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OECD Secretary-General

10 Years After the Failure of Lehman Brothers

 

Remarks by Angel Gurría 

OECD Secretary-General

OECD, France - 14 September 2018

(As prepared for delivery)

 

 

 

Ladies and Gentlemen,


It is my pleasure to reflect with you on what has happened over the past decade, take stock of what lessons can be drawn from the crisis and how we are tackling the challenges. When I was appointed Secretary-General of the OECD in the summer of 2006, it was a pleasant time to be an economist.

 

The Great Moderation had already solved the problem of having continuous growth while keeping inflation under control. Deregulation had unleashed the creative energy of the financial system, ensuring that the economy would always have the funds it needed. And the science of economics had finally solved the problem of depressions, according to Nobel laureate Robert Lucas.


The calm before the storm

At the end of my first year in office, in June 2007, the OECD Economic Outlook stated that: “the current economic situation is in many ways better than what we have experienced in years. Our central forecast remains indeed quite benign: a soft landing in the United States, a strong and sustained recovery in Europe, a solid trajectory in Japan and buoyant activity in China and India. In line with recent trends, sustained growth in OECD economies would be underpinned by strong job creation and falling unemployment.”

 

We were equally optimistic regarding the growing concern about the US mortgage industry. In July 2007, our Update on Financial Market Developments stated that: “While institutions focusing on sub-prime lending have been facing severe difficulties, larger financial institutions – and the financial sector as a whole – seem to have weathered the sub-prime crisis relatively well, owing to healthy balance sheets and strong earnings in other areas of their business. Securitisation has increasingly enabled a transfer of risk to investors that are more able and willing to bear these risks.”

 

Well, we all know what happened next. A crisis and a recession with impacts that we are still feeling. A rejection by large numbers of our fellow citizens of the globalization process, that they see benefiting only the lucky few. And cynicism about the advice of experts. The crisis taught us that mainstream economic thinking, and the models it was based on, did not reflect the reality either of the economy or of people’s lives and this is why we did not see it coming. We got it wrong!

 

Understanding the economy and the crisis

The traditional school of economic thought essentially sees the economy as a totally understandable machine which almost always operates in a predictable linear way, guided by policy levers. Occasionally, the machine gets knocked off balance, or out of equilibrium, and needs some resetting to get back on track. Too good or too simple to be true.

 

The economy is far from a machine. It is a complex adaptive system, with massive interdependencies among its parts and the potential for highly nonlinear outcomes. In such systems, there is no equilibrium to return to. It was Alan Kirman, one of our pillars of NAEC, who reminded me in 2012, of the quote by Stuart Kaufman: “An organism that is in equilibrium all the time is dead because nothing is happening.” Our notion of economics should move from classical mechanics to modern physics, and we should focus on the dynamic processes of the economy. Of course it’s more complex.

 

Complex systems fail regularly and fall into crisis. For example, there were 195 stock-market crashes and 84 depressions between 1860 and 2006. Despite this knowledge, however, we were not prepared for what happened in 2007. In previous crises there was a way out and only one country – or a group of countries – were affected. This time, however, the global financial system in its entirety was affected. According to our theories and our models, this should have been impossible.

 

Our approaches neither anticipated the crisis or how it would cause an economic recession and how the pain of that recession would provoke social and political crises in its wake. The results, as we all know, are rising inequalities, a massive erosion of trust in governments and institutions, and growing populism which is influencing politics and economic policy.

 

From disaster to inclusion – putting people first

So how might we tilt the odds from disaster to reform? We can begin by not turning a blind eye to the sentiments of people that feel left behind. We must listen to what people have to say.

 

The many people who fell through the cracks of society and who were inadequately protected by the system. People who have seen their living standards stagnate, who live precarious lives one pay cheque at a time, and whose children do not have equal opportunities to reach their full potential. People who accumulate disadvantages.

 

They feel that they played by the rules, while others in society didn’t, and that those others have been rewarded. They also feel at the mercy of big impersonal forces – globalisation, technological change, large corporations and financial institutions. They want to regain control.

 

Only by listening to people can we effectively tackle these challenges, make our societies and economies more inclusive and regain trust. In this respect, the crisis taught us that we can learn a lot from the biological and physical sciences, from psychology, sociology, political science, philosophy, anthropology, history and the humanities.

 

New Approaches to Economic Challenges

That is why we launched our New Approaches to Economic Challenges Initiative. We knew we had to overhaul our economic thinking, but we also realised that economics doesn’t provide all the answers to the multiple challenges our societies are facing. We have to tap into the wealth of knowledge and expertise that so many other areas of thinking offer us.

 

We have made some progress. For example, our Economics Department now systematically considers inclusiveness and green growth in economic policy recommendations and examines the distributional impacts of structural reforms and international trade. Our Statistics and Data Directorate is a global champion of the movement to go beyond GDP, developing measurement tools to capture key dimensions of material conditions and quality of life, focusing on outcomes, opportunities and inequalities, and on resources for future well-being. The Science, Technology and Innovation Directorate is helping us understand interconnections between economies, thanks to innovations like its database on trade in value added, that shows where the profits from international trade actually go. The Directorate for Financial and Enterprise Affairs is helping to improve the lives of workers along those value chains through its promotion of responsible business conduct.

 

And I could give many other examples of how we have shifted from defining success in terms simply of growth as measured by GDP to an approach which stresses that growth should lead to better well-being with everyone having a fair share in the benefits. We are helping to develop policies that put people at the centre, and new metrics which can tell us if we’re succeeding in measuring what matters most. We are also incorporating the environmental cost of the economic model we have followed.

 

This Organisation was founded “to improve the economic and social well-being of people around the world” and provide a forum for governments to “seek solutions to common problems.” This is our raison d’ être, it is our responsibility and it is at the heart of NAEC.

 

We are also grateful to the Partners for a New Economy (P4NE), with whom we have organised this Conference and look forward to working closely together to focus and federate the different parts of the movement for new approaches to economic challenges.

 

Ladies and Gentlemen:


In his book, The End of Normal, James K. Galbraith states that “the Great Crisis should be seen as a turning point, a barometer of the rise of unstable economic conditions”. Are we missing this opportunity? We cannot afford to!

 

We are indeed at a turning point. As countries are gradually leaving the crisis behind, we have an unprecedented opportunity to promote profound change which can lead to more inclusive economies and societies. We count on you to work with us and help us in this endeavour by telling us what lessons you have learned from the crisis. You can count on the OECD to continue designing, developing and delivering better policies for better lives.  Thank you.

 

 

See also:

OECD work on New Approaches to Economic Challenges

OECD work on Economy

 

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