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The Next 30 Years: Whither Finance — Repression or Turbulence?

Michael Klein's picture

The recent financial crisis shocked the world. Aftershocks are still reverberating. The future of the Eurozone remains clouded. Much ink has been spilled about the causes of the crisis. Extraordinary measures have been taken to stimulate economies and rescue banks. Thousands of pages have been filled with new regulations. But will all the efforts bring us back to normal?

The crisis itself was a surprise for most. Equally surprising could be the long-term consequences. Rather than returning to "normal" we may see lasting shifts in the nature of financial systems. Two scenarios — "Repression" and "Turbulence" try to explore the new normal for financial institutions over the next 30 years. My paper written under the auspices of the Frankfurt School of Finance and Management in Germany explores the matter. The first part of the paper reviews relevant historical data and arguments about key drivers for the future such as financial regulation, prospects for growth and demographics. Illustrative numbers about long-term economic growth are derived from long-term projections by the OECD.

"Repression" is a story of politicians in advanced economies "kicking the can down the road" while yielding to populist impulses. The provision of fiscal support and liquidity keeps countries in bearable shape. Creative destruction is kept in check yielding little in the way of positive productivity surprises. The financial systems are heavily regulated within country and under cross-border agreements. Insiders dominate. Innovation lags. Business models focus on managing politics and regulatory pressures. The geo-political stance of China as a "responsible stakeholder” creates the trust that allows the Renminbi to become a reserve currency.

"Turbulence" is a story of crises and discord, where governments lose control. Crises force dramatic action, sometimes beneficial, sometimes not. Successful policy experiments set the pace. Discord among nations limits coordinated approaches to global problems like financial regulation. At the same time "islands" of innovation are allowed to emerge and flourish. The business models of financial institutions are disrupted. "Banking goes the way of publishing".  

We cannot forecast what happens over decades, but we can imagine rooted in realism and consistent arguments. Scenarios can then help think about the challenges of the future — in this case those facing financial institutions. 

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