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DECEMBER 9 2008

THE ECONOMY: WHAT'S GOING ON?

BBC Business Editor Robert Peston captivated the audience at the latest JLA breakfast. In his speech “What’s Going On in The Economy” Robert told how businesses must adapt to survive this new economic climate:

“For me, the important message is that this isn’t just any old contraction or sharp recession – this feels like the end of an era.

Quite simply, we have borrowed too much. In the UK, our collective debt between the public, the government and business, amounts to three times our GDP - approx. 4 trillion pounds.

A lot of people are to blame. Regulators failed to control a whole swathe of financial activity. Central banks recognised that the economy was unsustainable, but somehow believed that borrowing and asset prices were hermetically sealed from the rest of the economy.

Economists came up with all sorts of reasons why house prices were nothing to worry about. They made a very simple mistake – they forgot that if what we borrowed went up, what we paid back would go up.

We in the media didn’t ring alarm bells as we should have done. You and I didn’t have to borrow all that money. We came to see debt as something that you could roll over forever and would never have to be repaid.

The government was also massively at fault. Policies could have been introduced to stimulate trade, taxation and interest addressed, our reliance on import reduced, but they thought it all too politically difficult.

Bankers did one unforgivable thing - they were paid to assess the risks of all this lending, and they got it wrong on a colossal scale. The losses they have accumulated haven’t just hobbled them as institutions, they have hobbled the global economy.

This is a global banking disaster, and what we are seeing is a global banking rescue. If you add together all the sums of money taxpayers have pumped into the banking system around the world, the grand total now is 13.5 thousand billion dollars – that is a quarter of global GDP.

The principal cause of this economic downturn is the shortage of credit. The Government is running out of tricks, and might have to start looking at radical solutions to get the banks lending again, such as part nationalisation.

So what does it mean for us? It’s not the end of capitalisation, in my view, but I do think the nature of capitalism will change. Managing the short-term crisis is such a huge pressure it’s hard to stand back and see what the long term is going to be like. It could look a lot like socialism and state control, or it could be a gentler more humane less greed-driven version of what we have today. I think it will be more like the latter.

This is a time when box-ticking compliance and formulaic approaches to managing risk are less important – what is important is behaving in a common sense, decent way. These are very difficult times. Individuals and institutions have to go back to first principles, basic values, about the right and wrong thing to do. People who go by the rule book will lose the trust of their employees.

Basic principles matter – if you employ people they have to be your priority at this extraordinarily difficult time. All of us have to get used to carrying more responsibility.”