Greek Crisis Confirms Systemic Capital Redirection Urgency

The Background

Despite the most serious financial and economic crisis of recent history, and having narrowly missed a catastrophic meltdown, the existing rules, and more importantly, the modus operandi, which caused the breakdown, are all still in place.

We still live with the moral hazard and the “excuse” of corporations “too big to fail”. We still tolerate major conflicts of interest brought by entities that perform a range of functions which are too wide. We still allow some “traders” to “corner” markets…

This crisis has revealed serious flaws in our economic and financial system and brought about the freeze of capital markets, the vital free flow of liquidity; and a collapse of trust and confidence, basic elements of any free market society and modern democracy. The Main consequence has been a continuing decline of capital flows and lending to the real economy, despite massive intervention by Quantitative Easing.

We are not out of the woods yet. Big dangers are looming over the horizon, with warning signs that underline the seriousness of this crisis, demonstrating that it is structural and far from over.

The implosion of the Greek sovereign debt crisis; the first of such a kind in living memory, poses enormous dangers for the whole of Europe and the West. The negatives of globalization keep strong a “destabilization pressure” underneath the western anemic economies, threatening the real pillars of modern capitalism and democracy: the importance and sustainability of financial markets and their functioning. Multinationals take further advantage of their oligopolistic positions, play the game of psychological denial, while the medium size companies, real drivers of the economy, are the most neglected, suffer the most and pay the highest price along with the general public. Governments and public institutions appear confused, slow to act and unprepared to take the initiative.

Some commentators dare to suggest that we are out of recession for some technical reasons. Yet, we are still in a full scale “human recession” with unemployment and underemployment at the highest levels ever, with the flows of capital and lending to the real economy in a continuous decline.

In the countries where it was deemed possible (e.g. the US and the UK), there has been a huge increase in public stimulus which mainly went to rescue large financial institutions. Yet, this stimulus is about to fade away leaving behind an enormous debt for present and future generations. The whole West is now burdened with the public debt problem. The ability to repay this mountain of debt depends entirely on an economic recovery of which there are no signs, let alone of a systemic approach or planning for it.

Clearly the winners will be those that innovate, courageously embrace change, take the initiative and adopt self regulation without waiting. The Greek sovereign crisis further confirms that, as in any period of deep losses and changes, there are also unprecedented opportunities and that the only real way out for the West is a systemic redirection of long term capital.

Let’s see how a strategy of capital redirection could help Greece, and be implemented in all of the western countries, to recover the necessary level of competitiveness, finally recreating a pattern of sustainable economic growth, and give the opportunity to compete and play a proper role with the emerging economies.

In order to introduce this recovery and investment strategy, let us first focus on one of the main causes of the structural problems of our economic systems.

Short Term Extremism: An Unbalanced Society Has No Future

Capitalism and a free market society are based on a balanced and dynamic flow of capital; on a free enterprise system, on profit and loss, where the entrepreneurs put their own capital at risk, where there is a positive “alignment” between management and ownership. Shortcuts and frauds should not even be in the dictionary of such a system. The most successful modern societies are those without big inequalities, where wealth is spread in a relative homogeneous way and opportunities are available to anyone willing to work hard and play fair. In all, capitalism depends on the ability of carrying out long term plans and human ventures, developing long term assets and a continuous prosperity.

The fact is that our capitalism is ill and needs to be reformed to get out of this crisis and to avoid its recurrence. The mother of all problems with the western economies, is that, beginning with the financial industry, they are sickly skewed towards an unbalanced and very short term asymmetrical stance. So, there is a dangerous tendency in hiding long term risks creating a deadly asymmetry with short term profits.

Little attention is de facto given to the long term, to sustainability and governance, to the real cost of production, to real values and quality of results. Moral hazard, socialization of losses and privatization of profits, “diversion and detachment” between management and ownership, should not belong in a free market society, nor in a modern democracy.

From a macro perspective this extreme bias for short termism, this asymmetry of risks and returns, represents the most negative and dangerous factor that has depleted real enterprise value, created a vicious circle of wrong incentives, destabilization, volatility, uncertainty, destruction and distortion of resources, and impediment to the creation of sustainable long term growth.

