Estate planning becomes more difficult when an American has non-American heirs.
Listen to this financial podcast to find out about the most useful tools for cross-border estate planning, which strategies may be available to you, and what you need to know if your heirs are not U.S. citizens.
Financial and estate planning is difficult enough for individuals; imagine how much more challenging it is for countries planning their budgets. Governments also seek strategies to prevent future economic problems and market crashes.
Geoff Mulgan, former director of the UK Prime Minister’s Strategy Unity and Chief Executive of NESTA (National Endowment for Science Technology and the Arts) discusses whether democratic governments have made any changes in their planning since the market meltdown of 2008.
What should have been done to improve existing financial systems, and was a useful opportunity for change lost?
Follow Geoff Mulgan at www.nesta.org.uk/ and on Twitter @geoffmulgan.
Watch NESTA on YouTube.Read the Transcript
Interview with Geoff Mulgan
After the economic meltdown in 2008, everyone felt there was a need for financial change on an international scale. Geoff Mulgan, UK chief executive of NESTA, a major charitable organization, discusses ways to ensure future financial meltdowns are less likely to occur.
Douglas Goldstein: Geoff Mulgan is the chief executive of NESTA, which is a charity that works to increase innovation in the UK.
After the market meltdown in 2008, you spoke about the need for change. Do you feel there’s been any substantial change in the systems that might protect people from such a meltdown in the future?
Geoff Mulgan: My interest over many years has been in how governments that are democracies could be better at handling the long term, dealing with the big issues that really matter rather than getting caught up just in day-to-day problems and spin and hype and so on. When the massive crash happened in 2007-2008, and it was clear that the whole set of models were no longer working and the financial system was in meltdown, I hoped that that moment would be used to fix some of the deeper imbalances and problems, particularly in countries like the UK and the U.S. I think what’s clear now looking back seven or eight years from 2016, is that governments in many ways did very well on the tactics. They did respond very radically to the scale of the crisis, pumping huge sums of money into the system, bailing out the banks, and the U.S. bailing out in the car companies, but very little was done to actually address the deeper long-term problems. That’s why many people now worry that the system may be almost as fragile now as it was 10 years ago. We’ve got a very serious risk of yet another major crash.
Has the System Learned From the 2008 Market Crash?
Douglas Goldstein: So is that risk because of things like a housing bubble, or might there be some other issue that we just don’t see that could be causing that crash?
Geoff Mulgan: A lot of the problems in the 2000s came from a financial system which was creating enormous leverage and enormous levels of risk. Throughout history, whenever that happens too much, you get too much of a gap between the monetary economy and the real economy it’s meant to represent. At some point you get a crash, and although there have been some minor changes, we still have huge ratios in banks between their underlying assets and their lending ability. Despite the warnings of many experts to try and fix that, we certainly have signs of housing bubbles in countries like my own. We still have big overhangs of public debt in many countries around the world, and the really striking thing in Wall Street and to some degree in Europe is that most of the people in institutions which were most involved in creating the problems in the 2000s are still there. Almost no one got punished. Remarkably few people lost their jobs, and it’s almost as if the system failed to learn. It had an amazing opportunity to really rethink how money was organized and that opportunity was missed.
Douglas Goldstein: It seems the takeaway from this is that if everyone knows the government is going to backstop the mistakes that people are going to make, why wouldn’t the banks take risks again going forward? Organizations like the FDIC in America is necessary, because we all say, “You have to have the government there to protect the banking system,” allow people to know they can always get their money out. Maybe just the concept of having that protection is the real problem. We have to just allow people to know what the risks are and say, “I’m either going to put the money in the bank or I’ll use the Treasury or a different bank from the UK that might be safer.” Are those the type of systemic changes you’re talking about?
Geoff Mulgan: Yes, and I think many people at the time of the crash said that we had a system where the gains were privatized. They went to the people working within the system, and the losses and the risks were socialized and spread around everyone else who had to bail the system out when it crashed. That is still largely the case. I think either you have to move to a system where you much more tightly regulate the banks so that they are not so exposed or leveraged or you have to have true risks so that as you say you allow some of them to go under, or you use other methods. One of the things we’ve been interested in here is building up alternative kinds of finance, peer to peer funding and new entrance to the banking market, much more digitally based funding tools which often don’t require the same levels of risk and exposure as we’ve got in our banks.
