When a person or an organization is disciplined, they usually have plenty of options…many of them good ones.
When a person or an organization is undisciplined, options are usually limited…and none of them are good!
We are seeing or have seen quite a few examples of the second of these statements in recent days and in recent months. Where does one begin?
· The auto industry…
· The financial industry…
· The housing industry…
· And the list goes on…
Oh, how about the American government?
Doesn’t seem like our government has many options these days…and none of them seem to be good ones.
I have made clear over the past eleven months that I believe that culture starts at the top…and in this case, it starts with the leadership of the United States government. Right from the beginning the current administration exhibited an exceptional lack of discipline…except for the requirement of loyalty to its own people and programs. Large tax cuts followed by an expensive war underwritten by the monetary authority could in no way be considered to be a “conservative” economic program. And, this was just the start!
But, the culture spreads…and once others began to see that “lack of discipline” was the standard of the day, they too began to feast on the beast. And, the lack of discipline spread throughout the land.
My biggest disappointment is that financial discipline broke down in a major way. My background is in finance and I was brought up with the idea that finance people were the ultimate arbiters of discipline, both in terms of individual behavior as well as organizational behavior. The first CEO I worked for told me that I had to speak up strongly from the discipline of finance for if I didn’t…there was no one else in the organization that would take that position!
Well, we have seen that when the financial standards break down…there is no one left to maintain discipline.
That is the past. We now have to deal with the future. The options are not good for anyone!
Let me reiterate the statement I made above…
I believe that culture starts at the top!
Right now there is no leadership at the top and we will not have any until January 20, 2009. This is nothing new…we have not had any leadership at the top for quite some time now…and that is one reason for our current dilemma. Those at the top, early on, wanted to sneak out of the door before things broke loose in the financial or product markets…but they didn’t make it. Even though their hearts were not in it and they had no idea what to do, they were forced to act in some way in an attempt to alleviate the financial mess. But, now, more than ever, they are looking for the door.
So here we are…and we still have to do something…invest our money…run our businesses…live our lives…
There are several things, I believe, that have to take place…
First, we have to re-establish discipline…individually…in our families…in our businesses…in our government.
Second, we have got to retrench. Here we have conflicting objectives. On the one side, we have to get back to basics, strengthen our balance sheets, and focus on what we do best. In this we have to do the best that we can…and we should not assume that someone is going to bail us out. If we do…we are bound for disappointment.
The other side of this is that retrenchment weakens the economy because the basic plan is to “pull back”, cut spending, reduce debt, and, if we can, save. This is the other side of the lack of discipline. It is fun on the upside when discipline is eased…it is tough on the down side when discipline is being re-established. This leads to the third point.
Third, we must also be community focused, locally, regionally, nationally, and internationally. While we are establishing discipline once again, we must not isolate ourselves and refuse to talk with one another. We must engage one another, talk and dialogue about what is needed, and work together to introduce solutions that build up communities in this time of trial. This will include government programs to stimulate the economy. This will include new regulations to improve the process of finance and economics. This will include new efforts at international cooperation to help us to work together and support one another. This must include the acceptance of change because the world that is coming is going to be different from the world that we have left behind.
But, this effort is going to require leadership and it is going to require leadership at the very top. Hopefully, we are going to get that leadership.
Hopefully.
People are looking for the bottom…the bottom of the stock market plunge…the bottom of the housing collapse…the bottom of the financial crisis…and so on.
My view is unchanged. Until the United States gets some leadership in place with a strong vision of what it is going to do and moves forward in a very disciplined way…the search for a bottom in these areas is premature.
Showing posts with label Paulson. Show all posts
Showing posts with label Paulson. Show all posts
Thursday, November 20, 2008
Wednesday, October 15, 2008
The Special Case of Financial Institutions
In my last post, “Good Management Never Goes Out of Style”, I discussed what I believe to lie at the foundation of good management. The primary emphasis of this argument is that good management focuses upon what helped to create any competitive advantage it might have and maintains that focus over the longer run. In order to do this, good management must obtain good talent and then give the good talent the room and authority to put that talent to work. Good management facilitates good talent by creating a culture of high performance while keeping the focus of the business on what can sustain the competitive advantage of the firm.
