July 12, 2012

400-Word Scenario #1: Clawback World

Patrick Marren
Partner

Scenario planning requires imagination. Everyone likes to pretend that imagination is fun and games. But really, imagination is often very difficult and painful, because it requires us not just to take incremental steps along a pre-existing path, but to make up an entirely different path. (There are gradations of this: from some godlike perspective even truly ingenious innovative thoughts can seem boring and incremental, and from an quotidian perspective simple incremental steps can seem like the moon landing. But I digress.) 

However, imagination, pain in the posterior though it can be, can be cultivated through regular exercise. So we are going to try an experiment here at FSG Outlook: a 400-word scenario of the future at least once a week. These may be spurred by something we have read, some idea that we have long harbored, or even by a suggestion from our readers (so please feel free to suggest a topic for future 400-word scenarios).

Naturally, these are not "real" scenarios, and we do not recommend that you plan on the basis of any of them. None of them will come true exactly. They are merely meant as thought-starters.

With these preliminaries out of the way, I give you, from the following inspiration [ http://nyti.ms/MgVsLw ], in exactly 400 words, Exhibit A: Clawback World.

It started way back in 2012, the backlash against Wall Street. No, it wasn't the Occupy Wall Street movement; that petered out as the tactic of "occupying" was shown to be limited by the change of seasons and the inconstancy of youth.

No, it turned out that the tide against Wall Street was turned by that staple of American politics: taxpayer revolt. Dozens of cities and pension funds in 2012 filed lawsuits against dozens of banks, claiming that they had been robbed by the banks' manipulation of the London Interbank Offered Rate (LIBOR), the basis for a huge array of loans around the world. 

The cities' success in suing the banks had a number of far-reaching implications. LIBOR was the basis of a truly staggering array of financial transactions: in 2011 alone, the trading volume of a single LIBOR-related contract on the Chicago Mercantile Exchange was $564 TRILLION. LIBOR was also the basis of most mortgage rates in the US. Every borrower turned out of his or her house by a bank suddenly had a plausible suit against the banks. Bank lending slumped as a result, at the worst possible time.

But it did not stop there. Once Baby Boomers who had not saved enough for retirement (a majority, by all accounts) realized they could sue Wall Street, the rush was on. In the aggregate, there simply was not enough money for everyone. The zero-sum-game struggle was on. The minority who had "played by the rules" and saved dutifully, found that their nest eggs were being alternately inflated away and simply expropriated to keep their more prodigal brethren from feeding out of dumpsters. By 2020 no pension was worth a thing: "defined benefits" were inflated down to worthlessness; and "defined contribution" 401-Ks were punished by erratic stock market returns and unpredictable taxation. 

The government, having failed to borrow and spend on roads, rail, ports, and other infrastructure when borrowing rates were near zero in 2012, found itself in 2020 having to borrow at much higher rates to stem a tide of physical decay and to pay for warehousing of indigent elderly. Some states clamored in vain for bailouts through the 2010s, while others refused federal money for health care and infrastructure spending. Neither type is happy now. Migration from state to state has surged as differentials in benefits have changed.

Then, as we all know, something very, very big happened.

Comments  | 

There's lots of scenario planning potential here. In fact, something resembling Clawback World came up several years ago in an engagement for an insurance company. We helped the client imagine 'Clawback' exposures across a set of product lines. It was an eye-opening exercise. For in times of prolonged economic distress, if there are serious perceived injustices, very little will be considered off-limits. Something to keep in mind with, as Patrick Marren suggests, millions of Baby Boomers facing rather acute financial insecurity in retirement.

Thoughts?