And what’s next (Part 2)

There's a good dialogue going on over at the blog last week about "What's Next?", with Paul P and Paul W debating whether economist Carlota Perez is right or wrong in her view that this crisis reflects the restructuring of the world's economies thanks to the network revolution.

Bearing in mind the old comment:

Q:  What do you call a roomful of economists? 
A:   A disagreement!

it is unlikely that we'll find a common thread of an answer on this one, but there is a fair bit of substantive analysis to support Perez’s theories in her 19 page paper from 2003: “Rethinking Globalization after the Collapse of the Financial Bubble: an essay on the challenges of the Third Millennium.”

Here's a couple of interesting charts from that paper.

The first shows that it takes about fifty years for a new commercial revolution cycle to mature (double-click to see larger version of this chart):

 

Whilst the second overlays this with the four previous commercial revolutions and demonstrates that after the internet bubble burst we were right in the middle of this one:

I would claim that, thanks to broadband and mobile, we are still in the middle of this one which is why Facebook and Twitter have changed our business models yet again ... and global low latency algorithmic trading has done the same in our investment markets.

So, about 2035 before this revolution settles down then!

It is also interesting to note two or three other economists, who are being referred to right now as potential pointers to our future, alongside Perez.

For example, the Times referred to Hyman Minsky the other day.

“Minsky showed that speculative bubbles, and the financial collapses that follow them, are an integral part of modern capitalism. That is, they are not the result of accidents or poor decision-making, but a fundamental and recurrent feature of economic life once you deregulate the financial system.

“He pointed out that, given sustained economic growth, there was a tendency for the finance system to move from a situation where everything is under control, to a speculative situation, which is precarious.

“Minsky’s proposed solution to financial crisis was state intervention on two fronts: the government should run a big budget deficit and the central bank should pump money into the economy.”

That’s exactly what has happened!

Thing is that Minsky was ignored because he was thought to be crazy, as he had nothing to substantiate his ideas. Now however, having been proved to be right, everyone is started to study his socialism of banking theories.

Mind you, if you listened to every crazy economist over the years, you would end up with a completely buggered economy ... oh yes.

Anyways, Tim Harford who writes as the Undercover Economist with the FT, throws in his own solution building on the work of Jeremy Bulow and Paul Klemperer:

“They suggest splitting crippled banks such as Citigroup or RBS into a good 'bridge' bank and a bad 'rump' bank. The bridge bank gets all the assets, even the so-called 'toxic' assets. These are not truly toxic, simply worth less than everyone hoped. The bridge bank also inherits sacred liabilities such as deposits. The rump bank gets no assets, only the debts the old bank used to owe to creditors.”

Now then, would you like your rump rare, medium or well done sir?