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Failed Economies

Date. 1st July 2022


Why Financial Crises Happen, and what we can do about it In 1751, a young Dutchman living in Amsterdam, Leendert Pieter de Neufville, founded a bank. It was a propitious move. A few years later, the Seven Years War began, spurring several European powers to seek new financing for their armies. De Neufville became a major lender to Prussia, his loans secured against huge stocks of commodities like wheat and oats. He made fabulous profits until the war ended in 1763, at which point food production rose again and prices plunged. De Neufville’s creditors got cold feet, and without the cash on hand to repay them, he was forced to sell his stocks, pushing down commodity prices further. The bank soon folded, and the effects quickly spread to other banking centers, including Hamburg and Berlin.

Inefficient Financial Management

The Icelandic economist Jon Danielsson believes mismanagement in banking triggered the first modern global financial crisis. He argues that 1763 was different from what had come before, as it was caused “not by war or crop failure but rather by shadow banking and the extensive use of financial instruments allowing risk to hide and spread. Over the subsequent 250 years, we have had many other similar crises. What is stopping us from preventing them?

According to Danielsson it has to do with efficiency in financial management. For the economy to grow, we need banks to accept the risk of lending, but we also need them to take the right amount of risk. Too little, and no one can borrow. Too much, and the system blows up, figuring out what is right amount. Doing so has proven extremely difficult, even as the increasingly necessary role that banks perform has made the largest among them too big to fail. Danielsson quotes a former attorney general, Eric Holder, who admits that he held back on punishing HSBC for failing to prevent Mexican drug traffickers from using its services because he was worried it would trigger a more damaging crisis. Attempts at holding bankers’ feet to the fire after the 2008–2009 global financial crisis was unsuccessful not only for this reason but also because proving episodes of misconduct is very difficult. Spanish lawmakers were determined to punish the former head of Bankia, Rodrigo Rato, for the failure of that bank in 2012, but succeeded only in jailing him for misusing his company credit card.

Bankers Risks

A great demand that bankers take risks. Muzzling them so that they can make only the safest loans would lower their profits, push up the cost of borrowing for entrepreneurs and homeowners, reduce interest rates for savers, people would not save and companies would not borrow. The factories would not get built and the economy would not grow.” There is clearly an acceptable level of risk, one that enables innovation and progress but does not bring the system crashing down. In the most persuasive section. Our attempts to measure and predict risk are more akin to “risk theater” than credible analysis.

To properly assess risk, we need to recognize that different investors care about different things, depending on their level of exposure and their time horizon. Yet it is much quicker and more profitable to lump all kinds of risk into a single aggregate number. The European Central Bank’s supposed ability to measure the systemic stress of the financial system to six decimal places on any given day. Such accuracy looks impressive but bears small correlation to what actually takes place. According to the ECB’s dashboard, systemic stress was close to its all-time low immediately prior to the 2008–2009 crisis and reached its peak after the crisis began. Surely, this argues convincingly, it should have been the other way around. There is clearly a level of risk that enables innovation and progress but does not bring the system crashing down.

Difficulties in Financial Crises

Another difficulty with predicting and preventing systemic financial crises is that they do not occur frequently enough. Organisation for Economic Co-operation and Development member country suffers such an event once every 43 years, too long for institutional memory of the crisis, which tends to last only for a generation, to get passed down. To regulate and try to prevent a repeat of the previous crisis rather than look in an unbiased manner at points of future vulnerability. Regulators and bankers are occupied in a constant “cat-and-mouse game” in which the authorities impose new rules while the people subject to those rules try to work around them. Fairly regularly, the mouse’s ingenuity wins out.

Given how thoroughly outlines the challenges of applying “Goldilocks” regulation to the financial industry that is, regulation with just the right balance of risk acceptance and aversion. It is somewhat surprising how confident is about our prospects of reducing the number of future collapses. Policy prescriptions hang on one word diversity. The biggest issue facing the industry is the drift toward monoculturalism, with its tendency to “amplify the same shocks and inflate the same bubbles.” Investors discovered, have always moved in a herd. This inclination has been encouraged by the adoption of universal “best practices” initiatives and the same risk factors. Regulators to enable the creation of more, smaller banks, especially ones that operate differently from the big banks. The barriers to entry lowered and more players to embrace countercyclicality. But, after more than 250 years of booms and busts, this would require an enormous change to how we think about risky behavior.

