In my opinion, definitely the article of the week in todays WSJ Opinion page, via interview with Anna Schwartz:
http://online.wsj.com/article/SB122428279231046053.htmlSchwartz co-wrote (with Milton Friedman) the seminal treatise on the role of the Fed in the Great Depression,
A Monetary History of the United States, and at 92 is still an active researcher at the National Bureau of Economic Research. In the interview, she discusses the current economic crisis, its root causes, and en route to those topics alludes to a "tragic flaw" of leadership. I'll summarize and comment on those here.
The Current Economic Crisis and the Root CauseToday's problems are based on a fundamental loss of trust -- "...a lack of faith in the ability of borrowers to repay their debts". The liquidity problems that have existed are essentially a symptom of that distrust, as banks cast doubt on their fellow banks ability to effectively value their balance sheets. Whether it is due to complexity, accounting, or simply negligence --- banks don't want to lend to each other because they are not comfortable that they will be repaid. This is a critical point that Schwartz very effectively articulates.
In Schwartz' words "...firms that made wrong decisions should fail... You shouldn't rescue them. And once that's established as a principle, I think the market recognizes that it makes sense. Everything works better when wrong decisions are punished and good decisions make you rich."
The Arbitrary FedSchwartz continues:
I think if you have some principles and know what you're doing, the market responds. They see that you have some structure to your actions, that it isn't just ad hoc... And the market respects people in supervisory positions who seem to be on top of what's going on. So I think if you're tough about firms that have invested unwisely, the market won't blame you. They'll say, 'Well, yeah, it's your fault. You did this. Nobody else told you to do it. Why should we be saving you at this point if you're stuck with assets you can't sell and liabilities you can't pay off?'
So what's the point? The point is that the Fed made a decision to bail out AIG, yet they let Lehman fail. Not only did they decide against letting the market work, they did so in an inconsistent manner, a situation that makes investors very nervous. Why? Because essentially, inconsistency leads to yet more risk - risk that can't be priced, just like the complex financial instruments that are also tied to this crisis.
Leadership ImplicationsBased on this discussion, some leadership takeaways...
First, leaders need to know what they are doing or be able to find those that do -- and manage them. My faith in Paulson is strong on this point, but who really knows.
Second, act in a principled, consistent manner. Whether you are a company participating in the market, or the government, or a business leader -- make sure that everyone "knows where you stand". Does everyone understand the principles that you believe in? Oh, and by the way, manage and perform to those...
So, essentially, in specific roles it's important to broadly communicate principle, philosophy, and intent, and then follow through (aka setting and managing expectations).
Here's to hoping that the Fed ultimately finds the way. It may be hard to blame them for "pulling out all the stops" to get the US through this crisis, but here's to hoping that they 1) identify a rational, consistent direction 2) that they communicate it clearly and 3) that they stick to it. Our financial futures may indeed depend upon it.
