Dear Leaders of the G20:

The debt crisis in Europe had almost led the world to forget about the wounds and ravages caused by the collapse of global finance only a few years back. Only the world’s “Indignados” and Wall Street Occupiers have brought the issue back on the table. Without fear of exaggerating the problem, we think that the questions to be answered are key to the very survival of democratic and sustainable societies: which room is left in today’s finance for people in flesh and blood? Which room is left for enterprises seen as associations of people, which finance should primarily aim to support? Which room is left for economic development, understood as the growth of opportunities and freedoms for the largest lot? And which is left for a real geography, made of places that are more and more interconnected but should not be mistaken for just anonymous nodes of planetary networks?
For years, the idea has been disseminated whereby developing modern financial infrastructures would lead to more efficient market risk taking and to growing and innovative economies. This idea has become the paradigm that has dominated the world economy over the last quarter century and more. Many developing countries have inspired their economic policy strategies to it. But the unconsidered use of those same factors that originated the success of the paradigm – that is, breathtaking information and communication technology development and paroxysmal market competition – have determined its failure.
They have rendered time and space incommensurable to human action. Time has shrunk, flattened by the speed of technology that cuts short the past and compresses the future: it forces us to be longing for everything at once, at any cost. There is no patient effort to build for the future: the present has no price. And space has contracted as well, disfiguring us. Yes, it does connect us all through instantaneous and global network links, but for finance we are only impersonal entities identified through statistic and stochastic parameters managed by artificial intelligences.
If all this sounds rhetorical, let’s see what happens when time shrinks and space shortens: the room for decision making collapses. Voices, market opinions, and judgments become unanimous verdicts based on fleeting conventional beliefs, rather than on underlying fundamentals. Those operating in the markets join the herds and follow the leaders, rather than running countertrend. Expectations align and strengthen market “sentiments”: euphoria, uncertainty, and panic mount and follow one another. There is no place for bonds among subjects willing mutually to support each other at difficult junctures, but only for numeric thresholds beyond which unknown counterparties buy or sell mechanically money promises that have nothing to do with real output or risk management. Speculation becomes dominant. Information abounds, yet there is no time to digest it. Its quality runs down, if those information producers have an interest in matching market expectations: the big financial frauds or the primary ratings given to toxic assets are only the most evident examples of feeding markets with the information they expect.
But then: who values risk, today, in the so-called efficient capital markets? And if banks – the ultimate risk assessors – are willing to take risks blindly and transfer them to others who are ready to do the same – as they did unrestrainedly in the US and Europe – who is really concerned with valuing risks?
Once upon a time, relationships used to link finance to enterprises, creating bonds of shared interests and aims as well as channels of privileged information. But those relationships were exclusive: they did not facilitate innovation or grant access to those who were not members of the recognizable elites. The development of modern financial markets unhinged such exclusivity, and opened up market access to individual ingenuity and true merit: they would democratize the economy – it was reckoned. In fact, the much awaited modernism of democratic finance sunk into the post-modernism of short time and flat space.
Where to re-start? We do not want to set the clock back. But we ask that men and women regain prominence in the economy. It is necessary that financial supervisory authorities reconsider the criteria to approve the financial innovations proposed by markets: do they produce clear and evident public benefits? Do they serve the real economy? Do they prompt those who adopt them to analyze risks case by case? And if such risks became unmanageable, would they justify the intervention of the taxpayer? It is fair to let markets experiment with new products, but experiments must be controlled to see if those products truly enhance prudent access to capital, or permit better risk management that does not feed into speculation.
Intermediaries will have to be called upon to judge the merit of borrowers individually, and to evaluate their potential through direct and informed analyses. Room will have to be given to financial activities that assess entrepreneurial innovative ideas from those agents (especially young people) who have not enough guarantees to offer other than sound business plans.
These steps will require deep and broad institutional changes, and will demand of financial actors to put the real economy and economic needs back to center stage, and make them the very core of their raison d’être. They should give value back to those who invest in and produce real wealth, thus regaining some sense to time and space in economic life.
The perimeter will have to be restricted for robotic finance. Those negotiating complex contracts will have to operate only on dedicated markets that will not be accessible from the general public (very much like speed racing car circuits). They will have to satisfy high standards of financial strength and will not be able to benefit from public guarantees. These intermediaries will have to analyze the products used, integrating product external ratings with their own assessments, and will have to prove to have full knowledge of products structure and risk. On the other hand, those who intermediate deposits will no longer be allowed to undertake complex transactions that cannot be deciphered by average market players and supervisory authorities. They will not be allowed to sign contracts based only on mechanical models and without carrying out rigorous counterparty analysis and only.
Finally, incentives will have to be considered that would extend the time horizon of investors. First, shareholder rights should be expanded for investors supporting longer-term investments. Second, management compensation contracts should reward long-term performance. And governments should tax short-duration holdings of securities, while subsidizing long-duration holdings.
These measures will not quench the fire of those who occupy the streets, but would contribute to make the economy serve the people – not enslave them.

November 2011
The Group of Lecce

Let's Get Back Time and Space