This extreme and widespread short-term fundamentalism is not easy to reverse. Certainly, it will not self correct and it is rapidly deteriorating because of the general situation of deep mistrust and uncertainty. Only with a coordinated systemic effort, a process fuelled by effective, carefully designed capital redirection schemes, to be facilitated by a proper set of measures of economic policy, can we begin to reverse and correct the current state of affairs. A “holistic approach” must be embraced to include all involved parties.

Necessary changes must “recondition” the mentioned total short term behavioral bias, the supply and the demand side of our economy, unfolding new long term market dimensions otherwise impossible to recreate by the action of individual firms or single individuals. In order to ignite a much needed recovery a systemic and long term approach of “direct reallocation of capital use” is needed. This is a “dynamic capital interaction” between capital rich institutions with a medium to long term horizon and enterprises in sound conditions that still need further resources, a strategic support and better future prospects.

“Cash Constipation”, “Capital Starvation” and New Bubbles

A fundamental factor continues to emerge clear and assumes further critical relevance. It is a “mirror” phenomenon which manifests itself in two aspects defined as “Cash Constipation” and “Capital Starvation”.

Cash constipation” is a problem suffered by such institutional investors with free capital and a long term horizon. Their problem is how to protect their declining assets and to identify new sources of yield and diversification to preserve their goals, and how to match their liabilities structure. Their risk is failing in their fundamental scope.

Capital starvation” is instead a widespread problem suffered by the players of the real economy and in particular by the medium size enterprises. This is due to the persistence of a deteriorating environment for “sound” enterprises and infrastructure projects, because of declining demand, a fall in the level of confidence and trust, withdrawal of the banks’ support, etc… These companies and infrastructure projects need now fresh resources, a strategic support to embrace new business models, to produce new sustainable offerings, and to insure long-term operations. Their risk of failure would further delay any form of possible recovery and deepen the current economic depression, making it impossible to repay the huge public debts.

The value of these firms would be hugely augmented by the “Direct Alpha” factor, the entrance of a “strong hand”, a long term investor/s among its shareholders. For an analytical and theoretical base to demonstrate “Direct Alpha”, the added value of “a strong hand”, an active and organized presence of a stable long term investor/s among the enterprise’s stakeholders, please see:Operation Direct Growth: “Direct Investing”: Enhancements to develop Sustainable Growth

Now in Greece, these outlined factors are worsened by the sovereign debt crisis and the loss of competitiveness. Therefore the importance and the value of a systemic capital redirection plan, is even higher on the order or real priorities. The same applies in the other European countries.

The legacy intermediaries, that traditionally favored the exchange and flow between who have free capital and who needs it, are not in condition by themselves of providing such vital function. Furthermore, their business model needs deep changes. Hence, strong players with long-term views and objectives find themselves not only in a highly superior and privileged position for the extreme scarcity of capital and absence of willingness to invest it. These institutions face now a heavy responsibility and an opportunity: to take on the task of “supporting” directly those deserving enterprises and projects with sound credit worthiness in their endeavors to respond to the challenges of a more balanced and sustainable development. Yet, the banks should play a strategic role in facilitating “direct investing” and participating to support the enterprises subject to long term investments.

In fact, unless the capital redirection towards long term utilization takes place, the West will not be able to emerge from its deepest problems. To make matters worse, huge amounts of liquidity are now directed towards the “wrong places”. New distortions, unbalances and “asset bubbles” (and, shall we admit it, “illegal speculations”), appear to be recreated. In all, an anemic western world filled with uncertainty is struggling to readjust, and also find a proper leading role in front of the growing and inevitable importance of the emerging economies.

Unless radical changes are brought forward in our businesses, operating models and in our economic infrastructure, these problems will not go away and the risks for corporations are high.

Give Me A Long Term Horizon And I Will Save The World

The current structural emergency in the world economy shows that there is a huge gap for investors with integrity and ethical standards to take the lead. “Operation Direct Growth” is not meant to be just another method to restart faltering western economies. It is first of all a new asset category and a step towards restructuring our businesses. It is created to promote, a new operating model for the enterprises subject to the plan’s investment. The aim is to generate “new (and different) levels of diversified returns, and a wave of economic prosperity”, to positively reverberate to the whole economy and contribute to its stability.

