I have a friend who regularly reminds me that if you jump off the top of an 80-story building, for 79 stories you can actually think you’re flying. It’s the sudden stop at the end that always gets you.
When I think of the financial-services boom, bubble and bust that America has just gone through, I often think about that image. We thought we were flying. Well, we just met the sudden stop at the end. The laws of gravity, it turns out, still apply. You cannot tell tens of thousands of people that they can have the American dream a home, for no money down and nothing to pay for two years without that eventually catching up to you. The Puritan ethic of hard work and saving still matters. I just hate the idea that such an ethic is more alive today in China than in America.
Our financial bubble, like all bubbles, has many complex strands feeding into it called derivatives and credit-default swaps but at heart, it is really very simple. We got away from the basics from the fundamentals of prudent lending and borrowing, where the lender and borrower maintain some kind of personal responsibility for, and personal interest in, whether the person receiving the money can actually pay it back. Instead, we fell into what some people call Y.B.G. and I.B.G. lending: “you’ll be gone and I’ll be gone” before the bill comes due.
Yes, this bubble is about us not all of us, many Americans were way too poor to play. But it is about enough of us to say it is about America. And we will not get out of this without going back to some basics, which is why I find myself re-reading a valuable book that I wrote about once before, called, “How: Why How We Do Anything Means Everything in Business (and in Life).” Its author, Dov Seidman, is the C.E.O. of LRN, which helps companies build ethical corporate cultures.
Seidman basically argues that in our hyperconnected and transparent world, how you do things matters more than ever, because so many more people can now see how you do things, be affected by how you do things and tell others how you do things on the Internet anytime, for no cost and without restraint.
“In a connected world,” Seidman said to me, “countries, governments and companies also have character, and their character how they do what they do, how they keep promises, how they make decisions, how things really happen inside, how they connect and collaborate, how they engender trust, how they relate to their customers, to the environment and to the communities in which they operate is now their fate.”
We got away from these hows. We became more connected than ever in recent years, but the connections were actually very loose. That is, we went away from a world in which, if you wanted a mortgage to buy a home, you needed to show real income and a credit record into a world where a banker could sell you a mortgage and make gobs of money upfront and then offload your mortgage to a bundler who put a whole bunch together, chopped them into bonds and sold some to banks as far afield as Iceland.
The bank writing the mortgage got away from how because it was just passing you along to a bundler. And the investment bank bundling these mortgages got away from how because it didn’t know you, but it knew it was lucrative to bundle your mortgage with others. And the credit-rating agency got away from “how” because there was just so much money to be made in giving good ratings to these bonds, why delve too deeply? And the bank in Iceland got away from how because, hey, everyone else was buying the stuff and returns were great so why not?
“UBS bank’s motto is: ‘You and us.’ But the world we created was actually ‘You and nobody’ nobody was really connected in value terms,” said Seidman. “Parts of Wall Street got disconnected from investing in human endeavor helping business to scale and take up new ideas.” Instead, they started to just engineer money from money. “So some of the smartest C.E.O.’s did not know what some of their smartest people were doing.”
Charles Mackay wrote a classic history of financial crises called “Extraordinary Popular Delusions and the Madness of Crowds,” first published in London in 1841. “Money ... has often been a cause of the delusion of multitudes. Sober nations have all at once become desperate gamblers, and risked almost their existence upon the turn of a piece of paper. To trace the history of the most prominent of these delusions is the object of the present pages. Men, it has been well said, think in herds; it will be seen that they go mad in herds, while they only recover their senses slowly, and one by one.”
And so it must be with us. We need to get back to collaborating the old-fashioned way. That is, people making decisions based on business judgment, experience, prudence, clarity of communications and thinking about how not just how much.