Thinking Managers

Robert Heller of www.thinkingmanagers.comlooks back at the origins of the credit crunch to see what lessons can be learned.

The Avoidable Second Crash

Ever since the First Great Crash in 1929, the Second has been greatly anticipated. A plethora of books and articles have sounded the warning. But the Second Crash never came – until now, perhaps.

Of course, the world economy has endured plenty of hard but temporary knocks since the Second World War. In every case, acute economic pain was suffered by nation states, but it passed.

In the current crisis, the collapse of further major Wall Street and British firms, following promising lulls in the stream of bad news, has caught the politicians and the regulators by surprise every time. They had no strategy for coping with the terrible results of slack finances because they failed to understand what was happening before the sub-prime chickens came home to roost. Therefore, they had to improvise.

However, the financial crisis that started on Wall Street was totally predictable. The pattern was familiar; I can say this with conviction, because I once wrote a book with my friend Norris Willatt called ‘Can You Trust Your Bank?’ The conclusion we came to was “no”, but don’t worry as your government will always bail out the few villains to save the many suckers and the wider economies with them.

The problem is that the regulators and politicians are just as unlikely to predict the disasters as the suckers. Forced to act by the hitherto ignored crisis, the governing bodies under-react for the exact reason that allowed the crisis to flourish in the first place; they have no idea what’s going on – how the system failed, who’s to blame, and what is going to happen unless rescue by intervention occurs.

The story has been repeated many times this century. At the millennium, ‘New Economy’ played the same old game by convincing the suckers that any high-tech entrants were racing certainties; the bubble then burst and bad businesses collapsed in numbers. Then in 2004, fabled head of the Federal Reserve Alan Greenspan ‘opposed tougher regulation of the financial derivatives’ and also hailed the sale of ‘adjustable-rate mortgages and refinancing for ordinary homeowners’. Because of this he can take his share of the blame for the sub-prime chaos that brought the US to near-ruin in a few years of madness.

The moral of the story is clear and can be summed up in three words: TAKE GREAT CARE. How come the big beasts of finance failed to follow that strategy? One simple reason is hubris. They thought they were marvellous, and so did others. Actually, they knew they had to be marvellous because they made such huge amounts of money.
Bad, ill-conceived decisions were made by top managers. The incentive of their own reward, rather than the wellbeing of the businesses, was uppermost in their minds.

About the author
Robert Heller is one of the world’s best selling authors on business management.

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