The Next Global Crisis..!!

The G20 is focused on preventing a repeat of the financial crisis, but the next global crisis to threaten the global economy is likely to be off the radar screen of policy-makers, as have previous ones.

What warning signals need our urgent attention?

In partnership with the World Economic Forum, CNBC hosts this debate focusing on the challenges and choices to be made to prevent the next great global crisis.

Key Points
• Three flash points are seen as sparking the next global crisis: 1) out of control sovereign debt; 2) over regulation of the financial system; and 3) protectionism leading to the demise of free trade and globalization
• Government debt in the US and Europe has risen by more than 75%. In their zeal to avert a Great Depression, policy-makers might have mortgaged the future for short-term gain
• Sarbanes Oxley in the US is said to have caused financial institutions to flee New York for London. With internationally coordinated regulation, companies have nowhere to go and would be crushed by excessive global rules
• The benefits of free trade and globalization have not been distributed equally, causing disenchantment among voters that could pressure governments to raise trade and other barriers, which could spark the next global crisis
• The audience voted sovereign debt as most likely to cause the next global crisis (50.7%), followed by protectionism (37.3%). Over regulation is regarded as a distant crisis (12%)

Synopsis
The next global crisis is likely to be sparked by the excessive amounts of sovereign debt that government piled on in their zeal to avert a Great Depression. Governments have done everything to shield the public from pain, but the relief is only temporary. Belt tightening and other painful measures could cause social tensions in the US and the United Kingdom, and emerging Europe could face outright defaults.

The US might not default, but its towering debts could reduce quality of life programmes such as healthcare. The solution is substantial cuts in military expenditures, agricultural subsidies, a manned space flight to Mars and other such programmes to help balance the budget. Higher taxes will also be needed.

Timing the withdrawal of stimulus spending and paring of sovereign debt is crucial. International coordination will be needed. The public should also be prepared for inevitable pain from higher taxes, spending cutbacks and other measures.

Those who see over regulation as the next global crisis point to the Sarbanes Oxley Act, which they say has made the US regulatory environment overly complex. The result was to drive financiers away from New York to London. But this will not be possible if over regulation becomes a global trend.

One solution is to let the financial industry regulate itself, including remuneration. Goldman Sachs and other banks are proving they can exercise self-restraint on perceived excessive bonuses. The mantra should be to let industry players stop, look, listen – and learn.

However, others argue that government still has to provide traffic lights and policemen. One possible approach is to strike a balance so regulation does not stifle innovation and the entrepreneurial spirit. Transparency in corporate operations can also regulate corporate behaviour as investors and other stakeholders pressure companies to act responsibly.

Those who view protectionism as causing the next global crisis fear that the high unemployment and other economic pain in the US and elsewhere will be blamed on free trade and globalization. That will be a mistake because they think free trade is a win-win proposition.

However, others say free trade is win-win only if the metric is countries. There are losers on the individual level, from companies that have to fold, to workers who lose their jobs and livelihoods. Some of the losers must be compensated, and the fruits of free trade more equitably distributed.

In the end, the majority of the audience (50.7%) were swayed by the proposition that the next global problem is a sovereign debt crisis. A bit more than one-third (37.3%) voted for protectionism, while only 12% thought over regulation would be the next crisis.

Happy Reading..!!