Competitive advantage produces exceptional returns but these returns are difficult to sustain because potential competitors, seeing the exceptional returns, attempt to duplicate the results and aggressive market response reduces the firms’ advantage and drives down returns. In some instances, the firm with the competitive advantage may be able to sustain competitive advantage. However, the company may not be able to sustain the competitive advantage…in many cases, it is just not possible. In such cases the only really effective action management can take is to become very efficient and reduce expense ratios.
One recognizes when these foundational principles are being neglected when firms resort to gimmicks to achieve performance. In the last post I mentioned two such gimmicks: increased leverage and the mismatching of maturities. There are many other gimmicks that can be used such as assuming additional risk, accounting tricks (hello Enron), attempts at diversification, and secrecy. As I argued, these efforts generally represent an attempt to force results and come about either from greed or hubris or both. Because they are forced and are not related to basic underlying market realities they eventually fail, often at great cost. Arguing that the world has changed and that this world-change requires new standards only lasts for so long. Losing or changing focus may produce results in the short run but it never succeeds in the longer run.
Financial institutions represent a special case that needs to be discussed separately. The reason for this is that financial institutions are generally intermediaries and therefore depend upon the two ends of the market that they intermediate. The commercial bank is the prime example of an intermediary for historically a commercial bank took small deposits from relatively small economic units that didn’t have any alternatives to depositing it’s funds in the bank, and made large loans to larger economic units that needed the funds to run their businesses. As a consequence of the nature of the business, a commercial bank was grounded in its local or regional economy. Only a few borrowers had a national presence.
This dependency started to break up in the 1960s. Bank borrowers got larger and larger and demanded larger and larger loans. Financial markets developed so that these larger borrowers found that they had more sources of funds than before. In order to support these borrowers, commercial banks had to create new instruments to raise the funds they needed to meet the changing conditions. Commercial banks began to innovate and the result was the large negotiable Certificate of Deposit and the Eurodollar markets. These markets were large and deep, sufficiently so that commercial banks could buy or sell all the funds they wanted to at the going market interest rate. (In the terms of the economist, the supply curve of funds became perfectly elastic.) “Liability Management” was created! Now banks were only limited in their size by their capital base. And, commercial banks could become truly international!
The large customers of the banks found that their sources of funds became more elastically supplied and hence their demand for funds from their commercial banks became more elastic. Bank spreads declined!
Competition worked! Now the race was on! The rest is history!
The problem with innovation in financial markets is that finance is just about information…and the marginal cost of creating more and more information is very, very low. (For an example of this idea see “Information Markets: What Businesses Can Learn from Financial Innovation” by Wilhelm and Downing, Harvard Business School Press, 2001.) Consequently, information can be cut up in many, many different ways. The primary example of this is the Mortgage Backed Security that allows mortgages to be cut up into tranches, including toxic waste, into interest only securities, principal only securities, or any other way that might be thought of and sold.
Thus, financial innovation in making financial more efficient narrows spreads as the supplies of funds becomes more and more elastic…people can buy and sell as much as they want without affecting the price of the funds they are buying or selling. But, in such markets, leverage can become infinite! And, how do people then make money? Well, they must find mismatches…mismatches in risk, mismatches in maturities, mismatches in information, mismatches in timing. There becomes no limit to gimmicks.
We have seen two types of responses to this. First, there was an increase in secrecy. With spreads narrowing it becomes imperative that others not know what you are doing. Long Term Capital Management was noted for its attempts to keep secret what it was doing. The reason…if others know what you are doing the spreads narrow even more. (Three cheers for competition!) Another way to increase secrecy was to put things “off-balance sheet”. In this way institutions could get away with smaller capital bases and riskier business than if they kept these assets “on” the balance sheet.
