Culture Crash

As the finan­cial land­scape is being reshaped in one of the largest cri­sis of con­fi­dence ever encoun­tered by the Amer­i­can form of cap­i­tal­ism, I can­not help but won­der whether what we are wit­ness­ing is the begin­ning not just of an eco­nomic crash but also of a cul­tural crash.

A few months ago, I started get­ting the feel­ing that we are in the process of mov­ing into a post-boomer era, and high­lighted some of my thoughts on the sub­ject. This was a sur­pris­ing change of pace to my read­ers, who are gen­er­ally more used to my study­ing things with tech­nol­ogy as my focus lense but it was the begin­ning of an evo­lu­tion in my thinking.

As the first rum­bles of the eco­nomic cri­sis started appear­ing a cou­ple of years ago (HSBC, my employer at the time, was one of the first com­pa­nies to aggres­sively write off bad loans), I started won­der­ing whether the cri­sis in the mort­gage space was only the begin­ning and think­ing that the credit card cri­sis was prob­a­bly going to dwarf the mort­gage cri­sis if it ever happened.

At the time, how­ever, I had been so focused on look­ing at the world with a tech­nol­ogy focus that I was fail­ing to find the words to really describe what I was wit­ness­ing. My gut was telling me that this was a big turn but I nei­ther had the audi­ence nor the vocab­u­lary to express my thoughts in a clear fashion.

Fur­ther­more, not being a cit­i­zen yet, I felt that it might be pre­sump­tu­ous of me to point to the ills of a coun­try that was host­ing me as a guest, a coun­try that had offered me so much oppor­tu­nity. So I kept quiet.

But I now believe that it’s time to attempt to high­light a few things that do not appear to be part of the debate sur­round­ing how to deal with the cur­rent cri­sis. And since I have the luck of deal­ing with read­ers who gen­er­ally are much smarter than I am (and many of them much more pow­er­ful than most peo­ple), I thought that maybe, just maybe, I could get some of the basic dis­cus­sion started here, spread­ing a meme around the con­cept of a cul­ture crash.

In this par­tic­u­lar case, I think the issue is around the destruc­tive cul­ture of credit Amer­ica has been cul­ti­vat­ing with the rise of the post-WW2 gen­er­a­tions. I am not say­ing baby boomers because they are only part of the prob­lem, as my own gen­er­a­tion ( Gen­er­a­tion X) and the fol­low­ing one, are also involved in the same destruc­tive addic­tion to credit.

At issue is the con­cept that over-extending one­self is a good idea. It may be because I am com­ing from a for­eign coun­try, or it may be for other entirely dif­fer­ent rea­sons but I have always had an aver­sion to credit. When I took my first mort­gage, I worked hard to try to repay more of the prin­ci­pal than was requested by the bank. My con­cept was sim­ple: I thought that if I could repay my loans early, I’d give away less as inter­est and could then use that inter­est to pay myself. It turned out to be a smart move but I have no idea as to how I came around to that con­clu­sion. The funny thing is that I had dis­cov­ered the con­cept of, to put it in terms that are now being used by every pun­dit, “liq­uid­ity is king.”

Whether it is credit cards, mort­gages, or other forms of loans (stu­dent loans, car loans, etc…), I’ve always been sus­pi­cious of the idea that one could spend more than they had. I was aware of the con­cept of assets but ulti­mately, I felt that assets should be, for the most part, tan­gi­ble. And a bank account with cash in it is about as tan­gi­ble as things get.

Liv­ing in the USA, how­ever, I have always been sur­prised by how much of a credit cul­ture the coun­try has. When ask­ing for a mort­gage, I had to fight my bank to get a “lower” mort­gage amount because they felt I was ask­ing for too lit­tle. The idea of low­er­ing the risk (both mine and the bank’s) of finan­cial default seemed to go counter to many in the go-go run-up of stock prices in the dot­com era, fol­low­ing by the go-go run up of real estabe prices in the recent hous­ing bub­ble. Sure, I didn’t spend a lot of time jet­ting around the world on a lot of vaca­tions as I toiled to ensure that my mort­gage was paid off (and it took me a few years to do so)  but I dis­cov­ered that many of the peo­ple who had run up their bills based on the promise of paper for­tunes rep­re­sented by their dot­com options were the same peo­ple who were finan­cially wiped out when those paper gains evaporated.

The same phe­nom­e­non seems to have repeated itself with the hous­ing cri­sis, as peo­ple refi­nanced their houses to take cash out and traded those houses as invest­ment vehi­cles up until the point where the vir­tual gains they had made in the run-up on prices evaporated.

The sim­i­lar­i­ties between the dot­com crash and the hous­ing crash are a lit­tle eerie and, with the ben­e­fit of hav­ing gone through one of those cri­sis, I am now start­ing to gain per­spec­tive on the other one.

Mean­while, the risk of dan­ger­ous invest­ment secu­ri­ties (the so-called struc­tured invest­ment vehi­cles) seem to have been bal­anced by tak­ing a few bad loans and mix­ing them with good ones. The prob­lem was that these mixes got increas­ingly com­plex and, as I was talk­ing to a friend of mine involved in devel­op­ing some of those prod­ucts, my gut feel got stronger. The thing in my dis­cus­sion with said per­son (who shall remain anony­mous in order to pro­tect the guilty par­ties) was that “no one really under­stands many of those invest­ment prod­ucts any­more.” It felt a bit like a house of cards to me but once again, I fig­ured that I didn’t really know enough to talk smartly about it.

