(MENAFN Press) The 2008 financial crisis has constrained economic liberty. The explosion of sovereign debt, the rescue packages for national banks and expanding regulatory rules for economic and financial policy are impinging on governments', institutions' and individuals' freedom of action.
In the current edition of "Perspectives", Burkhard P. Varnholt, Chief Investment Officer of Bank Sarasin & Co. Ltd, explains the importance of liberty for the prosperity and stability of our economy, and elucidates the long-term consequences that constraints on liberty have for investors. His liberalist economic observations point out how the self-perpetuating dynamics of overregulation can be halted and how investors can avoid constraints on their liberty by employing a holistic, sustainable investment approach.
"Man is born free; and everywhere he is in chains." The preceding quote from French philosopher Jean-Jacques Rousseau shows that personal liberty is linked with collective liberty and the world order. The scope of liberty is measured not just by the constraints imposed on it, but also by the possibilities of exercising or regaining freedom. This autonomy is a prerequisite to the prosperity and stability of the industrialized nations. Three ongoing developments spawned by the 2008 financial crisis “ excessive public-sector debt, the stealthy undermining of monetary-policymaking independence, and overregulation “ are constraining economic liberty and thus inhibiting prosperity and economic stability in the industrialized countries.
Burkhard P. Varnholt, Chief Investment Officer, Bank Sarasin & Co. Ltd
"Three regulatory deficiencies were leading contributing causes of the financial crisis: the USA's rejection of centralizing derivatives contract trading, bank capital adequacy, and the disastrous US mortgage market. The raising of international equity capital requirements for banks marks the biggest progress achieved to date. But there is still far to go to clear the way for the next generation to regain the liberty that today lies in chains."
Excessive sovereign debt as a consequence of politics and demographics
Public overindebtedness is less an economic problem and instead more attributable to political and demographical developments. The 2008 financial crisis forced many governments to take on debt to keep their national banks afloat. In most cases, the rescue packages for private-sector banks have been paid back with a profit for the state. However, governments wasted the opportunity to use those countercyclical interventions to stabilize public budgets. Although most of the bank rescues have been unwound by now with a profit for the respective supporting governments, the rescue frenzy also gave birth to numerous debt-financed economic stimulus and growth packages. It will take courageous political decisions to avert sovereign insolvencies in many industrialized countries in the years ahead.
Loss of independence is a problem currently facing monetary policy
By involving monetary policy in general economic and fiscal policy, central banks have jeopardized their policymaking independence. A good monetary policy must never be subordinated to the necessities of economic policy. Does the current unconventional monetary policy help or harm future generations? The USA, the UK and Japan exemplarily demonstrate that subordinating a central bank to economic policy becomes a fundamental liability when the central bank is its own government's biggest creditor.
Regulation often combats symptoms rather than causes
Increasing financial-market regulation and state intervention in the banking sector are not a lasting answer to the 2008 financial crisis. Over the last four years, for example, internationally operating banks have had to integrate an average of more than 100,000 pages of new regulatory directives into their business procedures. This immense thicket of rules is not a solution for strengthening financial systems. It takes clear and comprehensible regulations to safeguard collective public interests such as ensuring financial-system stability, transparency and efficiency, preventing too-big-to-fail situations and protecting consumers.
Long-term implications for investors
Against the backdrop of financial repression, on a two- to three-year investment horizon commodities, real estate and stocks offer better prospects than fixed-income securities, which are very vulnerable to regulatory repercussions. In uncertain times, traditionally riskier assets like stocks or commodities can stabilize an investment portfolio better than bonds can. Emerging markets as well present a good investment environment. Direct investments in emerging-market stocks or bonds offer better long-term prospects than investments in Western industrialized countries. Regardless of which asset class, a structured investment process currently promises greater success than an intuitive ad hoc process. Active, globally oriented asset management mandates employ such a structured investment approach and are a superior alternative to passive investments, especially in the present tough climate.
The full "Perspectives" newsletter can be downloaded for free from our website at www.sarasin.ch.