The second type of response is to review your business model. This is an appropriate thing to do, but in changing ones business model one must be careful about whether or not the change really builds a different business model or not. Financial institutions responded to declining interest rate spreads by cultivating the “fee-based” business model. It can be argued that this effort really did not change the nature of the business but just shifted business. If I create the mortgage, I can then sell the mortgage for a fee. Another institution can package mortgages and get a fee for that. And, another organization can service the mortgages and get a fee for that. And, another institution can…. And, so on and so on.
In this example, the financial business has not changed…just different pieces of the package have been shifted around…and risk is located somewhere else out in the world, someplace no one knows where.
A business model can be changed in a way that can create value. This is what I think the financial services industry is going to have to do. The financial institutions industry is not the only industry that is facing massive changes in this Information Age. When it becomes nearly costless to create information, the old business loses relevance and must find a new way to create value. The question for management becomes, “What is it about what I do that I can, at least initially, create a competitive advantage?”
The follow up question becomes, “After I create the initial competitive advantage, what do I do next?” We see in the case of Information Goods that time pacing becomes extremely important. I tell the young IT entrepreneurs that I work with, “It is all fine and good that you have captured a niche in the market but you must already be planning the next generation of the product or the new, new product that you will bring to market.” Modern technology produces such an environment.
What does this mean for the management of financial institutions? That is for the future to determine. I have my own ideas. But, another question is…and this is just as important…what does this mean for the regulation of financial institutions? In building new financial regulation in this Information Age we cannot just fight the past wars…especially the wars we are now engaged in. That, of course, is the hardest thing for the Government…both the President and Congress…to do! It is going to be an interesting ride.
Competitive advantage produces exceptional returns but these returns are difficult to sustain because potential competitors, seeing the exceptional returns, attempt to duplicate the results and aggressive market response reduces the firms’ advantage and drives down returns. In some instances, the firm with the competitive advantage may be able to sustain competitive advantage. However, the company may not be able to sustain the competitive advantage…in many cases, it is just not possible. In such cases the only really effective action management can take is to become very efficient and reduce expense ratios.
One recognizes when these foundational principles are being neglected when firms resort to gimmicks to achieve performance. In the last post I mentioned two such gimmicks: increased leverage and the mismatching of maturities. There are many other gimmicks that can be used such as assuming additional risk, accounting tricks (hello Enron), attempts at diversification, and secrecy. As I argued, these efforts generally represent an attempt to force results and come about either from greed or hubris or both. Because they are forced and are not related to basic underlying market realities they eventually fail, often at great cost. Arguing that the world has changed and that this world-change requires new standards only lasts for so long. Losing or changing focus may produce results in the short run but it never succeeds in the longer run.
Financial institutions represent a special case that needs to be discussed separately. The reason for this is that financial institutions are generally intermediaries and therefore depend upon the two ends of the market that they intermediate. The commercial bank is the prime example of an intermediary for historically a commercial bank took small deposits from relatively small economic units that didn’t have any alternatives to depositing it’s funds in the bank, and made large loans to larger economic units that needed the funds to run their businesses. As a consequence of the nature of the business, a commercial bank was grounded in its local or regional economy. Only a few borrowers had a national presence.
This dependency started to break up in the 1960s. Bank borrowers got larger and larger and demanded larger and larger loans. Financial markets developed so that these larger borrowers found that they had more sources of funds than before. In order to support these borrowers, commercial banks had to create new instruments to raise the funds they needed to meet the changing conditions. Commercial banks began to innovate and the result was the large negotiable Certificate of Deposit and the Eurodollar markets. These markets were large and deep, sufficiently so that commercial banks could buy or sell all the funds they wanted to at the going market interest rate. (In the terms of the economist, the supply curve of funds became perfectly elastic.) “Liability Management” was created! Now banks were only limited in their size by their capital base. And, commercial banks could become truly international!
The large customers of the banks found that their sources of funds became more elastically supplied and hence their demand for funds from their commercial banks became more elastic. Bank spreads declined!
Competition worked! Now the race was on! The rest is history!