Impact of Good Economy

With calls for greater transparency about how investments are aiming to achieve positive impact alongside financial returns. The Good Economy has launched an impact assurance and verification service. In July The Financial Conduit Authority (FCA), the UK’s financial services regulator, issued guiding principles to help market participants and retail investors better understand the basis on which sustainability claims are being made. The FCA followed this up in November with their Environmental, Social, and Governance (ESG) strategy, as well as releasing a paper signposting future regulation. This includes requirements on product labelling and mandatory disclosures over sustainability risks, opportunities and impacts. What does the push towards greater clarity and consistency mean for investors pursuing a positive impact approach to sustainable investing?

There are three important implications. First, it is no longer enough for investors to simply say they are doing ‘impact investing’. They must also demonstrate and evidence in the regulator’s words how funds are “seeking a non-financial (real world) impact, and if that impact is being measured and monitored”. As others have observed, this is a pivotal moment where it is shown. According to the International Finance Corporation (IFC), the private investment arm of the World Bank, impact investors are defined by their asset class with common risk and return characteristics and the approach towards investment. How investors are managing for impact including their processes, policies and procedures will be key to demonstrating authenticity. Critical to this will be having robust impact management systems, the process by which investors understand their investment role effects on people in the world and set good goals to adapt processes and improve outcomes.

Credible Contribution Strategy

A credible contribution strategy is at the heart of an efficient impact approach. That is, the ways an investor aims to cause change, whether through financial or non-financial means. This ‘difference made’ can play out across the spectrum of impact goals set out by the Impact Management Project. Are investors contributing to less of a bad thing, avoiding harm, more of a good thing, benefiting stakeholders’, or improving outcomes where they are most needed and contributing to solutions Investors may not always be able to precisely quantity their contribution to addressing social and environmental challenges. But they will need in the language proposed by the FCA to have the theoretical ability to deliver and measure additionality through investment decision-making and investor stewardship”. Changes will be needed in transparency about the specific impact objectives being pursued and how well funds are meeting these objectives. Being able to accurately describe against industry good practice and emerging standards.

The full range of impacts, as well as showing systems in place to measure and manage towards impact, will be critical in enabling shareholders and stakeholders alike to monitor whether their expectations are being met. As a result, independent assurance of impact processes and performance will become the norm and play an increasingly key role in building confidence in impact investing. The FCA is seeking views on whether “verification” should also be one of the minimum criteria for an impact product label. This echoes the Operating Principles for Impact Management’s requirement for independent verification. Alignment with these Impact Principles, which have now attracted some 150 signatories, is fast becoming the hallmark of authentic impact investing. The Good Economy has launched an impact assurance and verification service. Impact Assured is designed to verify alignment with sustainability standards, emerging regulatory requirements and industry good practices. Which including those codified in the Impact Principles. Informed by over a decade of experience evaluating and advising on impact strategies for clients. The methodology takes a deep dive into investors’ intentionality to have a positive social and/or environmental impact, their integration of impact considerations into the investment process, and ways they ensure impact integrity through decision-making and disclosures. Through Impact Assured we help investors ensure they are on the right track to delivering meaningful results by strengthening accountability over their impact claims. The service also provides an opportunity for investment managers to reflect on and refine their impact management systems.

Failed Economies


A steady-state economy is incompatible with continuous growth, either positive or negative growth. The goal of a steady state is to sustain a constant, sufficient stock of real wealth and people for a long time. A downward spiral of negative growth and depression is a failed growth economy, not a steady-state economy. The growth economy fails in two ways, a positive growth becomes uneconomic in our full-world economy, a negative growth, resulting from the bursting of financial bubbles inflated beyond physical limits. Temporarily approach, soon becomes self-destructive. That leaves a non-growing or steady-state economy as the only long-run alternative.

Jewel Cameron Sign


Construction- Quantity Surveyor- Valuer/ Appraiser. Project Management

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