3 Steps Americans Must Take to Prevent Another Economic Meltdown

A year and a half after the catastrophic failure of our economic system in September 2008 and we are still standing at the crossroads, trying to figure out where to go next. Wall Street and the White House are fighting over new regulatory rules for the banking system and a trade war with China threatens. Real change seems a long way off and we have not even started talking about some of the deep-rooted causes of the crisis -- the failure of corporate leadership, the problems in how we measure success in business, and the top-to-bottom financial illiteracy that allowed such a massive bubble to inflate.

One of the most shocking things about the crisis was the way that banks and other financial institutions simply ploughed ahead with their failing business strategies even as the economic storm clouds gathered and the credit crunch thundered. As one bank chief executive (now ex-chief executive) put it, "as long as the music is playing, you've got to get up and dance. We're still dancing."

The popular response to this casual disregard for anything but short-term profit-chasing is to boggle and rage at the stupidity of bankers. Look deeper though and the causes are clear: staff who thought about nothing but the immediate (bonus-linked) targets, CEOs who had no other benchmark of success than quarterly profit figures, boards that were asleep at the wheel, and shareholders that were too visionless or too powerless to challenge how these companies were being run.

We are not going to build a more sustainable, healthier capitalism unless we tackle these problems. In particular, action is needed on three main fronts.

First, the rising profits, surging share prices and buoyant economic growth in the years preceding the crisis may have glistered, but we now know that they were not gold. The booming stock market and record levels of GDP were but a mirage of prosperity -- we need better ways of measuring how companies and the economy as a whole are performing. It is hard to get excited about accounting rules and statistics but, if we do not get these right, then our economy will always be driving blind.

Second, there needs to be an urgent overhaul of how companies are run. Making boards and CEOs more accountable to shareholders (it is surprising how little power shareholders really have) is a good first step. Yet we also need to change the whole culture of business away from a blinkered ‘greed is good’ mentality. Too many people, from mortgage salesmen to top executives, have fallen back on the ‘Nuremberg excuse’ that they were just following orders. That is not good enough. Business without values or professional ethics is bad business.

Third, shareholders themselves need to step up -- and that includes you. Pension funds had a massive stake in the companies that drove the economy over the cliff, which is why so many peoples’ retirement plans have been hit. Those funds were not, and still are not, doing much to challenge the way companies are run, preferring to just ‘track the market’ when, surely, they should be the most far-sighted investors, thinking about which businesses are going to be successful in 20, 30, 40 years’ time. That is not somebody else’s problem. It is down to ordinary investors to question and challenge how their pension savings are invested.

Doing that will not be easy when so many of us are financially illiterate. It is not just the people who took out mortgages they could never afford that unwittingly made basic economic errors. It was almost everyone, including -- crucially -- many in banking, the media and politics who take many of the most important economic decisions. Too many in Congress, for example, preferred to take special deals from sub-prime mortgage lenders such as Countrywide to asking whether the sub-prime mortgage bonanza made any sense. The media was too often a cheerleader for an unsustainable boom.

Great thinkers about democracy, including America’s Founding Fathers, have long understood that our system of government only works if citizens are competent to think about and debate the important decisions that are placed before them. In the same way, the capitalist system needs economically competent citizens if it is to thrive.

These are not quick fixes that can be achieved by a piece of legislation or an executive order. This is an agenda that will require hard work to renew and revive capitalism to serve us better. Let’s get to work.


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