The problem with innovation in financial markets is that finance is just about information…and the marginal cost of creating more and more information is very, very low. (For an example of this idea see “Information Markets: What Businesses Can Learn from Financial Innovation” by Wilhelm and Downing, Harvard Business School Press, 2001.) Consequently, information can be cut up in many, many different ways. The primary example of this is the Mortgage Backed Security that allows mortgages to be cut up into tranches, including toxic waste, into interest only securities, principal only securities, or any other way that might be thought of and sold.
Thus, financial innovation in making financial more efficient narrows spreads as the supplies of funds becomes more and more elastic…people can buy and sell as much as they want without affecting the price of the funds they are buying or selling. But, in such markets, leverage can become infinite! And, how do people then make money? Well, they must find mismatches…mismatches in risk, mismatches in maturities, mismatches in information, mismatches in timing. There becomes no limit to gimmicks.
We have seen two types of responses to this. First, there was an increase in secrecy. With spreads narrowing it becomes imperative that others not know what you are doing. Long Term Capital Management was noted for its attempts to keep secret what it was doing. The reason…if others know what you are doing the spreads narrow even more. (Three cheers for competition!) Another way to increase secrecy was to put things “off-balance sheet”. In this way institutions could get away with smaller capital bases and riskier business than if they kept these assets “on” the balance sheet.
The second type of response is to review your business model. This is an appropriate thing to do, but in changing ones business model one must be careful about whether or not the change really builds a different business model or not. Financial institutions responded to declining interest rate spreads by cultivating the “fee-based” business model. It can be argued that this effort really did not change the nature of the business but just shifted business. If I create the mortgage, I can then sell the mortgage for a fee. Another institution can package mortgages and get a fee for that. And, another organization can service the mortgages and get a fee for that. And, another institution can…. And, so on and so on.
In this example, the financial business has not changed…just different pieces of the package have been shifted around…and risk is located somewhere else out in the world, someplace no one knows where.
A business model can be changed in a way that can create value. This is what I think the financial services industry is going to have to do. The financial institutions industry is not the only industry that is facing massive changes in this Information Age. When it becomes nearly costless to create information, the old business loses relevance and must find a new way to create value. The question for management becomes, “What is it about what I do that I can, at least initially, create a competitive advantage?”
The follow up question becomes, “After I create the initial competitive advantage, what do I do next?” We see in the case of Information Goods that time pacing becomes extremely important. I tell the young IT entrepreneurs that I work with, “It is all fine and good that you have captured a niche in the market but you must already be planning the next generation of the product or the new, new product that you will bring to market.” Modern technology produces such an environment.
What does this mean for the management of financial institutions? That is for the future to determine. I have my own ideas. But, another question is…and this is just as important…what does this mean for the regulation of financial institutions? In building new financial regulation in this Information Age we cannot just fight the past wars…especially the wars we are now engaged in. That, of course, is the hardest thing for the Government…both the President and Congress…to do! It is going to be an interesting ride.
Wednesday, October 8, 2008
Why haven't the financial markets responded?
The stock market has experienced a serious decline since the passage of the Paulson Plan. The money and bond markets still seem to be frozen in spite of a coordinated cut in world central bank target rates. The only way that this behavior can be explained in my mind is that without strong leadership…from the very top…the financial markets will continue to be weak. Even though others…Paulson and Bernanke…have tried to provide some form of leadership, the leadership that must be exhibited from the very top continues to be missing. (See my post of September 25, 2008, “The Absence of Leadership.)
Missing this leadership, members of the Bush 43 administration were hoping and praying that events would be relatively quiet until they were able to sneak out of Washington in January 2009 and let someone else handle the situation.
They didn’t make it!
And, like any other organization that does not have a leader, good people with good intentions when faced with calamities try to come up with some plan or some action that will plug the hole in the dike. The problem with this is that they have to work around the leader. And, there is no unifying force present is such situations, no calm hand on the tiller listening to alternatives, asking questions, and guiding responses. And there is no one around to punish dissidents.
