Lessons from the meltdown
I was listening the other day to Jeffrey Sonnenfeld of the Yale School of Management discuss leadership lessons from the financial meltdown with Wall Street Journal. Jeff likened the finger-pointing towards systemic failure to a man tripping while walking down the street and blaming the city for not paving the path properly. As the dust settles, and the world turns its attention to the effectiveness of the bailout package instead, it might be worthwhile to move the spotlight from the regulators and go back to dig deeper and discover what really are the lessons here? They are powerful in their simplicity.
Courage to walk away: The very first learning that emerged from what is now being termed as a financial Armageddon was the need for courage: The courage to carve your own path and walk away from the herd. We in India were born with this lesson as we gained independence with ‘non-violence’ in an era of World Wars. In the US financial world, we saw Warren Buffet display the courage to walk away. Back in 2002, when companies began toying with exotic derivative instruments, Warren Buffet termed derivatives ‘financial weapons of mass destruction.’ Few listened to him then but today he stands out as the voice of sanity. Save it for a rainy day: The second lesson is the forgotten power of savings. The ‘savings mentality’ has always been a hallmark of the Asian culture. India, for one, has always had a high rate of savings – a phenomenon that is getting eroded with a new culture of consumerism sweeping across our cities today. Interestingly, America, which is home to 5% of the world’s population, accounted for 30% of global production and 37% of global consumption during boom times! On an individual level in the recent crisis, the ninja loans reflect this mentality, but collectively it made the entire country vulnerable to risk. And there were those who saw the warning signals.In 2005, when the times were good, economists Paul Volcker and Clyde Prestowitz, pointed out that America was vulnerable due to all the leveraging, and predicted that a financial crisis could soon hit its shores. This has come true and – be it at a macro level or a micro level - it highlights a forgotten lesson on the power of savings and that that we should leverage only to the extent we can afford to service our debt. Its time for a “back to basics” approach, old fashioned as it may seen. Save and plough back in good times, and not fritter liquid assets away.
Caution, compliance and governance: The role of the American regulatory bodies can be debated till kingdom come. If investors such as George Soros and Warren Buffet and economists such as Paul Volcker saw it coming, why couldn’t the American financial agencies? The fact is that caution, compliance and governance are self checks that business needs to bring back. What was so extraordinarily complex about the bubble that a few investors could see and regulators could not? But the danger here is to get over-dependent on regulatory direction and therefore over-regulation. Lesson here: We have no choice but to think on our feet, keep our radar scanning the environment constantly, and not follow the herd blindly despite what the regulators have allowed.
Look ahead - A lot has been written about the fall and a lot is yet to be written. However, it is time we stop reading and start looking ahead. The world will emerge from this crisis the same way it has from many such crisis before - stronger. We need to look ahead as organizations and convert this crisis as an opportunity to transform the today for a better future. The people who look ahead will come out of this as winners, and I do hope more and more people start doing just that.