Thursday, December 27, 2012

Financial Reflection: Linear Time and the Willingness to Change

The variable that I rarely hear in the discussion of the financial crisis and the issues that plague our economy is that of time. It appears that our society has become reactive, linear, impatient, and unwilling to look outside the immediacy of whatever issue we are dealing with at any given moment. Because we are constantly reacting rather than actively improving, testing, and producing we are unable to see the benefit of long-term planning and the full impacts of the quick fixes we implement. In addition to short-term thinking, it seems that we forget that the economy and financial systems are of our own design and that we have the power to change not only our actions, but the interconnected system in which we operate.

When I first think of my own role in the economy, finance, and specifically the crisis, it's difficult to not feel powerless. What could I have done? I don't work in the financial industry, invest in the stock market, or even own a home. I am not a shareholder of any corporation. Yet, all of these actions and reactions affect me as a United States citizen and as a global citizen. I am then reminded of the variable of time and the interconnected systems we live in.

When I think about time, especially in regards to financial systems, I am reminded that we all perceive it differently, especially during moments of crisis. Our ability to think about long-term productive solutions to the issues we face is reduced when we exist in a volatile political climate. For example, the most recent "fiscal cliff" crisis has completely swept aside conversation about climate change (and the long term financial effects of a reliance on fossil fuels), our strongly divided dual-party political structure, and even violence in America. This tendency towards distraction during crisis is, I believe, true for those of us deciding how to stimulate the economy as well as those of us who are deciding how to feed our families over the next week. Whether we are desperate for jobs or desperate for food, the immediacy is the same. Collectively, we believe that we need to do whatever it takes to find a solution (now!). And yet, the fiscal cliff will be followed shortly by the Farm Bill Cliff and the deficit cliff... as Maureen Dowd of the New York times describes, "Once you start with the cliffs, you can fall into cliffinity-- with endless cliff riffs on the horizon."

We are living in a paradigm of revolving crisis where the discussion is not about long-term improvements but of short-term fixes. When we only feed the immediacy of now, we fail to see opportunities for long term societal health.

When I think about the interconnected systems we live in, I am reminded of how important it is to break free of linear thinking. If one party is right, then the other must be wrong. If we have this, then we cannot have that. We are in a constant state of compromise where there are clear winners and losers. Does anyone stand to gain when some of us lose, or at least perceive to have lost?

The 2008 financial crisis was the result years of increased government deregulation of the financial sector and the prevalence of complicated financial products such as bundled securities that leveraged bank assets at an alarming rate. For example, banks sold mortgages to Americans to buy homes. Because of the high rate that homes were being purchased at, home prices rose. Banks that lend, before deregulation, were not legally allowed to sell high risk investment products but because of deregulation of the banking sector, the very banks that sold mortgages were (and are) able to bundle these mortgages and sell them as securities to other investment banks. This allowed lending banks to turn a profit quickly and not wait for homeowners to pay off their mortgage over time. This short-term payoff caused these banks to relax their standards of who they sold mortgages to, meaning that, many, many people who could technically not afford to pay back their loans were given them anyway. Options on these bundled mortgage securities were then sold meaning that some banks (and investors) stood to gain whether these mortgages were paid back or not, whether Americans were able to make their payments and keep their homes or not. When people began to default on their mortgages, the chain of investments that leveraged and releveraged other people's "real wealth, fell apart.

Over the years that led up to the crisis, those who who sold these highly leveraged financial products made an incredible amount of money by being rewarded for their risk taking. Those who leveraged people's long term investments to make a short-term gain were rewarded with cash. As David Korten says, phantom wealth was created by leveraging other people's real wealth. Phantom wealth being money that is created by accounting tricks and real wealth being productive uses of money in such things as homes and infrastructure that helps people meet basic needs and increase the capacity of even more people to do so. As phantom wealth increased for a few, real wealth diminished for many. Whether those who gained understood how their actions and risk taking affected others in the system, they did nonetheless.

In order for us to truly "fix" our economy and ensure that our financial systems perform in a way that helps many people meet their needs and increase our collective capacity to do so, we must think with long-term stability and productivity in mind and appreciate our ability (and responsibility) to adapt the systems we use.

Joel Solomon, a responsible investor from Vancouver British Columbia, once explained the power that each of us has vote with our money. This sentiment is something I now live by. No matter how big of a player we are in the financial system, every dollar we spend has the ability to be productive. Change will take time and there is no one way to fix the economy but by understanding our own role and our own power to influence the systems that we design, we have the opportunity to create financial systems that allow us to thrive.

No comments: