted to countering criminal gangs in rundown parts of western cities. I agree with Dean at Travels with Shiloh that…
“The first priority must be to restore order and not with the ‘drive by policing’ system we have now. In many communities the public safety sector is viewed as indifferent (at best) to hostile (at worst) and trust can be non-existent.
Law enforcement and emergency services therefore should be permanently stationed (and adequately staffed) in the worst areas and not just drive through on patrol.”
Why not take this a step further? Give trusted local partners in local communities the training, resources, backup and legal authority to provide their own basic security – as community patrols, neighbourhood watches, special constables? Free up law enforcement agencies for specialist tasks, like emergency response, investigations, surveillance, and intelligence collecting and analysis. Build this on a foundation of urban regeneration programmes that, for example…
- buttress the authority of grassroots leaders and community groups;
- create jobs through, as Dean suggests, microfinancing for small businesses, tax subsidies for industry, and intensive local food, water and energy production;
- provide education opportunities to local people, especially youth, through inter alia ICT hubs and ‘computers in homes’ initiatives.
To paraphrase Kilcullen (p260), the main aim would be to gradually restructure the social, economic and political environment so as to deny the gangs a role in it.
by Charlie Edwards | Jun 21, 2009 | Conflict and security, Europe and Central Asia, Influence and networks, UK
Admiral James G. Stavridis PhD will soon take up his new post as commander of U.S. European Command and NATO’s Supreme Allied Commander Europe. In an interview with the Florida Times-Union Admiral Stavridis talks about strategic communications, COIN and compares Colombia and Afghanistan.
What will you take from your experiences at Southcom that will shape how you do your new job?
I think I will try to approach my job at NATO with three things in mind: international partnerships, interagency cooperation within the U.S. government and strategic communications. I think those three approaches will be the pillar of how I will try to do my job both at NATO and at U.S. European Command.
What do you mean by strategic communications in this sense?
I mean deciding what our message is and thinking about how to communicate it in new and innovative ways. I’ll give you examples: Facebook. Twitter. Linked-in. I’m on all those social networking mechanism…. I think that it’s extremely beneficial to use these new methods of moving information. Secondly, I think strategic communication has to be interactive. In other words, instead of simply trying to blast your message out there, you need to understand how to use feedback both from your partners and from those with whom you are competing and from those who are your enemies. You have to understand all of those feedback loops and then adjust your strategic communications. And then, thirdly, I think that an essential part of strategic communication is understanding the language and the culture of your partners, both of which are very important to me. I speak Spanish and French; I’m learning Portuguese.
How does being an admiral rather than a general shape your approach to the NATO job and what challenges will it bring not being a ground-force commander?
As far as my connection with ground force operations, I’m comfortable that the level of time and effort I’ve put in in study and in the joint world will make me effective. Let’s face it: The operations I’ve been most focused on in South America has been the insurgency in Colombia. My experience there will translate well to my role as the NATO commander in Afghanistan, which is, let’s face it, an insurgency, drug-fueled, obviously 100 percent different in many ways. But, my experiences in understanding and learning counter-insurgency I think are up to the task.
Interesting. I haven’t heard that comparison made between Colombia and Afghanistan before.
Both are insurgencies seeking to topple the government, both are drug fueled. In Colombia it’s a political insurgency. In Afghanistan, it is a deeper, more cultural, religious-based insurgency. But insurgency is something I’ve studied and learned about and I’m comfortable I can be a contributor.
Hmmm…
There’s something else I think is exciting about Admiral Stavridis’ posting this side of the pond – his concept of Humanitarian Service Groups (Pdf). The traditional carrier battle group model is not well suited to hearts and minds missions of today’s hybrid wars (Pdf). While Admiral Stavridis thinking was in the context of Southcom’s role in Latin America – I think there is great potential for translating his idea across to Europe. In a nutshell:
The idea is that instead of having a group of ships centered on an aircraft carrier, whose primary mission is to launch strikes on shore, we ought to have groups of ships that have as primary functions training, providing humanitarian disaster relief, and U.S. smart power in Latin America supporting humanitarian projects. What I am thinking about specifically is centering a group around a hospital ship and then including in that group several smaller ships that bring training capability with them.
Given previous ESDP missions I wonder if the first European Smart Power Initiative (ESPI) might be the assembly of a new multinational battle group centred around a hospital ship such as Royal Fleet Auxiliary (RFA) Argus, currently undergoing a refit, and ready for action soon…
by Charlie Edwards | Jun 21, 2009 | Cooperation and coherence, What we're watching
[youtube]http://www.youtube.com/watch?v=nbgQ1V2BLEs[/youtube]
