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Since the financial crisis, fragmentation rather than unity has become the norm. You can see it everywhere, from the euro-zone crisis to Communist Party infighting in China. In just the past few months, Argentines renationalized their biggest oil company, and several nations put capital controls on their currencies. Rich and poor regions from the E.U. to Japan and from China to Turkey are ramping up tariff increases, export restrictions and self-serving regulatory changes. World Trade Organization director general Pascal Lamy calls the rise in protectionism "alarming" and frets that we are headed back to the 1930s.
Given all the risks out there in the world, the 2% economy--in place of our historical 3%-to-4% yearly growth--has become the new normal for the foreseeable future. So is it possible to survive or even thrive in the new normal?
The answer is yes, but only if you know where to look and how to pivot. A key truism in this new age of volatility is that "everything local will take clear priority," says Peter Atwater, a financial researcher who studies social mood and the markets. That means much more focus on regional economic ecosystems and how to foster job creation at home instead of relying on global markets to raise all boats. In short, we need to be aware of the myths of globalization and how we can unleash untapped economic power closer to home. Here are some of the new rules of localnomics.
RULE NO. 1
Hometown Bankers Know Best
During the Great Moderation, finance was the industry that ruled the world. It greased the wheels of globalization, spreading capital like pixie dust, and came to represent some 30% of total corporate profitability in the U.S., up from about 11% in 1975. Even after the financial crisis, banks represent a greater percentage of the economy than ever before. Slowly but surely, that's changing. The Dodd-Frank banking legislation, which is still under construction, may well be toughened in the wake of several new banking scandals. Regulators on both sides of the Atlantic are making a new push to rein in banks, and even the Fed may be considering ways to goose the mortgage market by forcing banks to lend.
As public cries for a safer financial system grow louder, it's quite likely that banks will eventually be broken up into smaller, more manageable pieces and forced to hold more capital, moving the industry away from global laissez-faire business as usual and toward a more traditional banking model.
Already, in Europe, banking is balkanizing along national lines. There, the rollback of the decade-long, cross-border integration of banking may turn out to be a bad thing, because it underscores a lack of faith in the euro and will expose deeper rifts in the continental economy as a whole.