The crisis was too short.

I have a sinking feeling when I read reports that the global recession is over. It’s not that I love unemployment, poverty, or crisis. It’s just that none of the fundamental illnesses that afflict our global markets have been cured or even addressed. A great many people who caused the crisis are eager to go back to business as usual, and will thus create sooner or later the next financial collapse. 

What are these fundamental issues?

1. The U.S. dollar. There are too many of them, flooding the world, and you cannot run a global trading and financial system on a weak currency. America’s deficit this year is a staggering $1.58 trillion, even after optimistic revisions.   The world needs a stable currency. We had it, in the 19th C., under the gold standard. The “dollar standard” began in its life in 1944, under the premise, “the dollar is as good as gold”. And indeed it was, then. But in 1971-3, when the link between gold and the dollar was broken, the seeds of the current crisis were sown. We need a world central bank and a global currency. Had the crisis been deeper and more serious, perhaps we might have gotten one. Now, we won’t.

2. Capital flows. Enormous sums of ‘hot money’ race from country to country, seeking short-term profits. This is now expedited by super-high-frequency trading, in which computer algorithms running on supercomputers drive trading that occurs many times a second. This high-frequency trading could bring the next crisis, as indeed it did in 1987, when computer programs that drove both spot and future trading caused a feedback loop that crashed the US stock market by 20% in a day (on Oct. 19). 

3. Self-interest. Countries are still driven by selfishness and self-interest.Yet to make the global system stable and sustainable, we need intense cooperation and collaboration among countries. There is no sign of this. Each country pursues its own interest. When America’s interest calls for lower interest rates, the Fed cuts rates, even if global conditions need higher rates. America’s Fed cannot both be America’s central bank and the world’s central bank.  There is no effective body in which coordinated integrated global policies are set. Perhaps, had the crisis been deeper, such a body might have been born, as the United Nations was born out of the depths of World War II.

A great many other issues remain to be repaired, but will not be. Human memory is very short. As the media reassure everyone that “it’s over”, our behavior will return to that of the bad old days — until the next crash. And as a result, it will likely be a lot worse.