This is effectively a new asset category which does not exploit the owner in terms of fees, governance, control and transparency. “Operation Direct Growth” achieves the “direct reallocation of the capital use” between capital rich institutions (most of which manage public resources) with a medium to long term horizon and firms and infrastructures that need resources, a strategic support and future prospects. There are no direct intermediaries in the exchange and the main actors of this plan will be a consortium of long term institutional investors, pension funds, endowments, central banks, insurers, cash rich councils, sovereign funds, and supranationals.

Operation Direct Growth” will consist of “selection and participation” in a diversified portfolio of enterprises taking the form of “preferred investments”, embedding qualities of both equities and bonds. These assets will generate pre-agreed returns and carry guarantees in case of a deterioration of credit worthiness, entailing a privileged credit status.

This new asset category will be directed towards “sound” enterprises of the real economy that due to the current unprecedented and prolonged negative circumstances are: i) not able by themselves to fully capture business opportunities; or ii) which prospects risk deteriorating for the continuation of the general lack of trust and/or for absence or withdrawal of banking facilities.

The investment subjects will be in sectors with growth potential such as: new technologies, renewable energy, sustainable growth, biotechnology, life science, IT, creative industry, education, economic rationalization / re-conversion, infrastructure projects, and in those sectors that will possibly receive government incentives to favor demand.

The aim is not to substitute public recovery efforts but to favor meritable enterprises and infrastructure projects. Such interventions will observe ethical values, full respect of best corporate governance practices, transparency, and aim to sustainable growth. The plan will actively seek to attract various governments’ incentive programs to favor demand for the products of the sponsored industries. In addition, the plan aims to receive fiscal benefits that are higher the longer these investment commitments are kept.

When applied, this plan will have huge positive implications. It will not only release the world economy from its current despair, restarting a new wave of re-employment; “Operation Direct Growth” could be the new asset category to change both: the “applied world of investments”, and the economic foundations to generate a whole new set of theories and fundamentals for the new world going forwards.

Here are the major advantages of such a plan:

  • Real economic and growth stimulus and a bridge to fill the gap left to support the real economy. It would reinvigorate the banking system, its stability and reduce future shocks impact
  • Strong reduction of unemployment, recreating a virtual consumer spending cycle
  • Attraction of foreign long term investments in growth opportunities in western economies
  • Opportunity to create a secondary market for this program which would re-establish a much needed overall credibility in securitization and in security investing in general
  • Opportunity to expand this program to involve the FSB, but also to involve a group of reputable financial institutions for a much needed “image recovery” and expertise sharing
  • Support the creation of financial stability by offering real sources of growth to the wall of liquidity that currently has no “place to go” and serves to inflate prices of a number of asset classes without fundamental reasons

Key instrument for a strategic and effective institutional investors external manager asset allocation program to achieve real diversification (real alpha)

Conclusions:

This has not been an ordinary crisis. Going forwards financial authorities, regulators, governments, unions, institutional investors, enterprises, and top managers, must understand the challenges and also the unprecedented opportunities that lie ahead. It is paramount to look beyond the short term and assess the long term changes now strongly needed. A historical opportunity lies ahead to make real positive changes to bring the West forward to achieve successfully the transition towards the information era.

Who is now able to reignite real growth if not a systemic long term investment program? What will give Greece the ability to repay its huge debt? (And for this reason to all the other Western economies including of course the UK?)

What will create jobs for the Greek people who rioted on the street to express their disappointment with the necessary austerity measures that the government has to take to receive the IMF and European loans?

Paramount for a recovery are scheme proposals like “Operation Direct Growth / Direct Investing”, the new investment impact program for real economic stimulus, financial stability and reserve management.

Operation Direct Growth and similar schemes will reignite a much needed capital redirection and will be able to have the strength to recreate markets long since disappeared, to re-establish a much needed long term horizon matching the human activities in a balanced way; re-establishing a proper dynamic between risks and returns.

Self regulation and independent private initiative from players and market participants will be a major key. Governments will have to play their new role to facilitate an economic redevelopment and restructuring with positive incentives to the industries subject to investment and fiscal benefits for those players and investors available to commit capital in the long term. This will gradually reduce uncertainty and instability and re-establish trust and confidence.

