With the speed of a thunderstorm and the force of a glacier, the massive deleveraging of global markets is reshaping the face of American finance. The venerable system of Wall Street investment banks was carved from the map in a matter of weeks. The unwinding is not over of course. But a way forward must be found.
There will be a moment in the months and years to come, when our culture will look back and realize that it is over. That we survived a very black time and that better days are finally upon us. At that moment, without a doubt, we will have an entrepreneur to thank. An innovator. A free thinker. Teams of them in fact.
Some would argue that innovation got us into the mess in the first place. They cry out – It was the derivatives! The credit default swaps! It was those complicated and new fangled financial instruments that made all of this happen!! In a way they would be right. There is little doubt these financial innovations amplified risk to an astonishing degree rather than democratized risk as they claimed. But the answer is not so easy.
Deeper problems have been building for years. Our central bank was too cozy with our politicians and too archaic in its structure. Our affordable housing mandates were pushed too far and they injected poison into the financial bloodstream. Our energy policy was tumbling headlong into dangerous addictions. The price tag of our social aspirations outstripped the income of our tax system. Our national obsession with stuff eclipsed our cultural heritage of rugged individualism.
Not surprisingly, the creation of sophisticated financial instruments coincided with the maturation of computation. Financial wizards fed data and ran programs as fast as their processors could handle it. Currency arbitrage could be tracked and bet upon. Fluid commodity markets like oil and wheat could be understood in new and different ways. By the height of the credit bubble, Wall Street was selling a piece of a piece of a piece of a debt insured by someone who was insured by someone who owned a security. The math was unfathomable. Turns out the risk was unknowable and the damage unthinkable.
The innovations were not without benefit of course. The securitization of mortgages lowered borrowing costs for millions of people for decades. The explosion of building brought an explosion of jobs. Marketers had people to pay them. Brand builders had people to brand. Web designers had sites to build. There was money to fund the tech start ups. There were customers to buy computers and pay for internet access.
But the system was still the same. The innovations were just still the playthings of the old guard. Profits were maximized and risk was forgotten. But the bones of the system could not handle the new weight that was being created. Remember, the horse drawn buggy was improved with newer wheels, better axels, and better suspension right up until the automobile relegated it to history forever.
And so it comes to you. To us. The destructive force of unwinding is clearing out a new space upon which to build a new financial model. The task to us is to build nothing short of a new cultural identity. The architects of this new model have not yet revealed themselves. But make no mistake; the new model will be as different from the old as the car is from the buggy.
Eric Hoffer observed, ‘In times of change learners inherit the earth; while the learned find themselves beautifully equipped to deal with a world that no longer exists.’ The denizens of Wall Street and the tired politicians in Washington are beautifully equipped indeed. It is time for the learners to step forth.