Up until a couple of weeks ago, Treasury Secretary Paulson and Fed Chairman Bernanke tried to band aid the system, proposing temporary responses to the growing crises that would tide things over until the new government came into office to deal with the problems. It seemed as if Paulson and Bernanke had reached a game plan…a bailout took place for Fannie and Freddie…and, Lehman was to fail with no help and nothing would be done for AIG.
Then, it appears by all reports…Bernanke reached a turning point!
Bernanke called Paulson and indicated that the financial markets were falling apart and that if nothing were done the economy might not be there the next Monday. The Congressional leadership had to be informed of this development and brought on board for a major flood of liquidity. In no instance could the financial system and the economy come up short of liquidity!
Paulson set up the meeting with the Congressional leadership and at that meeting Bernanke poured out his story of woe. And, according to some of the members of Congress that were there…Bernanke scared the life out of them!
One question needs to be asked at this point…where was the “decider”?
The Treasury plan was assembled as quickly as possible for passage by Congress as quickly as possible…no hearings…really, no questioning…things were so bad that there was no time for these niceties that could take place when things were not so dire.
And, then the financial markets froze!
Why not?
Here was the Chairman of the Board of Governors of the Federal Reserve System saying that the economy might not be there on Monday. What did he know that market participants didn’t? What was going on in Europe and elsewhere? Here was a major case of asymmetric information. And the people that were without information were the suppliers of funds.
Bear Stearns had failed. Merrill Lynch had failed. Fannie and Freddie had failed. Lehman had failed. Washington Mutual had failed. AIG had failed. Wachovia had failed. Who was going to be next? What did the Fed and the Treasury know that market participants didn’t know?
The initial effort to get “the bill” through Congress failed! There was no one in a leadership position that could call the troops to order. (Even presidential candidate John McCain road out at the head of his Calvary to lead the charge to get the bill passed…only no one followed him! No leadership here.) Paulson could not do it…he was not the leader…there was no leader!
The “decider” was marched out…but he was dazed and only mouthed the words that were given. Why should anyone have any confidence in what was being done?
Is the bill passed last Friday any good? After what went on in the two previous weeks the bill seems somewhat irrelevant…a very costly irrelevant. There is still no vision going forward. There is no strategy. There is no structure. There is little or nothing. At best we are told that maybe in four weeks the “Paulson Plan” will be up and running.
That will be after the election and we will have a president-elect. But, the president-elect will have to wait for over two months before he can do anything about the financial crisis.
Meanwhile the Fed floods world financial markets with liquidity?
Bernanke’s study of the Great Depression taught him that during such a crisis the world cannot have too much liquidity. And, so “Helicopter Ben” is acting on that premise. Total reserves in the United States banking system, for the two weeks ending September 10, averaged about $44 billion on a non-seasonally adjusted basis. For the two weeks ending September 24, the total reserve figure was about $111 billion. Never has the United States banking system received so many reserves so rapidly. And look at the sources and uses statement of the Federal Reserve System…the H.4.1 release. In the last three weeks the sources of reserves in the banking system increased by more than 50%!!!!!
Never have we seen anything like this! Never!
This is what happens when there is no leadership. One cannot blame this situation on previous administrations or other conditions within the world. The current leader of the free world is MIA.
Unfortunately for the financial markets, for the economy, for workers, for families, for everyone else…there will not be a new president for several months yet. And, we still have to uncertainty with respect to what the newly elected president will do. Will he, when in office, be able to provide the leadership that is so badly needed?
So, there is still an enormous amount of uncertainty with respect to the future and this enormous amount of uncertainty will reign in the markets until such leadership surfaces. And, the financial markets will still remain tentative as they attempt to discern who will fail next…and then next after that…and then next after that…
Missing this leadership, members of the Bush 43 administration were hoping and praying that events would be relatively quiet until they were able to sneak out of Washington in January 2009 and let someone else handle the situation.
They didn’t make it!
