“Credit scrunch.” That’s how Bob Giffords and I, co-authors of a recent discussion paper, term the current financial crisis. Our firm conviction is that there is much more at stake than just recovery from the economic confusion. Scrunch means to crush, crumple or squeeze. We believe that reacting to events with current mindsets could lead to the scrunching of the world economy, but, likewise, that we may need to crush, crumple and throw away traditional thinking about financial markets. We can’t fritter away the opportunity to improve that a crisis affords.

If short-term thinking got us into this mess, it is unlikely to get us out of it. Yet short-term thinking abounds, with potentially adverse consequences for the speed and surety of recovery. Over the past two years, people have stumbled and bumbled from incident to event to problem to one failed fix after another.

The state we’re in
Harvard’s Professor Niall Ferguson noted: “By the end of 2007, 15 megabanks, with combined shareholder equity of $857bn, had total assets of $13.6tn and off-balance-sheet commitments of $5.8tn - an aggregate leverage ratio of 23 to one. They also had underwritten derivatives with a gross notional value of $216tn - more than a third of the total.”

Everyone of substance agrees that the crunch emerged, firstly, because money supply growth exceeded GDP for more than two decades, exacerbated by fractional banking leverage that was out of control. Secondly, there was under-saving in the West, largely caused by lying about pension obligations. And, thirdly, there was an over-concentrated oligopolistic cabal of 15 global investment banks, four auditing firms and three credit rating agencies that reduced diversity and encouraged herd behaviour. But the $9tn spent so far on alleviating the crunch has gone towards radically increasing money supply (quantitative easing), reducing motivation to save and consolidating 12 banks. All this in a desire to return us to 2005: in other words, to run up the next bubble.

Right questions, right answers
The renowned anthropologist Claude Lévi-Strauss once concluded: “The learned man is not the man who provides the correct responses, rather he is the man who poses the right questions.” The questions we should be asking are: how would we know when our financial system is working; and what is truly our desired outcome?

Sadly, some common answers are quite short-term: when LIBOR returns to normal, or when things look like 2003 again. A more permanent answer might be: when a 20-year-old can safely enter into a financial structure for his or her retirement.

This is a response that raises a host of related issues - it draws in actuaries, accountants, life insurance, savings, investments, security, fraud, risk, returns and firm defaults - and demands sustainable financing over 75 to 100 years, not just quickly flipping transactions.

Sustainable finance is a necessity that we have not yet been prepared to pay for. The financial system, if it is not broken, is incapable of facing the long-term. The credit scrunch cries out for an organisation that will take a long-term view of finance, and so City of London commercial think-tank Z/Yen, in conjunction with Gresham College, has started one: the Long Finance Institute.

A new map
The Institute aims to improve society’s understanding and use of finance over the long term. The immediate objective is to establish a body that can ignite global debate on long-term finance, by examining how commerce should enable and encourage environmental and social sustainability. Its iconic project is the Eternal Coin, a global educational experience about the meaning of money as a medium of exchange and a resilient store of value. The aim is to develop a roadmap of the key questions that need resolution over the next 100 years.

While we will restructure research priorities as we progress, Long Finance intends to conduct detailed research in eight thematic areas: long term versus short term, fiscal versus monetary, free versus regulated, selfish versus selfless, mutual versus public-sector versus private-sector, rational versus behavioural, sustainable versus robust versus resilient, and theoretical versus practical.

The near-term objective is to get pilot funding for the next three years, after which the Long Finance Institute should be generating enough value to sustain itself directly. We’ve had support from Willis and the Chartered Institute for Securities & Investment (CISI), among others, and are discussing material foundation sponsorship of research, fellows and scholars with financial centres, sovereign funds, financial information firms and accountancy firms.

Had the Long Finance Institute existed in 1900, I hope it would have challenged with an idea such as: in the future you may be paying for shopping and meals with Bakelite. The Long Finance initiative has already scheduled publication of two commentaries, one on long-term mortgages and another on using government debt innovatively over decades. Other projects include the economics of harsh climates, the finances of long-lived institutions and valuing abundance as well as scarcity. We’d like to look at Eternal Coins through the ages. What did the Egyptians, Greeks or Romans believe constituted eternal value?

The long view
Once you look through the lens of Long Finance, you realise that many of today’s sustainability issues arise because society’s core risk/reward transfer system isn’t yet capable of handling long-term risk/reward transfers. Financial institutions must affirm the power of competitive markets to make the world a better place.

A key point is that ‘too big to fail’ is too big to regulate. Regulation creates barriers to entry, promotes the large over the small, reduces competition variation and creates huge risk exposure behind closed doors. Fannie Mae and Freddie Mac, two of the biggest failures of the scrunch, had no competition and enjoyed their own regulator. ‘Too big to fail’ is too late. We have to stop financial institutions either getting to that stage or being in that position.

For example, if we were talking about an internet crash in 2007, say, that saw two billion internet users focused through fewer than 20 nodes - at least two of which crashed, several of which wobbled and all of which were dodgy - our analysis would simply conclude: don’t concentrate on just 20 nodes; break it up. Wholesale investment banking is no different. Competition means having companies that can fail. Yes, society wishes to provide a safety net for retail investors and other groups, but that is a separate issue. The religion of regulation works best when it worships at the altar of competition. So I’m betting it’s worth founding a Long Finance Institute for this research.

If you’re interested in finding out more about our work, visit longfinance.net . Meanwhile, let’s all keep asking uncomfortable, impertinent questions.

Michael Mainelli FCSI is a director at Z/Yen Limited