When historians look back on the 21st century, 2008 will stand out as memorable. Not only as the year that America elected its first African-American president, but also as the year of the “Great American Financial Collapse.” Much as 1929 is identified in the 20th century, 2008 will be viewed as a momentous year for this century. Thank goodness 2008 is now dead and buried, to be resurrected only by the historians.
The question these chroniclers of great events must now answer is why and how did the financial crisis come about? Until we can come to grips with the cause of the financial melt, we will be doomed to repeat it. Many have already begun to sift through the ashes of 2008 seeking answers as to where, when and why the fire started. The real mystery for many is why the collapse spread to the entire structure of the economy so quickly?
But never fear ‘cause Mac is here. The mystery is solved. You need to go no further, because I am going cut through all the smoke and give you the real reason for the economic crisis of 2008.
A number of igniters have been identified. Most of the blame seems to be pointed at business leaders, certain captains of industry who basically were greedy, incompetent and cheaters. Political leaders who were either asleep at the switch or were actually the beneficiaries (in more ways than one) of the dishonesty of business are also blamed. But, these are no more than partial explanations. America experienced the greatest financial crisis in its history because its business and political leaders did not cheat enough. If these leaders had really been serious about cheating then the crisis could have been averted.
Of course, I am not talking about honest to goodness lying, stealing, deceit and fraud. That’s real cheating. And there’s been plenty of that. But that type of cheating takes place all the time, in all personal and professional relationships. While it is bad, it is never enough to cause the collapse of the entire system.
What caused the downfall of the financial system was the failure of business and political leaders to cheat on rules that had become. in and of themselves, dishonest. What I’m saying is that business and political leaders put rules in place were inherently dishonest and by indiscriminately following those rules, only injustice, pain, and financial suffering could result.
The Missing Ingredient
What was needed but failed to emerge was a critical mass of business and political leaders who not only had the ability to recognize these rules as dishonest, but even more important, had the guts to cheat on them. Instead, the opposite happened:
- • As more and more and more business leaders became slaves to the rule that quarterly earnings must always increase, fuel was added to the fire.
• When business leaders followed the rule of “entitlement” that led to obscene bonus plans for the top few, fuel was added to the fire.
• When business leaders lost sight of the basic operating principles of their business, and opted instead for sub-prime loans and esoteric investment contracts, fuel was added to the fire.
• When business leaders fell prey to the peer group pressure who take unwise actions because “everyone one else is doing it,” fuel was added to the fire.
• When political leaders followed the rule that “what is good for business is good for the country,” and obligingly watered down regulations or looked the other way, fuel was added to the fire.
• When political leaders followed the rule that a growing economy, even if artificially stimulated was the way to re-election, fuel was added to the fire.
I don’t mean to be too simplistic and Pollyannaish here, but the fact remains that as we look back on the financial crisis of 2008, all of the “experts” are asking the same question, “How could we have been so stupid to do what we did?”
It seems so simple now to recognize that if banks are encouraged to make as many mortgage loans as possible and then sell those loans at an immediate profit to others with no recourse to the bank if the loans go bad, then it is likely that bad loans will be made. And yet, that is exactly what happened.
Isolated as a single action, even the most naïve and inexperienced of bankers, accountants or financial analysts would recognize that making expensive loans to those with little income and poor credit was inappropriate and a recipe for disaster. Yet, following the rule that “if everyone one is doing it, it must be okay,” hundreds of executives and scores of otherwise well-run companies engaged in the practice with reckless abandon.
Experienced insurance executives who knew full well that they should not gamble the future of their company by taking risks they did not understand or could not manage ignored their experience and followed the rule of short-term gain at any cost. And their irresponsibility cost them dearly.
We often mock those who fall prey to financial scams with a certain sense of superiority and what the Germans call schadenfreude, taking delight in the misfortunes of others. We even question how they could be so stupid to be taken in by what, in retrospect, is so obviously a fraud. After all, “we” know the rule: “if a thing is too good to be true, it probably is.” And yet the irony of the year 2008 is that far too many played by the rules of the game — rules that had become dishonest. The result? The entire financial structure of our economy virtually imploded. And, that is the greatest fraud of all.
And the moral of the story is …
There is a simple lesson for us to learn. Yes, seek input, understanding and information, but in the end keep your own counsel and do what you know is right. If you know what your business is about, then be about it, not about the business of others. Always be willing to question and challenge what others tell you are the rules of the game and if you find them to be outdated or dishonest by nature, be willing to cheat on them.
If the leaders of banks had remembered that they were bankers and not investment gurus, they would not have failed. If the leaders of AIG had remembered that the company was not about taking risks that could not be managed, few of us would have even heard of AIG, except as one of the world’s greatest insurance companies. If the leaders of Merrill Lynch and Lehman Bros had remembered they were about investing other people’s money and not leveraging their own out of pure greed, they would still be independent and alive.
If the business and political leaders had been willing to look beyond the euphoria of short-term actions and been willing to question, challenge and cheat on rules that had become dishonest, then 2008 would have faded into the past with little to remember it by except, of course, the election of Barack Obama.