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G20 Summit Confronts “Unknown Unknowns” Of The Global Economic Crisis

April 2nd, 2009
As the 20 leading economic powers gather in London for their summit on the Global Economic Crisis, an anxious world awaits with high anxiety the emergence of an effective, coordinated prescription to the synchronized recession that has spread like the plague. Much of that hope is enshrined in the symbolism of a single head of state, U.S. President Barack Obama. Undoubtedly, some contrived communiqué will be unveiled at the conclusion of the G20 Summit, if nothing else then as a cosmetic palliative to assure a ravaged world that it can have confidence in the leading political figures of our planet Earth to somehow figure a way out of the Global Economic Crisis.
The logical impediment to such hopes is that one must comprehend the major dynamics of this global financial and economic crisis to formulate effective policy responses. I don’t expect anything in the G20 communiqué that will even hint at those destructive currents. For an answer, we must actually turn to a discredited former cabinet secretary of the recent Bush administration.

As Bush’s defense secretary and a leading architect of the Iraq war, Donald Rumsfeld is not fated to go down in history as one of the most inspiring and admired government officials. However, without actually realizing it, Rumsfeld gave a tortured explanation of what may go wrong with the Iraq war that is a perfect description for what underlies the Global Economic Crisis. Before commencing “shock and awe,” Rumsfeld told a news conference that he was a bit nervous about what he referred to as “unknown unknowns.” That two-word paradox actually defines the essence of our current global economic calamity.

Capitalism is based on risk management. Those who place large bets with capital investments but are able to effectively manage those risks win big, in the process facilitating overall economic growth. That has been the core of classical capitalist, free enterprise ideology. However, in our post-regulatory world, risk management as a scientific business concept broke down in many economies, including one as large as the United States and another as small as Iceland. Derivatives were sliced and diced upon a black hole of debt, with a system of incentives that led decision-makers to abandon sound risk management principles, and instead embrace reckless gambling. Classical capitalism morphed into casino capitalism, leading the global economy to our present catastrophe. In effect, the financiers and tycoons have transformed global capitalism from a system predicated on sound risk management to the Rumsfeld alternative universe of unknown unknowns.

What does this Rumsfeld verbal masterpiece mean in economic terms? Fundamentally, we are all now inhabiting a global economy infused with uncertainty. No one knows how bad bank balance sheets really are, or how much value can be placed on toxic assets. Counterparties are paralyzed with uncertainty, in the process blocking normal flows of credit. If bank number 1 knows its balance sheet is full of worthless assets, it has no basis to believe that bank number 2 has a balance sheet any more solvent. The end result is that banks don’t trust each other; multiply that behavior by a factor of many thousands and one can begin to comprehend how corrosive uncertainty is to the numerous fragile linkages that are the superstructure of the modern global economy.

Nothing is likely to emerge from the G20 that will even begin to address the tyranny of these economic unknown unknowns. As long as no one trusts each other in the financial and commercial world, no rational basis for economic recovery exists. In fact, this Rumsfeld disease is spreading contagiously.

Recently, China’s premier gave expression to the weight of the unknown unknowns that are now impacting Beijing’s perception of the Global Economic Crisis. When the premier told a news conference that he was a “little worried ” about the credit worthiness of the United States, which has received $1 trillion from China to finance its massive government deficits, he was manifesting how acute uncertainty has replaced risk management, even at the level of state-to-state relationships. With sovereigns now regarding each other with suspicion as intense as that which exists between financial counterparties in the commercial world, it is clear that massive uncertainty is metastasizing beyond the point of what an artfully constructed G20 communiqué can hope to contain.

 

 

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