The Ring

Five years into the crisis: What lies ahead?

Tue, 2012-11-27 15:34

A dynamic and engaged group of 100 students, academics and retirees filled a UVic lecture hall on Nov 21 to learn from and ask questions of a panel of experts about the current world economic crisis.

The panel included Drs. Amy Verdun (political science), Paul Schure (economics), Basma Majerbi (business), and guests Dr. Adriann Schout (Deputy Director of Research EU) and Tony Gage (chair of the Investment Committee of PSP Investments).

“We wanted to present a panel that looked at the economic crisis through many different lenses,” says Verdun. “The crisis has many layers of complexity—we hoped our panel could address some of them.”

In their seven-minute presentations, the panellists covered a range of topics, including the cause of the crisis, its origins, possible fiscal resolutions, the EU debt crisis, and new banking regulations.

An expert in European Integration Studies, Verdun, walked the audience through the origins of the marketplace collapse of 2007. Verdun says the consequences we see today are the result of an exacerbation of the drastic imbalance of wealth between the rich and poor and rising youth unemployment.

Schure spoke about monetary policy and fiscal policy. He remarked how in 2009 many governments worldwide were in an expansionary mode (more spending) but made a 180-degree turn in the years following. “In 2012 we are clearly in a time of fiscal austerity,” says Schure. He indicated that countries, particularly those with high public debt levels, can look forward to continued loose monetary policy: “My crystal ball shows inflation levels that are higher than we have gotten used to in countries such as the US and Japan.”

 “Will the too-big-to-fail banks prevail?” an audience member asked. Majerbi, an expert in international finance, responded “Yes, in the short run”. But she went on to explain how new banking regulation subjecting big banks to stricter prudential supervision, could help reduce bailouts in the longer run. She said some experts from within the banking sector believe it is time to break up the big banks, but instead it seems the biggest five in the US keep getting bigger based on their assets size since the beginning of the financial crisis in 2007/2008.  

So what about Europe and the EU? Schout spoke about the Euro debt crisis and the future of Europe. “Europe is experiencing an existential crisis of the nation state,” he stated bluntly. The smaller EU nations cannot function on their own but they don’t want to work together either.  “Clashes and conflict are all part of EU politics,” insisted Schout, “the world needs to realize that the EU was built on clashes.”

The panel concluded with Tony Gage discussing the impact on pension plans and individual investors.  He argued that the decline in interest rates, and, in particular real interest rates, will challenge the assumptions made regarding investment returns.  Large pension plans are adjusting to this new reality with a number of strategies.  They include selling liquidity by investing in private asset classes, increasing the assets managed internally to reduce costs and by borrowing to enhance returns.  He pointed out for individual investors that a series of guaranteed investment certificates will likely outperform a standard bond fund.

What have we learned? The experts agreed that good governance counts, and that re-regulation of banks and an increase in the quality of regulation will avoid a deepening crisis. Politics too will play a key role in making sure a redistribution of wealth occurs in the first-world countries hit hardest by the crisis.

“The entire business model is changing, in part due to the crisis,” says Verdun. “Investing in knowledge is more important now than ever before in a rapidly changing world. Other countries (for instance Brazil, Russia, India and Chin—the BRICS) and others are coming up. The way for a country to ensure economic growth is to invest in the knowledge economy.”