And, like any other organization that does not have a leader, good people with good intentions when faced with calamities try to come up with some plan or some action that will plug the hole in the dike. The problem with this is that they have to work around the leader. And, there is no unifying force present is such situations, no calm hand on the tiller listening to alternatives, asking questions, and guiding responses. And there is no one around to punish dissidents.
Up until a couple of weeks ago, Treasury Secretary Paulson and Fed Chairman Bernanke tried to band aid the system, proposing temporary responses to the growing crises that would tide things over until the new government came into office to deal with the problems. It seemed as if Paulson and Bernanke had reached a game plan…a bailout took place for Fannie and Freddie…and, Lehman was to fail with no help and nothing would be done for AIG.
Then, it appears by all reports…Bernanke reached a turning point!
Bernanke called Paulson and indicated that the financial markets were falling apart and that if nothing were done the economy might not be there the next Monday. The Congressional leadership had to be informed of this development and brought on board for a major flood of liquidity. In no instance could the financial system and the economy come up short of liquidity!
Paulson set up the meeting with the Congressional leadership and at that meeting Bernanke poured out his story of woe. And, according to some of the members of Congress that were there…Bernanke scared the life out of them!
One question needs to be asked at this point…where was the “decider”?
The Treasury plan was assembled as quickly as possible for passage by Congress as quickly as possible…no hearings…really, no questioning…things were so bad that there was no time for these niceties that could take place when things were not so dire.
And, then the financial markets froze!
Why not?
Here was the Chairman of the Board of Governors of the Federal Reserve System saying that the economy might not be there on Monday. What did he know that market participants didn’t? What was going on in Europe and elsewhere? Here was a major case of asymmetric information. And the people that were without information were the suppliers of funds.
Bear Stearns had failed. Merrill Lynch had failed. Fannie and Freddie had failed. Lehman had failed. Washington Mutual had failed. AIG had failed. Wachovia had failed. Who was going to be next? What did the Fed and the Treasury know that market participants didn’t know?
The initial effort to get “the bill” through Congress failed! There was no one in a leadership position that could call the troops to order. (Even presidential candidate John McCain road out at the head of his Calvary to lead the charge to get the bill passed…only no one followed him! No leadership here.) Paulson could not do it…he was not the leader…there was no leader!
The “decider” was marched out…but he was dazed and only mouthed the words that were given. Why should anyone have any confidence in what was being done?
Is the bill passed last Friday any good? After what went on in the two previous weeks the bill seems somewhat irrelevant…a very costly irrelevant. There is still no vision going forward. There is no strategy. There is no structure. There is little or nothing. At best we are told that maybe in four weeks the “Paulson Plan” will be up and running.
That will be after the election and we will have a president-elect. But, the president-elect will have to wait for over two months before he can do anything about the financial crisis.
Meanwhile the Fed floods world financial markets with liquidity?
Bernanke’s study of the Great Depression taught him that during such a crisis the world cannot have too much liquidity. And, so “Helicopter Ben” is acting on that premise. Total reserves in the United States banking system, for the two weeks ending September 10, averaged about $44 billion on a non-seasonally adjusted basis. For the two weeks ending September 24, the total reserve figure was about $111 billion. Never has the United States banking system received so many reserves so rapidly. And look at the sources and uses statement of the Federal Reserve System…the H.4.1 release. In the last three weeks the sources of reserves in the banking system increased by more than 50%!!!!!
Never have we seen anything like this! Never!
This is what happens when there is no leadership. One cannot blame this situation on previous administrations or other conditions within the world. The current leader of the free world is MIA.
Unfortunately for the financial markets, for the economy, for workers, for families, for everyone else…there will not be a new president for several months yet. And, we still have to uncertainty with respect to what the newly elected president will do. Will he, when in office, be able to provide the leadership that is so badly needed?
So, there is still an enormous amount of uncertainty with respect to the future and this enormous amount of uncertainty will reign in the markets until such leadership surfaces. And, the financial markets will still remain tentative as they attempt to discern who will fail next…and then next after that…and then next after that…
Thursday, September 25, 2008
The Absence of Leadership
The New York Times has it right this morning. There is an absence of leadership in this country. See the lead editorial, “Absence of Leadership”: http://www.nytimes.com/2008/09/25/opinion/25thu1.html?_r=1&hp&oref=slogin.
