The Olympics Lesson To Save The Economy

The recent Olympics were exceptional because they came during the most critical times in modern history. After five tumultuous years, the future of our society is still in the balance. We live in a period of deep structural economic crisis, political division, uncertainty, and yet no reversing trend is in sight. (Capitalism Without Owners Has Failed: Where Is True Growth Going to Come From?)

Sporting metaphors are frequent in economics and finance. In this extreme environment, can sport teach us something of value for an economic recovery? I think so and, in fact, something has emerged way beyond the results, human values, emotions, and the celebration of these memorable Games.

To succeed in any human endeavor, a level playing field is the way to make the most difficult of goals achievable; a sustainable and uniform distribution of resources, and the whole world is better off.

For the third time in the Games’ history, they were held in London, and except for the poor ticket management, these Olympics and Paralympics were an overall success.

Decisive ingredients of this accomplishment lay in diligent long-term planning, deployment of resources and funding, gathering of talent, inclusion, and hard work. Finally, such a success would have been impossible without the generosity of volunteers and the participation of people from all walks of life. Many Olympic moments will be forever remembered. There was a slogan asking future generations to be inspired. Hopefully, an even more immediate legacy could be learned as the key to go forward, not only in sports, but in everyday life. A few parallels first:

An important observation is the power of crowd support. An exceptional number or world records have been broken thanks to unprecedented encouragement from the crowds. This suggests a highly believable economic counterpart: enterprises will succeed much better if they win full support and encouragement from the people watching them, and in the communities in which they operate – customers, suppliers, employees and if they can operate in a favorable environment.

Another relevant observation is that intense rivalry and great co-operation are two sides of the same coin.  Rivals are the only people that come between a competitor and his or her dream.  Yet, in most sports, we find that competitors have a strong sense of respect and get on very well.  The reason is that we can only make the best of ourselves by playing with others, sharing our game with others, in a healthy competition and exchange. We learn from each other by pushing our own boundaries higher, unfolding new areas of strength and so, opening up new opportunities, which reward our motivation and hard work.  The economic lesson is clear again – large monolithic organizations that dominate the field and dictate (and violate) their own rules, are unhealthy and a larger set of highly motivated smaller enterprises is more likely to provide success and benefit for all. The rules are the same for everyone; no cheating is allowed or can be bought out.

The other observation is that of inclusion, diversity, and freedom. A slogan says: “Sport does not care who you are: Anyone can take part”. Diversity, variety, and individual expression of freedom. There are so many sports and so many winners!  From the classic track and field, to swimming, martial arts, gymnastics, weightlifting, equestrian, and so on…  There are sports for all shapes and sizes.  So, for an economy to work and be healthy, we need a wide variety of businesses each fit for purpose in their own expertise. Oligopolies are destructive to democracies, free markets, and our communities, and thus for wealth creation.  Success is achieved via a multitude of highly motivated smaller and medium sized enterprises well routed in their communities.

In all, the 2012 Games demonstrated how the key to get out of our economic mess is a level of unity and fairness. We need to be able to compete on the same grounds, with the same rules, with no special privileges, and with the necessary resources and time. We need to promote and encourage the willingness to work hard, open opportunities for those currently disadvantaged, and we must firmly suppress cheating. Only in this way, is possible to get the best results, the widest number of people can contribute, be in the condition to participate and benefit from such results. Only in this way, a sustainable recovery is possible and the much-needed capital can find ways to be invested productively in real activities and for the long term.

The oligopolies that impose socializing losses and privatizing profits, and their resistance to change, are the main obstacles to a long needed recovery; the bread on the table of our society. The oligopolies must be broken down, starting from the financial services industry. Antitrust laws should be applied. No additional regulation, no name and shame, or anything else like it, is necessary. Only re-establishing a proliferation of players, with the promotion of partnerships and of direct ownership, is the way to fix the financial system. The condition of developing entrepreneurship, attracting long-term capital investments, create employment and sustainable growth. Capital would flow back to the Small and Medium Enterprises (SMEs), the real motor of our world. Full employment and proper allocation of resources would be achieved. Operation Direct Growth: The Avenue to Redevelop the Real Economy

Unbundling oligopolies already happened in the past in the railroad, oil, and telecommunication industries. There is no reason not to do it in the financial services, as it is such a vital sector to serve and support our society. So far, the advice of eminent and super partes experts beginning with Paul Volcker have gone unheard.

