Strategy and the crash

The phrase 'Second Great Crash' has been used too many times since the First in 1929. Numerous books and articles sounded the alarm. But Crash No.2 never arrived – perhaps until now.

In reality, the world's economy has suffered many hard but temporary knocks following the Second World War. In each case, acute economic pain was suffered by nation states, but the trauma was transient.

The collapse of further major Wall Street and British firms in the current crisis, following promising lulls in the flow of bad news, has caught the politicians and the regulators off guard every time. The high and mighty had no strategy for coping with the awful results of profligacy because they failed to understand what was happening before the sub-prime chickens came home to roost, and so they were forced into improvisation.

The irony is that the financial crisis that originated on Wall Street was entirely predictable. The pattern is a familiar one; I can say this with conviction, because I once wrote a book with my friend Norris Willatt under the title, Can You Trust Your Bank?

The conclusion we came to was No, but there's no need to worry too much, because your government will always feel obligated to bail out the few villains to save the many suckers and the national and world economies along with them.

The problem is that the politicians and regulators are no more likely to foresee the disasters than the suckers. Forced to act by ignored but now all too obvious crisis, the governing bodies under-react for the same reason that allowed the crisis to occur to begin with; they don't really know what's going on – how the system failed, whose fault it was, and what is going to happen unless salvation comes in the form of intervention.

The story has been repeated time and again since the start of the Millennium. The 'New Economy' played the same old game by convincing the suckers that any high-tech entrants were sure bets; the dot.com bubble duly burst and badly conceived, badly managed businesses collapsed in droves.

Then in 2004, fabled head of the Federal Reserve Alan Greenspan 'opposed tougher regulation of the financial derivatives' and for good measure praised the sale of 'adjustable-rate mortgages and refinancing for ordinary homeowners'. For this he can take his share of the blame for the sub-primes which brought the US to near-ruin in a few crazy years.

The lessons are clear and can be summarised in three words: TAKE GREAT CARE. Why didn't the big beasts of finance follow that strategy? Hubris is one simple reason. They believed they were marvellous, as did others. In fact, they knew they must be marvellous because they made such enormous amounts of money.

Bad, ill-informed decisions were made by top managers because their own reward, not the wellbeing of the businesses, was uppermost in their thoughts.