Operation Direct Growth” should be brought forward as a coordinated western plan acting immediately and being customized for the different countries and economic regions, Greece and the entire West. A long term investment market that disappeared will be redeveloped. A systemic approach applied to a global world that needs to recover major excesses and distortions.

This appears now as a positive opportunity.

4 Responses to "Greek Crisis Confirms Systemic Capital Redirection Urgency"

  1. Guest   May 21, 2010 at 9:28 pm

    I think Mr. Carlo is addressing the key symptoms of the sickness facing not only the West, but the world economy.Let’s ponder further about investment. What will bring us real food; farming or investing? What happen if everyone is investing in something but not “working”? Will growth brings about sustainability or the other way round? Is constant growth possible?

    • Carlo R   June 6, 2010 at 5:42 am

      Dear Friend,Thank you for your observations.You are right:1) We need sustainable growth with respect to the environment and natural resources.2) Also true is that we must all work and “physically” contribute to real growth; our behaviour and actions, as consumers, and in the jobs we perform, must reflect this;3) We must make sure that capital is invested in the “right places”, in sustainable productive ways. Contrarily to what is happening, where Capital goes only to go to inflate basic commodities, and creating new asset bubbles.I view that my proposed capital redirection Plan that I define under the umbrella name of: “Operation Direct Growth”, addresses and can fulfil these main crucial points and requirements to build a better world.Best regards,Carlo R

  2. Ajay G   May 23, 2010 at 2:56 pm

    Implementation of this measure is a different story. In China, it would be easier maybe.The background for me is that economic power is shifting regions and this is never going to be an easy ride. You need shocks to make adjustments. In democracy, you do not make the right changes just like that, you need to have no other recourse to take the right decisions unfortunately.Your proposition is politically difficult to implement.

  3. Carlo R   June 6, 2010 at 5:50 am

    Dear Ajay,Thanks for your comment.My view is that because we are in a democracy and in a free market we cannot allow a socialization of losses and a privatization of profits.Capitalism and a free market society are based on a balanced and dynamic flow of capital; on a free enterprise system, on profit and loss, where the entrepreneurs put their own capital at risk, where there is a positive “alignment” between management and ownership. Shortcuts and frauds should not even be in the dictionary of such a system.The most successful modern societies are those without big inequalities, where wealth is spread in a relative homogeneous way and opportunities are available to anyone willing to work hard and play fair.In all, capitalism depends on the ability of carrying out long term plans and human ventures, developing long term assets and a continuous prosperity.The fact is that our capitalism is ill and needs to be reformed to get out of this crisis and to avoid its recurrence.The mother of all problems with the western economies, is that, beginning with the financial industry, they are sickly skewed towards an unbalanced and very short term asymmetrical stance. So, there is a dangerous tendency in hiding long term risks creating a deadly asymmetry with short term profits.Little attention is de facto given to the long term, to sustainability and governance, to the real cost of production, to real values and quality of results. Moral hazard, socialization of losses and privatization of profits, “diversion and detachment” between management and ownership, should not belong in a free market society, nor in a modern democracy.From a macro perspective this extreme bias for short termism, this asymmetry of risks and returns, represents the most negative and dangerous factor that has depleted real enterprise value, created a vicious circle of wrong incentives, destabilization, volatility, uncertainty, destruction and distortion of resources, and impediment to the creation of sustainable long term growth.I agree with you that this extreme and widespread short-term fundamentalism is not easy to reverse.Certainly, it will not self correct and it is rapidly deteriorating because of the general situation of deep mistrust and uncertainty.My view is that only with a coordinated systemic effort, a process fuelled by effective, carefully designed capital redirection schemes, to be facilitated by a proper set of measures of economic policy, can we begin to reverse and correct the current state of affairs. A “holistic approach” must be embraced to include all involved parties.In order to ignite a much needed recovery a systemic and long term approach of “direct reallocation of capital use” is needed. This is a “dynamic capital interaction” between capital rich institutions with a medium to long term horizon and enterprises in sound conditions that still need further resources, a strategic support and better future prospects.This is in the ultimate interest of capital, a free economy and our democracies.The West should embrace it not to loose its leadership and to continue to contribute to the world humanity.Best regards,Carlo R