When the skies are in tumult it's best to concentrate on awe rather than anxiety.

Interesting comment by Alan Greenspan

The article is an excerpt is a from his new chapter in the updated edition of "The Age of Turbulence", published 10 September 08.

As Greenspan says, it’s all about underpricing risk. Mind you I'd say it was really about underpricing the risks involved in misaligned incentives (that allowed, for example, Freddie Mac's CEO taking US$14 mil the month before they implode!). And it is becoming about underpricing the risk of environmental collapse if climate change isn't addressed.

But is Greenspan right in suggesting that periodic bouts of euphoria, followed by depression, are part of the human conditions, like some sort of economic bi-polar syndrome, and that all we can do is be flexible enough to be ready for the alternating shocks?

I'm only an amateur in this area, but was surprised at him saying: “I was appalled and shaken when the financial system failed to protect itself more effectively against a euphoric boom. We at the Federal Reserve had always counted on banks in particular to avoid the most troublesome risks”. A weak comment in the face of, again, obviously misaligned incentives.

He then lays down the challenge with “I know of no regulatory system or degree of protectionism that can transmute irrational exuberance or debilitating fear into a stable growing economy.”

Has he missed a key point? The implied, albeit often disputed or ignored by some classes of market theoreticians, role of government as guarantor of last resort has been brought out into the open in a way not seen for 70 years. Sustainable financial systems depend on an over-riding framework of governance and guarantee that both limit cannibalising activity when things get particularly torrid and ensure the broader needs of society are figured in decisions about how the sector goes forward.

(I've just been reading Nick Robins' sobering book on the East India Company, with its description of the ghastly outcome of corporate behaviour without governing frameworks when the Company manages to both create and then make worse through short-termist behaviour the vast Bengal famine in the late 18th century.)

Long-term investors such as pension funds, to ensure the sustainability of their returns, surely need to make sure (improved) governing frameworks are in place that will protect and enhance those returns. They have a vested interest in pushing governments to design and manage systems accordingly; but, in a intellectual environment to date dominated by the servants of short-termism, they’re going to have to contribute more to the thinking behind this.

How the Gay Index can help Superannuation & Pension Funds

A few years ago a Pittsburgh economist called Richard Florida came up with two indexes that he claimed were the best indicators of regional economic success. They were the “Gay Index” and the “Bohemian Index”.

His thesis, eloquently argues in a series of papers and then a best-selling book, The Rise of the Creative Class, was that regional economic success in the current US economy was dependent on attracting and keeping a growing class of "creative workers". Creative workers are defined as those that use creativity as a key factor in their work whether engineering, product development or business. Based on available workforce data, Florida estimates 30% of the working population of the US were now members of the "creative class".

This class of worker is mobile. Economic growth is a feature of locations where the class congregates. Their patterns of congregation match most closely patterns for the concentration of gay people and for "bohemians", such as artists and culture workers - ergo the two indexes.

Florida, however, is no lightweight academic.

He bases his arguments on mountains of quantitative data. His work has now become widely published in the US and he has become something of a superstar on the academic talk circuit.

The key points he makes are:

• Creative workers are the engine-drivers of our economies, everywhere from manufacturing to finance and information technology;

• They have displaced Organisation Men (gender-skewed as they were) as the most productive employees, and as the dominant social class;

• They have a very different approach to work that values enjoyment, personal challenge, flexibility ahead of security and tenure;

• They place a high value on environments full of creative and cultural activity and tolerant of diversity - and they exploit their relative employability to gravitate to such locations.

If you accept the notion that concentrations of creative workers drive innovation-based economies, then this last point suggests scope for moulding regional environments to attract such workers and boost economic success.

This is exactly where Florida's work has taken him. He now advises cities from New York to Memphis on civic policy to attract creative workers. At one stage the Deputy Premier of NSW took to reading excerpts from the book to his fellow NSW Cabinet members.

Florida's prescription for civic policy?

1. Invest in the creative eco-system.

This can include arts and culture, nightlife, restaurants, artists and designers, music (Austin, Texas' famous music scene is often cited as a key talent attractor underlying it's high-tech industry success), innovators, entrepreneurs, affordable spaces, lively neighbourhoods, spirituality, education, density and public spaces.

2. Embrace diversity.

It gives birth to creativity, innovations and positive economic impact. People of different backgrounds and experiences contribute a diversity of ideas, debate, talent and perspectives that enrich communities. This is how ideas flourish and build vital communities.

3. Invest in and build on quality of place.

While inherited features such as climate, natural resources and population are important, other critical features such as open and green spaces, vibrant downtown areas, and centres of learning can be built and strengthened.

Investors have an interest in successful economies more than most people. Companies that seem worth investing in have far more chance of success in a growing economy than a stagnant or declining one. The idea that regions and cities with vibrant economies can be created, let alone picked from the mass, is an intriguing one.

If civic policy can influence economic success, it raises the question among major investors of how they skew their investments to exploit this - or even how they can help ensure economic success.

The idea that investment policy spills over to influencing civil policy is not new to large US pension funds like Calpers. As pension funds become more significant players in the economy the issue becomes how funds can influence economic settings for the success of companies they invest in.

If we know that social policy X leads to economic outcome Y (read Florida's book and judge for yourself) do we wait for Government or Corporations to move in that direction, or do we gently try to help stimulate the correct policy settings ourselves?

The question for pension and superannuation funds, of course, has to be answered in terms of what is in the best interests of their members.

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For more on Richard Florida:

Web site: http://www.creativeclass.org/

The New American Dream, published in the Washington Monthly, March 2003. http://www.washingtonmonthly.com/features/2003/0303.florida.html

The Economic Geography of Talent, published in the Annals of the Association of American Geographers, September 2002 . http://www.creativeclass.org/acrobat/AAAG.pdf