It doesn’t take an Einstein…
Or maybe it does! Einstein once said ‘you cannot solve current problems with current thinking. Current problems are the result of current thinking’!
If we look at the global credit crisis, or as it is now becoming, the global economic crisis, we can see governments, leaders and the business community generally trying to find solutions and to do so quickly. There is no doubt that they will look at ‘past performance’ of previous recessions and crisis to see if there is anything that they can use from those experiences to fix the problems of today. However, as quickly as they come up with one answer, they are either finding that they need to change it or add to it. This should not be a surprise because the circumstances today (PEST) are different, as are the interdependencies and consequential ‘knock-on’ implications.
For example, China announced a major investment of $586 billion in trying to underpin/stimulate its own economy and those it relies upon (although it is unclear how much is ‘new’ money). The US has just decided not to use the $750 billion originally approved by Congress for Treasury to use to buy up ‘toxic’ dept securities (Troubled Asset Relief Program, or TARP) from the banks and is instead now planning for the Federal Reserve to create a new special-purpose lending entity, which would lend cash to investors or companies that put up collateral in the form of consumer loans. The Fed might lend up to 80 percent of the value of those loans, providing a cushion for taxpayers against losses.
The Treasury claim that they would only contribute 5% to 10% of the money to finance the lending. But the Fed would raise most of the money by selling what is known as nonrecourse commercial paper (Promissory Notes) to investors. So in theory, the plan would allow them to leverage the government’s money by as much as 20 to 1, meaning that the Treasury would provide 5% of the money and investors would provide 95%. Using $50 billion in money from the government rescue program, they said, could thus underwrite $1 trillion worth of lending for consumer loans. However, this highly leveraged idea is not without its detractors who are concerned that the taxpayers are indirectly carrying the risk for the whole amount!
Terms like ‘desperate times need desperate measures’ are being bandied around in many circles and our natural instincts are to ‘batten down the hatches’ whilst this storm (or series of storms) blows over. However, there is a real fear that the risk of being ‘risk averse’ will undermine or negate the attempts by governments throughout the world to adopt Keynesian principles and pump money into the system to keep it going. The UK govt, like the US is becoming frustrated with the apparent reticence of the banks to use the ‘bailout’ funds they have been given to help increase the flow of lending into the wider economy. Indeed, there are some who are accusing the banks of exacerbating the pressure on businesses, so increasing the risk of failures and consequential redundancies. The answers are not easy, but if we don’t try and think outside the box when looking for solutions, we will not progress. In times or war and crisis, it is the application of intellect, thought leadership and innovation that achieves the most success. We believe that those who adopt this approach with an active rather than a passive strategy will survive and prosper.
Written by Mark Thelwell - Visit Website