Can We Avoid Another Cataclysmic Meltdown Of The Global Financial System?

December 14, 2016 |

sklarTake-aways from Rana Foroohar’s Article Titled  “Saving Capitalism” (Time Magazine, May 23, 2016) and her book titled ”Makers and Takers, The Rise of Finance and the Fall of American Business”.

By Tim Sklar, 
A Concerned Project Development and Project Finance Professional

Special to The Digest

Background

Over the last thirty years my firm Sklar and Associates (S&A) had been engaged in assisting clients in defining and evaluating, numerous new infrastructure and energy projects  and to assist them by packaging selected projects to facilitate their financing.

In the 1980’s, project development services were provided to clients on a variety of commercial projects, involving light manufacturing, agri-business, food processing, wholesale, and retail operations.  In the early 1990’s, as sub-consultants to number of large consulting engineering firms, we provided financial viability assessments on a variety government sponsored infrastructure projects they had under development in Asia and Africa. We also helped evaluate a variety of financing schemes that were being considered when financing proposed toll-roads, bridges, tunnels, freight rail systems, mass transit systems, ports, and airports. In the late 1990’s the project mix shifted to the energy sector and included petroleum refineries, power plants and power distribution systems.

And starting in 2006, our focus had shifted to participating in development of projects capable of producing biofuels and bioenergy on a commercial scale. At that time, there had been significant interest expressed by Northern European coal-fired power plants to burn bio-coal made from US forestry wastes. A few years later, evolving technology stimulated interest in promising new biorefining processes that would be able to makimagese advanced high value biofuels from these same forestry wastes.

Unfortunately, the obstacles encountered in trying to develop these wood-waste-to biofuels plants became insurmountable, as the evolution of commercial-scale biofuels technology had lagged and  the price being paid for competing fossil fuels had significantly dropped. This led to new risk thresholds that made financing of these high risk-start-ups  extremely tenuous. And in the aftermath of the financial melt down of 2008. the obstacles being encountered in obtaining financing, became insurmountable. And by 2015 we decided to abandon our biorefinery project development efforts.

New Concerns

Although we still believe that there will be a place in our energy future for bioenergy and biofuels, we believe that the future outlook for bioenergy and biofuels development will remain uncertain, as the future of the US and the global economy has not fully recovered and the prospects for another financial melt-down and subsequent recession, remains as a distinct possibility.

Some experts are now suggesting  that the U.S. system of market capitalism itself is so broken that  another cataclysmic  collapse is imminent. We are equally concerned that the fixes that are described by these experts, may not be effective any time soon. And one has to wonder whether there is the collective will  to accept the “strong medicine” we are being told is needed.

In her new book, titled “Makers and Takers…” and her recent article that appeared in Time Magazine, Rana Foroohar has provided  excellent and lucid explanations as to how we got into the fix we are in over the last 40 years. She also describes some of the “strong medicine” that may be needed. She clearly places blame on what has happened to our financial system and describes how our financial banks, hedgefunds, mutual funds, insurance firms, and trading houses are no longer providing financing to the real economy. She admonishes those who own and manage our financial institutions for being so self-serving that they are no longer a help to business. She concludes that our financial institutions have now become a hinderance to business and are no longer serving the real economy or society as  a whole. Unfortunately, she devotes only one 10-page chapter out of eleven of her book to the discussion of five big ideas that would integrate finance into the real economy, to better serve our shared prosperity and growth.

To better understand the fix we are in and how to get our economy back on track without having to read all 329 pages of what Ms. Foroohar has written, this synopsis is offered. It highlights each of her chapters in “Makers and Takers”, and culls out the various “fixes” that are mentioned. I then opine on what has to happen to implement each “fix”. This  should help the reader decide for themselves, whether obtaining such a fix is probable or problematic.

What’s Happening? Our Current Economic Malaise

It has been 8 years since the financial crisis of 2008. Although trillions of dollars have already been expended in order to turn the economy around, in 2016 , there is still widespread disaffection with the anemic economic recovery, the stagnant incomes and increased income disparity.  And this economic malaise is now a major tissue in the 2016 presidential campaign.

Further, there is still confusion among the experts, pundits and political leaders as to what our financial system should be designed to do and who it should serve. As a consequence, we are being told that there are a plethora of prescriptions that could fix the system. We are also being told  that these fixes may still be inadequate as America’s economic problems go far beyond unsound practices of the bankers, hedge funds, and the too-big-to fail financial institutions. We are also being told that it will also take more than a set of major revisions to laws and regulations  to reign in corporate tax avoidances schemes, to close tax loopholes. to shore up lax regulations and to improve regulatory enforcement. 

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