The lesson of the economic crisis ought to have been that there’s a lot of inherent uncertainty. Always has been and always will be. Even when we assume things are certain, or nearly certain.
The problems were all caused or enabled by people having too much faith in the bets they were making, in the “efficient market,” and the supposed stabilizing effects of increasing complexity (for a while I believed the last notion too). But instead of learning from those mistakes and dealing differently with uncertainty, executives are still pretending it’s still just a temporary thing, for which others are at fault, invoking it as a reason to do nothing:
For a long time, businesses have been complaining that they can’t hire and they can’t invest because of all the uncertainty the Obama Administration has injected into the system. Who can make plans when no one knows what the American health care system will look like or how various prongs of our financial system will be forced to change?
That’s from Barbara Kiviat at Time‘s Curious Capitalist blog, arguing that “the uncertainty excuse needs to come to an end” (via Economist’s View): the uncertainty about what regulation will look like is falling away, as the regulation appears close to passing it’s time for business leaders to do what they’re supposed to do:
Now, I am sympathetic to businesses being somewhat hamstrung by economic uncertainty. Are we coming out of this recession once and for all, or are we headed toward a double dip? That is the sort of thing that makes it tough to decide whether or not to hire or open a new plant. But where we are in the business cycle is far from anything the President controls. As people with a sense of history like to point out, the U.S. economy has grown and contracted under all sorts of Presidents and policies.
Executives love to go on TV nowadays and talk about how the President should show more confidence in the economy. That probably wouldn’t hurt. But you know what would actually help? If these same executives did that themselves by going out, taking some risks (what they’re paid millions of dollars to do!) and expanding their companies.
This seems to be exactly the same attitude that made a mess of things in the first place: taking credit when things are going well and then blaming problems on someone or something else. The psychological roots of this self-serving bias are further reinforced by the need to puff up for shareholders. Both the culture and the mechanisms of business today make honesty very difficult to pull off.
But that’s no excuse not to try. At least if everyone admitted that much we’d see needed steps in the right direction.
These flaws were obvious when the Dotcom Bubble collapsed and then again after Enron imploded. The ensuing fallout in accounting and finance ought to have eroded more of the old mindsets and caused some deeper soul-searching among executives. To me it seemed like people would finally have to deal with the problem of “irrational exuberance.” That’s when we should have seen the start of what Richard Florida has been alerting us to as “the Great Reset,” which the global economy seems, finally, to be going through now.
But something totally unexpected happened: Islamic extremists crashed planes into the heart of global capitalism — both literally and figuratively.
By the end of 2001, even with the dust of Enron’s collapse still in the air and accounting scandals looming elsewhere, the chairman’s letters of annual reports highlighted the “difficult operating environment” caused by 9/11 and other external factors, rather than suggesting deeper undercurrents. Almost invariably, they went on to say their perseverance through such challenges was testament to their firm’s strength, reassuring shareholders they “emerged stronger than ever before,” as Hank Paulson’s letter put it. Jimmy Cayne’s brief letter to shareholders of Bear Stearns implies 9/11 was directly responsible for every challenge they faced that year, dedicating the entire opening paragraph to the attacks — a feature that was repeated in the report’s strategic review, noting that the “industry as a whole suffered in the wake of the terrorist attacks…”
Indeed it did, and it’s impossible for me to fully appreciate how those tragic events affected people living and working there — who lost loved ones and colleagues — but the question still remains: to what degree were the challenges of 2001 caused by the hubris that still smoldered throughout the finance industry and among executivess in general?
Instead of being forced to look at the effects of their own attitudes and practices, which they can change, business leaders exploited the opportunity to pass off blame to factors that were completely beyond their control, enabling them to double-down on many of the same erroneous assumptions that eventually led to the financial collapse in 2008.
I suppose that glossing everything over — hiding weaknesses, blaming external factors, taking credit for being lucky and embellishing their strengths rather than identifying weaknesses and recognizing their own mistakes — is to be expected. It’s simply how executives behave and how businesses are expected to communicate with shareholders and the public.
But that gets straight to the underlying problem in this ongoing state of affairs. The key flaw throughout is their unwillingness (or inability) to take responsibility and assume more initiative towards long term solutions. Until business leaders show signs of addressing those deeper problems, no statistical indicator will turn me into an optimist.
If they keep this up, it won’t merely be a near-term “double dip recession” we’ll be worrying about, but rather an eventual collapse that’ll be even wider and deeper than what we saw in 2008. Every business built on the ethos of hubris and persuasion rather than openness and the creation of genuine value is vulnerable.
The sense of certainty has always been false and always will be. Long term economic success can’t be founded on external factors we can’t control. We need to cultivate genuine mastery and integrity of what we can.