I think the bigger risk here, though, is always what went wrong in the UK and in the U.S. in the 2000s. We became so obsessed with the financial sector and allowed it to take such enormous profits. In the U.S., about 40% of all corporate profits were going to finance by the middle of the last decade. That was actually sucking value out of the real economy, and if you’re concerned about the long term in any country, you’ve got to be concerned about investment and the underlying springs in wealth, which are things like knowledge, technology, innovation, and infrastructure - things which take quite a long time to materialize but actually are the only ultimate sources of wealth. If you allow too much to be siphoned off by what’s meant to be a service, finance is meant to serve the real economy, not dominate it. You shouldn’t be surprised if the rest of your economy risks stagnating and you might get the productivity problems which we’re seeing very, very acutely right across Europe and North America at the moment.
Douglas Goldstein: You said that the gains were given to private individuals, but the losses were socialized. Isn’t it true that AIG paid back an extra $20 billion? In other words, the U.S. government actually profited, even though for a long time people thought they weren’t going to?
Geoff Mulgan: In a few cases, the deals ended up quite good, but I think if you look at most of the deals, the taxpayer hasn’t done well from them. Of course, the overall effect of the crash, which was a crash almost entirely driven by the behavior of the financial institutions’ GDP, is still well below what it would’ve been without the crash. So essentially many other people are paying the price for mistakes made by really a very small number, most of whom didn’t in fact pay much of the price for any of their mistakes at all.
Douglas Goldstein: It seems to me that ultimately in the crash in 2008, there were a very few people running the show. Even in the U.S. government, it was mostly Ben Bernanke who would convince the other people at the Fed about a decision or the secretary of the Treasury, and so literally, there were a couple of guys sitting in Washington making decisions that had multi-trillion dollar impacts. So I’m actually very interested in hearing more about your other proposal, for example, peer-to-peer financing, which does imply that there is risk, but people are willing to take that risk. Is that how it works?
Geoff Mulgan: One of the problems with banking systems is that they often get effective monopolies over the creation of money and creation of credit given essentially by government. So not surprisingly, they can become very rich. So one of the solutions is to try and open up competition so it’s much easier for newcomers to come along with different ways of lending, different ways of raising money, different ways of intermediating.
We work a lot with the government in the UK to open up those markets. There are things like peer-to-peer lending, crowdfunding of equity. There’s a whole series of non-bank-lending models, and of course, now there’s a very big social investment sector which hardly existed 10 or 15 years ago, which is trying to raise capital to achieve both the financial return and a social return. We’ve had new financial innovations in government, like social impact bonds, development impact bonds, trying to use clever financial ideas to generate real value and in a way to answer the complaint made many years ago by Paul Volcker who was the head of the Federal Reserve, who said he couldn’t think of any good financial innovations over the last 20 years except for the ATM. That’s a slightly extreme point, but it clearly was the case that many of the innovations in the 2000s were good for the sellers but really not very good for the buyers at all, and quite disastrous for the system. And so the really clever people in finance use that brainpower to solve real problems, to create real value for the customers in societies, to improve the environment, and to solve social problems. This seems to be a much better approach than just pumping more money into the old system.
Douglas Goldstein: It seems that these new ideas can either be directed by the government or by organizations like yours, or just by allowing an open competition without so much regulation, but with an insistence upon transparency. Then this would allow new ideas and new people to come in. Is that the way to go, or do you feel this has to be a top down solution?
Geoff Mulgan: I think the ideal thing is that you allow an open market so people can generate ideas. In London, where I am at the moment, we have a phenomenally innovative financial technology sector constantly devising new digital tools for lending money, handling identity, etcetera. You make it easier for these innovators to talk to the regulators about what is an appropriate level of regulation. Usually, that’s going to be some guidelines, otherwise it’s too much of an imbalance between the buyer and the seller, and fully laissez-faire financial markets tend to be a bit disastrous. But if you have too much regulation, then the newcomers have no place, no way of getting in.
So what we’re saying in cities like London and New York, and also others like Berlin, I’m thinking, is to have a much more dynamic conversation between the regulators and the newcomers, the insurgents rather than having them dominated by the incumbents who have cozy relationships. These used to be between central banks as dominant regulators and the big players, which were usually designed to keep everyone else out.
Douglas Goldstein: How can people follow you and follow the new innovations that you and your team are working on?
Geoff Mulgan: The organization I work for is called NESTA (National Endowment for Science Technology and the Arts) in the UK. Our website is www.nesta.org.uk. We are both an investor, a researcher, and a runner of programs. We also do big events about the future. We have several thousand people coming to our festival of the future in September, if anyone wants to visit London then, and lots of information on our website on new ways of solving social problems and new ways of making money achieve more.