The Deeper Message of Financial Markets’ Volatility
The Dow swung 600 points (high to low) in two days this week—and the week’s not over.
Key stock market indices in Indonesia and South Korea lost over 6% of their total value yesterday alone. Seoul’s Kospi Index had its biggest point drop ever.
Katie Couric leads the CBS evening news with tales of homeowners who can’t find lenders to refinance massively increasing adjustable rate mortgages they (stupidly) assumed.
What’s it all mean?
The short story is the same as the long story—but the long story is much more interesting.
The short story starts with a classic housing bubble. People start borrowing to buy real estate. It becomes musical chairs, flip the property, sell to the greater fool. And use leverage. Better yet, OPM (other people’s money). Best—use both.
Lenders, like good drug pushers anywhere, develop new products and pitches. Finance the first mortgage with the second; “liar’s” loans, no proof of income required. Wall Street packages loans, slices and repackages them and resells them. No one is left holding the bag—-everyone is left holding the bag.
National Public Radio reports that you can purchase complete lies about your income and employment history at sites like verifyemployment.net to help fuel the game.
The short story is that the world has become so connected financially that a housing bubble in the US can decimate the stock market in Djakarta. Everything is linked to everything. This isn’t like 1929, where wealthy people lost money in the crash and soon couldn’t pay their employees. This is far more integrated, international, intertwined, interdependent—and fast. Butterflies flapping wings and all that.
True enough. But the financial markets are just a piece of a bigger puzzle.
In the long story, the growth in connectedness of all things exceeds the wildest dreams of rabid conspiracy theorists from just a few decades ago.
Tom Friedman’s The World is Flat is, at root, about how the world has become interconnected. Time and space are being obliterated by always-on, high-bandwidth, voice, data and video connections. Capital flows easily around the world. The internet’s inherent freedom runs roughshod over the desires of industries and nations alike to maintain boundaries. Even labor becomes mobile—if not through immigration, then through outsourcing.
Six degrees of separation has for some time now begun to look like an overstatement.
The first level of business implications is clear. Pick one thing and do it the best in the world; outsource everything else to whomever is doing those things the best in the world.
But even that is old paradigm stuff—competing in a global world and all that. Increasingly, that’s so five minutes ago.
The really, really big lesson is this.
The game of competition is over. It’s not about vertical corporations competing against each other anymore. It’s about collaboration and connectivity—with everyone. He who can get along with everyone better than everyone else will succeed.
In a massively connected world, corporate strategy is less relevant than customer strategy. It’s your ability to cut agreements with customers and suppliers that helps you—not your ability to squeeze pennies out of them.
This is a huge shift for people raised in business in the last 50 years, weaned on concepts like sustainable competitive advantage and shareholder wealth creation.
The business-strategic value of trust was always high. It’s about to get far, far higher. Those stuck with mental models built on inter-corporate competition are going to get left behind those who "get" the simple idea of service to customers, employees, and partners.
Charlie, while I agree with your general argument, I take issue with a minor point.
"Katie Couric leads the CBS evening news with tales of homeowners who can’t find lenders to refinance massively increasing adjustable rate mortgages they (stupidly) assumed." (My bolding added)
When you look at America’s shocking illiteracy rates, I think it is clear that many Americans took on staggering debts from predatory lenders (/legal loan sharks) based on not stupidity, but ignorance. That’s an important distinction.
And, the behaviour of gullible Americans in the housing crisis is symptomatic of a much larger problem.
The same people hat are gutting funding for public education system are also aggressively dismantling (or detoothing) industry and government oversight bodies and checks and balances.
We wind up with over-crowded, underfunded school systems, that "teach to the test," and indoctrinate a strong obedience to authority without teaching basic literacy, let alone analysis or critical thinking, which churn out under-educated, gullible Americans who don’t have the basic skills to look out for themselves. That doesn’t make for self-reliant consumers any more than it makes for a healthy democracy.
When half your population is functionally illiterate, it is easy for them to get duped. I’m not saying that everyone in trouble in the housing meltdown is a wide-eyed innocent, but neither were all of them greedy or willfully stupid.
And when you get repeatedly screwed over by the institutions you’ve been explicitly taught to trust (Hurrican Katrina anyone?), that’s a recipe for some major trust issues.
I completely agree with you. I had intended to assign roughly equal blame to lenders and borrowers alike, but my language didn’t accomplish that. And in any case, I too think the preponderance of blame and shame here belongs on the fraudsters, not the gullible.
You make a good point about the hypocrisy of defunding education and regulatory oversight at the same time.