The troubles of the US subprime-mortgage market have now mushroomed into a global financial and economic crisis. Despite the massive government response, we still don’t know when or how the turmoil will end. Nonetheless, many policy makers and business executives continue to assume that it’s just a matter of time until we go back to where we were before the crisis began. They are probably mistaken. We know that the ground has already shifted significantly in several ways, with important implications for many players. At least five key developments can be identified. We still don’t know how the crisis will play out, but by recognizing these changes early, we can begin to adjust our rules, our practices, and our thinking to meet the challenges ahead.

Government will assume a greater role in developed markets and economies.

Before the crisis erupted, in mid-2007, Western governments had spent many years deregulating and privatizing industries and had taken a largely hands-off approach to a rapidly evolving and increasingly complex financial sector. No longer. Since the crisis escalated, in September 2008, these same governments have dramatically expanded their role in financial markets in an effort to stabilize them. Governments have nationalized major financial institutions, injected capital into others, and invented new vehicles for lending public money to private companies. We can expect reregulation, not just of finance, but of many other sectors as well. Government is likely to play an even greater role in managing trade. Protectionism and nationalism—and possibly even populist authoritarianism—are likely to resurge in policy debates. While more global coordination will be needed, national politics will complicate all discussions.

Businesses and policy makers must recognize that governments will be a critical stakeholder not only in many emerging markets but also in mature ones. In addition, they will have to develop strategies to cope with an evolving regulatory, tax, and trade environment.

Changing circumstances will force executives to rethink many business and economic benchmarks.

Expectations of baseline profitability, shareholder returns, and economic growth all will need serious recalibration. Inflation and deflation will be less predictable. Volatility is likely to continue and even to increase in many markets. The high returns and economic growth of recent years resulted from very cheap credit, which is unlikely to return for a long time.

Business executives will have to be more active in developing contingency plans for events and trends that may appear very unlikely—the so-called long-tail outcomes. To derive real insight into the problem of which benchmarks would now be appropriate, companies will have to improve their ability to gather and interpret knowledge, their problem-solving activities, their databases, and their methodologies. Managers will have to rethink the value that talent creates when cheap credit no longer bolsters it.

The economy is being massively deleveraged.

Households, financial institutions, and corporations are dramatically reducing their borrowing because they either can’t get or afford credit or have scaled back their spending plans in response to the economic downturn. Governments are the exception: they have stepped up their borrowing to finance rescue efforts.

Households, particularly the most indebted ones, will have to reduce their consumption and postpone retirement. Financial institutions (increasingly bank holding companies) will have much higher capital requirements, less freedom to operate and innovate, and, in all likelihood, lower profitability. Corporations will find that capital is going to play a very different role in their business models. Governments will have even more limited resources to meet growing demands, including education, the environment, health care, infrastructure, national security, and pensions.

Business executives will need to think more creatively about how to attract and retain customers, to develop new business models, and to adopt new strategies for sound risk taking. As in any downturn, companies will have to conserve capital and make their operations and organization more efficient. Meanwhile, policy makers must look for ways to make government more productive and innovative.

Tighter capital is challenging many business models and will probably lead to more bankruptcies and industry consolidation.

This shift will also provide openings for new business models and give some companies an opportunity to become stronger as competitors weaken. Even aside from the economic slowdown, business models that depended on abundant, cheap capital will no longer be realistic or must change significantly. Executives and managers may face higher funding costs, through both debt and equity and less access to capital at any cost. They will find a lower appetite for risk in funding markets, as well as a reduced ability to hedge risks and higher volatility. The hardest-hit business models will be those based on high leverage, indirect consumer credit, large customer-financing operations, and high working-capital needs. Businesses with long or inflexible production cycles or very long-term-investment requirements will find it especially difficult to manage their funding. Some won’t make it: the best should thrive.

A new global financial and economic order, with more participants, is emerging.

The crisis is changing the power and roles of national governments, multilateral organizations, regions, industries, and individual businesses, among others. In particular, several trends under way before the crisis hit will probably continue, now at an accelerated pace, including the “rise of the rest”—that is, the ascendance of new national and regional economic powers, notably China, India, the Middle East, and possibly Russia. While much of the discussion focuses on governments and businesses, we see a growing role for other types of financial actors: sovereign-wealth funds, government holding companies, pension funds, private-equity firms, and new hybrids that mix public and private funds and goals.

This emerging new order heightens the need to construct a new global financial architecture of regulations, practices, and institutions better suited to a global economy and global players. National governments and corporations will no longer dominate financial markets, nor will trade be the primary financial linkage between economies.

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