In the meanwhile, the financial services industry is malfunctioning and failing to perform the fundamental role of support to the real economy and society. As widely documented, there are no economies of scale that justify the dimensions and the conflict of interests of the largest financial players: using the words of an expert, Dr. Yves Smith: “Shame on any fool who insults our intelligence by making this argument with a straight face”, (Quelle Surprise! Former JP Morgan Chairman Offers Dubious Defenses of Big Banks).Instead, we continue to suffer from the perilous consequences of oligopolies: market manipulations, excessive and unjustified level of compensation, frauds, mis-selling scandals, mistreatment of customers and suppliers, money laundering, uncalculated risky activities, and a whole array of uncompetitive and criminal behaviors (and no jail sentences!!!). . Only corruption of free market rules keeps the sector together thanks to the success of a small group of lobbyists buying governments, regulators, media, and still enjoying the implicit public guarantee towards their reckless business risk. This is the honest answer.

The breakup of the financial activities would unleash huge value in the financial and industrial world. It would bring back the “skin in the game”, that ownership/responsibility element, that is so important to any human activity. It will make taking calculated risks and receiving proper rewards sound and possible. This will also enable a restart to lending activities and capital access for Small and Medium Enterprises (SMEs), an absolute key to any feasible recovery. The latter should be the paramount focus of any western government. A Systemic Capital Redirection Strategy Is Our Only Hope

So, after all the medals conquered, the world records scored, the memorable moments, the legacy challenge to be won remains possibly the most difficult one, that is to reinstate a level playing filed to restart our economic engines in a sustainable and honest way. Yet, like well run Olympics, while it requires great effort, it is a possible goal – a goal of which we are capable.

Now it is time for leadership beyond the boundaries of party politics and it is an opportunity to make a mark on history. Whoever is in power should win over the opposition and deploy the proper reform. The country that will effectively embrace this transformation first, will be the world leader; it will reap the greatest benefits before anybody else, and enjoy a much-needed turnaround. Here is the opportunity to win a real Gold Medal and accomplish the best Olympic legacy.

Rest assured that the alternative is not a pretty one.

11 Responses to "The Olympics Lesson To Save The Economy"

  1. Yochanan Altman   September 29, 2012 at 1:26 pm

    Well said and finely articulated. Where are the leaders to take on the financial services oligarchies and free us from their enslavement?

  2. Carlo   September 30, 2012 at 1:51 pm

    Thank you Yochanan for your favorable comment.

    Besides freeing us, a proliferation of financial players, would free the markets. This would make possible the paramount allocation of capital towards real economic activities.
    The latter is the only way to get out of this terrible mess.

  3. Michael Mainelli   October 5, 2012 at 3:35 am

    Can't agree more. The Olympics show the power of competition – structured competition brings out the very best in people. Carlo is right, we need more competition in finance – breaking up oligopolies. The Credit Scrunch, as Bob Giffords and I termed the crises some years back, "was not a failure of open markets but a failure of highly regulated markets due to unexpected consequences of regulation and private decisions". Too big to fail is too big to regulate.

    • Carlo   October 5, 2012 at 8:48 am

      Dear Michael,

      Thanks for your remarks.

      You are raising a key matter: it is impossible to regulate what cannot be regulated.

      In reality, the key to solve matters are only to be found in re-establishing market freedom and so applying antitrust laws to financial services as it is done in all other businesses.

      While deposits from retail clients should receive public guarantee, any bank should be free to fail. Then no argument would be raised if banks make lots of money, or if they decide to compensate their employees or owners with hefty bonuses.

      Assessing and managing risk in financial services would be conducted in a very different way. And the bank owners would make sure that the lights are turned off at night.

  4. paul bostock   October 8, 2012 at 1:51 am

    Yes – you cannot win a medal without a huge personal commitment to training and the involvement of expert coaches. Winning in consecutive Olympics is extremely hard, as younger new entrants come through. One lesson must therefore be to make it easier for new entrants to compete with the established giants.

  5. carlo   October 9, 2012 at 5:59 pm

    Thanks Paul,

    And for allowing new entrants, and engaging in healthy competition and proper risk return reward system, we need to apply Antitrust laws, that rule any sector of economic activity, to the financial services sector as well.

  6. Carlo   October 9, 2012 at 6:00 pm

    Thanks Paul,

    And for allowing new entrants, and engaging in healthy competition and proper risk return reward system, we need to apply Antitrust laws, that rule any sector of economic activity, to the financial services sector as well.

  7. maurilio   October 16, 2012 at 3:23 am

    Caro Carlo,
    as usual one of the best article of yours. Sporting metaphors are frequent in economics and finance……but in the opposite meaning that you state…..wild competition, greedy etc.
    The oligopolies imposing socializing losses and privatizing profits must really be broken up and destroyed…….instead continuing the mantra……too big to fail.
    Banks create money in the form of debt, playing a crucial role in determining How Demand is distributed in the economy. Hence they determine how Economy develops and WHO gets WHAT. This is an extraordinary power and again it’s fundamentally POLITICAL in nature. Friedrich Hayek call for the abolition of CBs and the establishment of a free mkt in money. The Republican Congressman Ron PAUL wrote a book about FED’s Abolition.

