Posted by: The Global Ripple | October 7, 2008

Current economic crisis – what’s the lesson learned?

Hello everyone… Sorry for the hiatus, but I’ve traveled just over 6,000 miles since the last post and weathered more than a few crises, including my personal hit in the financial market crisis.

That written, there is a leadership lesson in this and it involves the ethical question of greed, with a healthy dose of self-deception thrown in.

The article at the bottom of this post by David Brooks was sent to me this morning by a Board Member. It pretty much sums up my view of the current, global financial meltdown, so all I have to say is “Yep, ditto, what David said.” Hmm, nope I do have something else to say – here is my input…

Greed, detachment, greed, self-delusion, greed, lunacy, greed, idiocy, greed, greed, greed. Hmm, greed keeps popping up. Greed from financial markets purchasing sub-prime mortages from greedy mortage companies, who were offering low/no down, interest only loans to greedy consumers who were buying more home than they could afford, in many cases, completely skipping the question of whether they could afford a home at all.

As an optimist, economist, and lover of history, I keep the long term, macro perspective in mind. We will get through this current fiasco. Things may be rough for a while, but the global economy will soar again. 

Life goes in cycles, it always has. The question is whether we will learn anything from the current crisis? History tends to repeat itself time and time again.

Peace Out, Martin Fox with the Center for Global Leadership and the “Be The Change Today” tour.

The Testing Time, by David Brooks
Every few years, the world seems to face a new testing time. After Sept. 11, leaders had to figure out how to respond to Islamic extremism. Now we face another test. Today, leaders around the world have to figure out how to stabilize economies amid volatile global capital flows.

This test is rooted in a global shift in economic power. The rise of China, the vast wealth of the petro-powers and easy monetary policies created an ocean of excess savings that had no obvious place to go.

This money was entrusted to a few thousand traders who sloshed it around the world in search of the highest returns. These traders live in a high-tech version of Plato’s cave. They do not see reality directly. Instead they see the shadow of reality as it dances around in numbers on their computer screens. They form perceptions about other people’s perceptions of where the smart money is going next, so they’re three or four psychological levels removed from normal economic activity.

These traders are driven to take big risks because the glory goes to the biggest stars. And because they are human, they assuage their ensuing uncertainty with self-deceptions. They develop an excessive faith in “value at risk” computer models, which seem to calculate their exposure in soothingly rigorous terms. They adopt accounting techniques that tell them they’re on firm footing.

They go in for complicated financial instruments that promise “riskless risk” by dispersing risk into a million small pieces and casting them into the ether.

The economists talk about “mispriced risk” and “illiquidity” in the system. But many economists are trained to downplay emotion, social psychology and moral norms, and so produce bloodless and incomplete descriptions of what’s going on. The truth is, decision-making is an inherently emotional process, and the traders in charge of these trillions become bipolar as a result of their uncertainty.

When things are going well, they don’t think they’re just lucky and riding a wave. They’re infused with a sense that they have it all figured out. When these traders are in their manic phase, they flood countries and economic sectors with capital. Without meaning to, they dissolve the moral fabric and spoil their own profit zones.

Easy money severs actions from their consequences. National leaders find they can run up huge deficits with no negative effects. Congressmen lean on Fannie Mae and Freddie Mac to acquire more and more risk. Highly regulated banks find they have money to lend far and wide, and everyone else finds credit is easy. Families decide they can afford homes and lifestyles beyond their means.

It all feels great until it doesn’t. Then when things go bad, the social contagion sweeps the other way (the computer risk models never quite get this). One minute there’s an ocean of credit, the next minute there’s barely a drop. Once ebullient traders become paranoid, realizing how little they know about their trading partners. They refuse to acknowledge the true value of their portfolios. Everything stops.

At these moments, central bankers and Treasury officials leap in to try to make the traders feel better. Officials pretend they’re coming up with policy responses, but much of what they do is political theater. In reality, they’re trying to cajole, bluff and calm their audience of global money-sloshers.

This is more than a mortgage problem. We live in a world in which trillions of dollars can move instantly, but they are in the hands of human beings who are, by nature, limited in knowledge, and subject to self-deceptions and social contagions. By one count, financial crises are twice as prevalent now as they were 100 years ago.

In his astonishingly prescient book, “The World Is Curved: Hidden Dangers to the Global Economy,” David M. Smick argues that we have inherited an impressive global economic system. It, with the U.S. as the hub, has produced unprecedented levels of global prosperity. But it has now spun wildly out of control. It can’t be fixed with the shock and awe of a $700 billion rescue package, Smick says. The fundamental architecture needs to be reformed.

It will take, he suggests, a global leadership class that can answer essential questions: How much leverage should be allowed? Can we preserve the development model in which certain nations pile up giant reserves and park them in the U.S.?

Until these and other issues are addressed, the global markets will lack confidence in asset values. Bankers will cower, afraid to lend.America’s role as the global hub will be threatened. Europeans will drift toward nationalization. Neomercantilists will fill the vacuum.

This is the test. This is the problem that will consume the next president. Meanwhile, the two candidates for that office are talking about Bill Ayers and Charles Keating.

About these ads

Responses

  1. If nothing else, this is a time of transition that we will collectivley pull through as a country, and hopefully come out stronger as a result of the experience.


Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

Categories

Follow

Get every new post delivered to your Inbox.

%d bloggers like this: