Sunday, October 12, 2008

Thoughts on the Economy and Steps toward improvement

Tonight I was at the opening of the 100th Anniversary Harvard Business School celebration. This is a 3 day working conference where the alumnae and many MANY world luminaries have gathered to celebrate and to work on the issues at hand in leadership and management.

Since the Economy is something on many people's minds right now, it was a subject that was oft mentioned in the opening speeches and which I feel obliged to pay tribute to in tonight's post.

First it is clear that blame is a backward looking game which many people will play better than I, so I have chosen not to engage.

In looking forward, over the last several days I have heard many opinions, but a few stand out to me as lasting:

-This economic "crisis" is a failure of leadership on many levels, and it is a problem that will similarly be solved by strong leadership.

-This is a problem whose solution must be approached on three levels like a trauma patient (this from Jay O. Light, HBS). 1) Stop the bleeding and stabilize; 2) Perform necessary surgery to correct the basic damage; 3) begin rehabilitation and therapy to address the long-term recovery. Many people are talking about 2 and 3, but if we don't get 1 right, then there will be little need for 2 and 3.

-In my estimation, #1 (see above) is solidly a recipe calling for the shoring up the domestic financial institutions with appropriate equity capital either from government (i.e. taxpayer) or from investors (classic bank investors). I had the pleasure of doing exactly this for several years as an analyst and investor in thrifts and S&Ls in the aftermath of the regional 80's S&L crisis in the southwest, and I can tell you that such a prescription of regulation and government working with private investors works. We bought banks with distressed loan portfolios and huge, hairy, blocks of non-performing assets (NPAs), all in concert with regulators from the Resolution Trust Corporation and the Office of Thrift Supervision (OTS). Though the scale is bigger today, the principal of creating banks with strong capital as a first step OUT of the crisis is EXACTLY the same.

-And the last point.....Dean Light read a letter to the assembled crowd tonight which hammers home the last point.....

"We are in the midst of a financial crisis, the likes of which we have never seen. Let us first understand the context. War is fresh on our minds. There is a Republican President in office. Banks have failed and the largest trusts have been shaken at their roots due to risky lending practices atop thin liquidity. Technology has been integrated recently into our markets and businesses at a pace few of us could have imagined. And corporations and their Wall Street advisers have recently been engaging in mammoth consolidations the size and complexity of which we have never before seen." Unknown Banker, year 1907

Clearly the final point, is that WE HAVE BEEN HERE BEFORE. The size is different, but the scope of fear is not. Let us take stock and set about the solution.


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