Over the past six or seven months I have tried to emphasize two things. First, leadership must begin at the very top of an organization. The leader determines the culture and he or she must project this culture in everything that the leader says or does. My experience in business, government, and the not-for-profit sector is that if there is a leadership void at the top, even though others in the organization attempt to pick up the leadership reins, they cannot completely succeed. This is because there are others that will not go along because there is no one to “hold them in line” if they don’t follow those that are trying to pick up the leadership. Thus, things just don’t get done efficiently or effectively…and morale deteriorates.
Last night, the President referred several times to what “his” administration has been trying to do under “his” guidance. Yet, as the Times editorial points out, the whole rescue effort led by Hank Paulson has been highlighted by the fact that the President has been no where in sight. The President was pulled out of his bunker last week to speak to the press about the need for a bailout package, but his performance was like a puppet on strings and the voice that came out of his mouth was not his own. (See my post of September 22, 2008.)
Last night, with the whole Congressional effort lagging, the President was pulled out again to tell the American people that the thing we need to fear is fear itself and if the bailout bill was not passed quickly, Congress…not the administration…would be held responsible.
Again, the performance was less than believable, put on by someone that has no credibility.
In fact the show looked like a feeble re-run of past claims of impending disaster.
And, what does the absence of leadership get us? A bailout bill with little or no specifics; A Congress that is not cowered anymore by the idle threats of a lame duck; A nation that is not rallying to the call and is more against the bailout bill than for it; A brewing class war…the common man on main street and the greedy predator on Wall Street; and a market that has no idea where to go.
And, this is the second point I have tried to make…the increase in uncertainty faced by the financial markets. Yes, there are very wide swings in the stock market on a day-by-day basis. Yes, there has been a rush to quality and shorter term bonds. Yes, lending has dried up. This is what happens to markets that have little or no idea about what the future holds for them. Greater and greater volatility!!!
This, to me, is the bottom line of the current situation: there is little hope that we will get any leadership from the White House and the leadership of the Secretary of the Treasury does not substitute for the leadership of the President. There is a void in terms of “the leader of the people.” Hence, any bailout package that is forthcoming at this time will be less than satisfactory…and I believe that this is an understatement. And, this will mean continued uncertainty for the financial markets which can only lead to more volatility surrounding a weakening economy.
I fear that the pain is far from over.
And, I guess, what further disturbs me is that I don’t see the candidates for president “stepping up to the plate” to fill the void in leadership. They, of course, have to be careful in what they say with the pending bailout bill before Congress. However, people are claiming that the time is the worst since the Great Depression…that we are heading for a Second Great Depression…that those living have never faced anything like this…and so on and so on. The President says that times could get really, really bad. And, the responses we have gotten from our potential “Leader” leave us sadly with little confidence that the role will be adequately filled come January 20, 2009.
Financial markets…and the economy…thrive on confidence and trust. Confidence and trust allow market participants to make projections about the future and then confidently commit on an action plan. Without this confidence and trust, the future looks extremely hazy leading to only a tepid willingness to commit resources to any possible action plan.
The consequence of this…in general, stay as risk free as possible and as short as possible.
People may argue that this is not in the common interest. My answer is that, no, it is not in the common interest but our leaders have brought us to this point.
This is the same answer that I bring to the comment that “unbridled greed” brought us to the chaos that we are now experiencing. The leaders that set the economic policy of this country created the environment that rewarded people for acting in the way they did.
People respond to the incentives that are created by those individuals that determine the culture in which we live. It is always good to refresh ones’ mind on this point by reading and re-reading “Freakonomics”. It is also good to refresh ones’ mind to the fact that it is as normal for human beings to respond to ‘negative’ incentives as it is for them to respond to ‘positive’ incentives. See, for example, why Sumo wrestlers are like grade school teachers in Chicago!
