Saturday, January 31, 2009

When Reassurance Meets Reality

In recent months, we've witnessed wealth destruction on a massive scale. In the coming months, there are likely to be a great many bankruptcies and liquidations, both household and commercial. While unfortunate, many are the result of questionable decisions, principally in the form of debt willfully issued by borrowers and underwritten by lenders. This was done in large part because asset values were expected to rise indefinately, while risks to future income streams were not fully appreciated. With unviable (or simply irrelevant) businesses finally called to a reckoning, unemployment is increasing, and deflation is the force du jour. This means cash flows are evaporating and valuations are declining. At the moment, a bottom has not yet been identified, meaning uncertainty prevails, and with it we have unprecedented volatility, an absence of individual economic freedom, and a lack of economic confidence. We have lost our unprecedented propsperty and are in free fall; all we can say with certainty right now is that we're in transition.

In his 31 January column in the Financial Times, Harry Eyres writes: "...if we are wise, we must surely question what it was about our apparent wellness that contributed to and led up to the crisis. Was the crisis really nothing to do with us, with the way we were living - was it an overwhelming catastrophe emanating from outside of us, sent by some angry deity such as Poseidon, the god of earthquakes and tsunamis?"

Might we, through our apparent wellness, have contributed to our current situation? Yes, of course we did, for reasons which go beyond this simple blog entry. One characteristic of our "apparent wellness" is worth calling out: the "we're all winners!" societal norm we adopted is not sustainable. Bankruptcy, while perhaps necessary and healthy for the economy, is not a hallmark of success. Clearly, not everybody is a winner.

Perhaps in addition to creating asset bubbles, we've created a "self-worth" bubble. We've interfered with our societal synapses: the "we're all winners!" messaging has made us into an entitled society. Our "everybody gets a trophy" ceremonies have inflated our perception of what we're truely capable of delivering despite overwhelming evidence to the contrary. Ditching the trappings of false performance and learning to contend with the reality of limitation will be a systemic shock, but a very positive one that will go a long way to restoring the synapses that created such tremendous human achievement in the first place. Human accomplishments have been bred from many factors, including talent, fortitude and no small amount of luck, but not entitlement. Not once.

It will be interesting to see how our societal psyche comes to grips with economic reality. We no longer have the luxury of maintaining the illusion of entitlement. The issue isn't that any person lacks worth, but that each person must earnestly and honestly accept where his or her talents lie and do not lie. Trophies, slogans, and emotions will not sustainably overcome a shortage of talent in an increasingly competitive global economy. This is not to say that we mustn't encourage risk, only that we need to encourage responsible risk. Anything else is speculative at best, irrational at worst.

And the last thing we need now is another bubble fueled by misplaced confidence in our ability to do things that we simply cannot.