    Non si è riusciti a reperire € 30 bln per risolvere definitivamente la fame nel mondo e si sono immediatamente reperiti € 2.000 bln ( € 2 TRN) per risolvere il default del sistema bancario USA.
    We are in the middle of a big Mess.

    FED continues in the QE 3d pumping $ 40 bln into the Economy each month buying MBS justifying the action by explaining the FED’s tools involve affecting Financial Asset Prices.
    Bernanke is trying to push investors twds Stocks and other financial assets in the belief that it’ll boost economic recovery…..Humh!!…
    That’s reminding the “ Helicopter Cash Dispenser Machine “ “ New Eras bring New Challenges “ observed Bernanke late 2002.
    Taylor Rule where is it gone ?? it lost importance and collapsed; clearly not longer guiding US Monetary Policy.
    I.E. FED was behaving as if it were targeting “ Risk on, risk off “ moving Int. Rates to push investors towd or away from risky assets. On Wall Street they call this “ Risk on “, “ Risk off “:

    – Nov. 2008 FED began its first round of QE buying $ 1,25 TRN of MBS and $ 500 bln GSE and Long Term USTsys through March 2010;

    – Nov. 2010 FED launched QE 2 buying $ 600 bln USTsys through June 2011. And now with QE 3d;

    Of course all that will boost or at least support strongly BUBBLES to form in various mkts, at last resulting in greater VOL % and damaging crashes, won’t do it ??.

    “ The Triffin Dilemma & Gold “

    The speculation around Triffin’s work was about how the US$’s world reserve currency status would evolve (unwind) and what the catalyst would be for its demise. What would replace the $ ?? Many proposals about a Global Central Bank and a Global reserve were offered . None have materialized in any serious way.
    $ maintains its reserve currency status because it’s the least worst of the major 4 currencies, $, BP, Yen, €. All of there are now suffering the effects of a stimulative, expansive and QE – oriented Monetary Policy which explains the reduction of VOL % in the short term structure. If all currencies Yield about the same and are likely to continue doing so for a while, it’s hard to find out a relative value among them, hence, VOL% falls.
    The real Int. Rates in $-denominated assets and USTsys are negative ( nominal yields 1 yr 0.15 % ; 10 yr 1.59 % ) . This a recipe for a weaker $. Inflation, it seems, is the dog that just won’t bite, no matter how much the worrywarts warn that a spike in prices will soon gobble up any value to be found in US debt.
    Anyway given the size of the total GOLD holdings in ETFs ( like GLD or IAU ) and their turnover it appears that a growing number of investors are adding to a personal hoard of Gold ETFs a way to store value in other than a domestic currency. Physically backed Gold ETFs now exceed 2500 tons ( source Barclays ) and are steadily growing. That makes the ETF universe one of the largest Gold hoards in the world. Modeling of changes in VELOCITY ( GDP divided by M2 ) suggests that the GOLD price will move much higher when measured in the various currencies engaged in QE.
    Gold is a long-duration asset and the C.B.s are buying long duration from the mkt.
    Why Euro EXIT is an Option for Germany
    Germany accumulated a lot of net claims with the European System of CBs but also with other members of the Eurozone due to not only the “ Internal CBs Accounting “ but also its large Current Account surpluses.

    All the best. Maurilio

    • Carlo   October 17, 2012 at 2:16 pm

      Thanks Maurilio,

      You are certainly right when you say that we are in the middle of a big mess.

      It is also touching what you write on the fact that we cannot find US$30 billion to eliminate poverty in ther whole world but we spent trillions to save the bankers!!!

      It is sad that the implicit guarantee from the public is still on!

      That's why we should brake up the banks and let them compete and fail if they do.

      Then credit would flow and the industrial recovery could take place.

  8. Cary Depel   October 16, 2012 at 10:14 am

    Carlo has made a number of good points here. Because most people are too shallow to rise above greed and dominion over others, and define themselves by external measures, like wealth and the trappings of material success, they become coin operated.

    Until CEOs, Finance Directors, and Heads of Business Units are promptly prosecuted, convicted and jailed for either their wrong acts, failure to act or turning quietly away, AND businesses are allowed to fail, we will continue to get what we've always gotten.

    Many people have an unrealistic sense of entitlement to the best of life, hiding behind 'the rules of the game', 'situational ethics' or none at all, and 'everyone else is doing it'. Capitalism, in some form that we understand, is only possible if we revalue our values, and that includes how and why we compete.

  9. Carlo   October 17, 2012 at 2:21 pm

    Thanks,

    I agree. If we would break the oligopolies, there would be no need to over regulate.

    The freedom of enterprise initiative should be at the core of our society.