Until this cur­rent crisis.

Stu­dents of his­tory are famil­iar with the con­cept of a run on the bank. As I was read­ing up on such issues as part of my prepa­ra­tion for a speech, I started think­ing about how brit­tle our eco­nomic sys­tem really is. Ulti­mately, most of the finan­cial mar­kets are based on people’s per­cep­tion of value and, if that per­cep­tion changes, the whole thing can unravel pretty quickly.

I think we are now at the tip­ping point of a major shift in the per­cep­tion of what a good finan­cial deci­sion is. Wall Street may be the most impacted by this for now but I sus­pect that it will spread rel­a­tively quickly (my gut tells me the per­cep­tion will be gen­er­al­ized glob­ally within the next 3–12 months). The change is com­ing from the fact that growth may no longer be con­sid­ered as valu­able as tan­gi­ble assets.

Dur­ing the dot­com days, I received a cou­ple of crash courses in per­cep­tion man­age­ment. The first one was going from VC to VC with a plan try­ing to raise around a mil­lion US dol­lars for a start-up. The com­pany was slated to be prof­itable within 2 years and would grow at 15–20 per­cent after­ward, per our pro­jec­tions. To say that our financ­ing efforts were not going well was an under­state­ment. The moment of real­iza­tion came when, in another dis­as­trous meet­ing, a VC told us “you’re ask­ing for a mil­lion dol­lars, and will only give us 15–20 growth after the ini­tial cou­ple of years. Your plan lacks ambi­tion.” The whole time, we had been bas­ing our plan on real­is­tic achiev­able num­bers and I failed to under­stand why we were con­sid­ered to not be ambi­tious. Things got worse and, in a fit of des­per­a­tion, my busi­ness part­ners over-rode my deci­sion of con­ser­v­a­tive growth based on solid rev­enue and cre­ated a pro­jec­tion set based on year on year tripling of the busi­ness, start­ing with an ini­tial invest­ment valu­ing the com­pany in the 15–20 mil­lion dol­lar range. I thought were were going to be laughed out of the room by the first VC we pre­sented this but some­thing truly scary hap­pened: not only did the VCs like it, but some of the peo­ple who had pre­vi­ously given us a soft no were now bang­ing on our door, try­ing to get into the round. Of course, we took a first round, and a few more after­ward, and enjoyed a nice liq­uid­ity event that achieved a nice profit for the ini­tial investors. The com­pany con­tin­ued on air until the dot­com crash, which it didn’t sur­vive as a going concern.

The les­son here is that VC invest­ment, IPOs, the hous­ing bub­ble, etc… all have one thing in com­mon: they are based on the idea of future pay­out, due to year on year growth that is often based on num­bers that are wish­ful think­ing in the best of cases ( and out­right fraud in the worst cases, as we have learned from Enron and Worldcom)

I think this con­cept is now hit­ting the wall. The prob­lem is that it has yet to be replaced by some­thing else as we are mov­ing through the irra­tional stage that gen­er­ally marks the end of every great cul­tural move­ment. So the oper­a­tive word is “sell, sell, sell” and con­fi­dence has shaken some of the might­i­est insti­tu­tions on Wall street as it will shake up other insti­tu­tions soon.

On Wall street, they are now well aware of that real­ity and some of the cooler heads are real­iz­ing there may be some ways to profit from the stam­pede by acquir­ing assets at fire sale prices.

How­ever, I’d ven­ture that both the panic and the cool reac­tion are rel­a­tively con­tained right now. Con­tained to peo­ple in the finan­cial indus­try, the media (who have never seen a cri­sis they can’t hype), and the react­ing investors.

A few days ago, I was at a party in the tech com­mu­nity, and the happy atmos­phere reminded me of the eupho­ria I had expe­ri­ence in the late 1990s, only a few months before the dot­com bub­ble went crash­ing down. As I travel in the murky waters between Wall Street and the tech­nol­ogy world, I was shocked by the con­trast between the panic I was wit­ness­ing in the finan­cial space, and the relent­less opti­mism I encoun­tered in the tech space. The assump­tion that the cri­sis is con­tained to Wall Street was well engrained (and may yet change as more peo­ple see their 401k go down) but I started won­der­ing about the dis­con­nect. When pre­sented with the issue, one per­son pointed out that a lot of peo­ple would go to grad school, as had hap­pened after the last dot­com bub­ble and the only thing I could think of, upon that remark was “and where will they get their stu­dent loans from?”

Once again, I was get­ting stuck in the credit mind­set and it made me uneasy but it came from the real­iza­tion that credit is a core basis for the cur­rent US economy.

What I sus­pect is now going to hap­pen, after the credit cul­ture crash, is a move to core value, with peo­ple work­ing hard to save up in order to buy things in cash. Actu­ally, I hope that that is the case because any other option only seems to pro­vide a short term band-aid to a major prob­lem. If we fail to take the oppor­tu­nity to move beyond the credit mind­set, the next cri­sis will make this one look as easy to deal with as the dot­com crash cur­rently looks to us: a big deal for a few peo­ple but ulti­mately some­thing we can get past.

And I’m afraid that we will con­tinue to spi­ral down the road of an ever increas­ing amount of debt until such time as there is no other thing to do but crash the cul­ture in order to reset it.