Until we get some real leadership at the top in this country, my prediction is…hang on for the swings!
Over the past six or seven months I have tried to emphasize two things. First, leadership must begin at the very top of an organization. The leader determines the culture and he or she must project this culture in everything that the leader says or does. My experience in business, government, and the not-for-profit sector is that if there is a leadership void at the top, even though others in the organization attempt to pick up the leadership reins, they cannot completely succeed. This is because there are others that will not go along because there is no one to “hold them in line” if they don’t follow those that are trying to pick up the leadership. Thus, things just don’t get done efficiently or effectively…and morale deteriorates.
Last night, the President referred several times to what “his” administration has been trying to do under “his” guidance. Yet, as the Times editorial points out, the whole rescue effort led by Hank Paulson has been highlighted by the fact that the President has been no where in sight. The President was pulled out of his bunker last week to speak to the press about the need for a bailout package, but his performance was like a puppet on strings and the voice that came out of his mouth was not his own. (See my post of September 22, 2008.)
Last night, with the whole Congressional effort lagging, the President was pulled out again to tell the American people that the thing we need to fear is fear itself and if the bailout bill was not passed quickly, Congress…not the administration…would be held responsible.
Again, the performance was less than believable, put on by someone that has no credibility.
In fact the show looked like a feeble re-run of past claims of impending disaster.
And, what does the absence of leadership get us? A bailout bill with little or no specifics; A Congress that is not cowered anymore by the idle threats of a lame duck; A nation that is not rallying to the call and is more against the bailout bill than for it; A brewing class war…the common man on main street and the greedy predator on Wall Street; and a market that has no idea where to go.
And, this is the second point I have tried to make…the increase in uncertainty faced by the financial markets. Yes, there are very wide swings in the stock market on a day-by-day basis. Yes, there has been a rush to quality and shorter term bonds. Yes, lending has dried up. This is what happens to markets that have little or no idea about what the future holds for them. Greater and greater volatility!!!
This, to me, is the bottom line of the current situation: there is little hope that we will get any leadership from the White House and the leadership of the Secretary of the Treasury does not substitute for the leadership of the President. There is a void in terms of “the leader of the people.” Hence, any bailout package that is forthcoming at this time will be less than satisfactory…and I believe that this is an understatement. And, this will mean continued uncertainty for the financial markets which can only lead to more volatility surrounding a weakening economy.
I fear that the pain is far from over.
And, I guess, what further disturbs me is that I don’t see the candidates for president “stepping up to the plate” to fill the void in leadership. They, of course, have to be careful in what they say with the pending bailout bill before Congress. However, people are claiming that the time is the worst since the Great Depression…that we are heading for a Second Great Depression…that those living have never faced anything like this…and so on and so on. The President says that times could get really, really bad. And, the responses we have gotten from our potential “Leader” leave us sadly with little confidence that the role will be adequately filled come January 20, 2009.
Financial markets…and the economy…thrive on confidence and trust. Confidence and trust allow market participants to make projections about the future and then confidently commit on an action plan. Without this confidence and trust, the future looks extremely hazy leading to only a tepid willingness to commit resources to any possible action plan.
The consequence of this…in general, stay as risk free as possible and as short as possible.
People may argue that this is not in the common interest. My answer is that, no, it is not in the common interest but our leaders have brought us to this point.
This is the same answer that I bring to the comment that “unbridled greed” brought us to the chaos that we are now experiencing. The leaders that set the economic policy of this country created the environment that rewarded people for acting in the way they did.
People respond to the incentives that are created by those individuals that determine the culture in which we live. It is always good to refresh ones’ mind on this point by reading and re-reading “Freakonomics”. It is also good to refresh ones’ mind to the fact that it is as normal for human beings to respond to ‘negative’ incentives as it is for them to respond to ‘positive’ incentives. See, for example, why Sumo wrestlers are like grade school teachers in Chicago!
Until we get some real leadership at the top in this country, my prediction is…hang on for the swings!
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