In 2008, the collapse of several financial institutions, Lehman Brothers and Bear Sterns, and the recent Greek banking crisis creates a need to reflect on whether these are related in some way. The overarching patterns that the surviving entities need to reflect on to avoid becoming a victim of thinking it survived through some superior strategy and that the forces that led to the others collapsing do not apply to them. When competitors die it may be a warning for the industry and not a victory for the ones left standing. The common but distant and hidden involvement of Goldman Sachs in both of these significant historic events needs the investigative journalist to determine what they may have to do with each other.
In a TED talk b Jared Diamond he list the causes for society collapse which left me wondered how this may inform the current financial crisis and how it may be interpreted as an early warning for the enlargement of the a few US Banks and the flexing of central EU bank authority by Germany. In summary here is a concise list.
1. Destroying the economic environment
2. Climate change
3. Degenerating relationships with friendly neighbors
4. Hostile attacks
5 Political, economic, social, cultural attitudes, stasis or insular views
No society wants to collapse nor does it intentionally make decisions to undermine its own survival so how is it possible that a society is able to collapse suddenly or through a long gradual process. One would think that natural forces would tend to evolve a society beyond its own tendencies of maintaining some ineffective behavior. Could it be that the signals are not visible or that conflicting forces are such that what seems to be the obvious decisions are actually the wrong ones to make and that some counter-intuitive approach is needed to turn around a direction heading towards a collapse? Could what seems to be a good decision for an individual company or country be disastrous for the global market it competes in?
How would the above list be interpreted in terms that may be relevant to banking and it's control over economies?
1. Destroying the economic environment
The economic environment for banking includes the financial health of all of its customers, the ability to assess and manage risk, and strong industries to invest capital to get a future return, sensible government policy, a continuous open discourse on the constituent elements of the environment. One can think of this as an ecology of financial interdependence amongst many actors in the environment. A market view that is myopic and doesn't consider how these actor's may impact each other may be inadequate in spotting a pending collapse and thus remains at risk and may not recover from a severe downturn. The short term interest of a few elite can end up eroding the long-term survival of the many. The challenge for the banking industry during this time of turmoil is what does it do to help the economic environment instead of retrenching into the usual strategies of increasing fees, cutting cost and jobs, and reducing access to capital in response to increased risk. Making the wrong decision could make matters worse thus provoking the very situation the decisions are meant to prevent, the further collapse of the financial ecology. Given that the previous austerity measures did not work for Greece and the current plan focus on debt repayment instead of growth is it a sign that the central bank might be making some bad decisions and that Greek is complacent in its obligations to revive its economy?
2. Climate change
Climate change may be interpreted as any factors for which prediction is impossible since sudden disruptive shifts could happen at any time while a normal range of expectations is common. Not preparing for or adjusting to the climate change could lead to exposure which threaten survival. In banking that climate might be analogous to public sentiment, these are the perceptions of trust, and safety, or assumption of guarantees, or the overall confidence that people have in the institutions they entrust their sense of security or dreams of the future too. The lack of confidence and trust has a climate that spreads quickly and can inflict a penalty on industries that are not prepared or respond appropriately. In 2008, the spiral drop in confidence in the financial markets that followed the over inflated sense of optimism that lead to the prevalence of subprime mortgages and credit default swaps unsettled, for many people, the sense of a stable and predictable climate. How quickly the public markets forget, now we have Greece and the battle between democracy and its incompatibility with capitalism. If the economic environment was healthy and cared for appropriately, would a sudden storm have such a large impact on the public sentiment?
3. Degenerating relationships with friendly neighbors
Degenerating relationships with friendly neighbors may be interpreted as those adjacent industries to banking that impact its dynamic. Banking seems to operate in isolation, but it has a part in both sides of each transaction. The merchant and the customers are both using the banking system to facilitate commerce. When one views this in the context of an entire industry such as health care and recognizes that the patients in this case are making financial decisions that impact their health greatly it is easier to see that the inter-relationship and inter-dependencies are many and that the economic environment of the adjacent industry may impact banking in significant ways. Add the shift in confidence and trust in these institutions and the consequences to both industries are many with the customers either not participating fully, dissatisfied, having unmet needs, and ready for alternatives. In Greece, the final days of the negotiations with the EU central bank, Greek business were accepting other currencies besides the Euro since the bank froze the money supply.
4. Hostile attacks
Every industry is subject to competitive forces but may be unaware of the hostile attacks that may come from non-traditional competitors. It is often the case that the largest companies discount smaller companies that currently do not compete with them, in particular, when what they offer doesn't have the same surface features. In the case of Germany versus Greece the size of the economies put German as the economic aggressor. What happens when a new industry emerges quickly that has the same underlying conceptual basis as the traditional industry with mature businesses? If one was to rethink banking as information repositories with the information having a value and the foundational technology being similar to a number of adjacent industries that use communication technology, then hypothetical scenarios may be possible that would not typically be considered. Could the hostile attack come from a Google, Microsoft, combined with a telco carrier, to gain customer confidence and trust, care for their well-being, foster relationships, and detect public sentiment? In the case of Greece would they have benefitted from introducing a parallel crypto-currency the tension, Is banking really so unique or complex that a threat is not possible?
5. Political, social, cultural attitudes and insular views
The banking industry has long traditions where its has its own jargon and cultural characteristics that govern a strong sense of correct behavior. Much of this was necessary to portray a safe place for people to store their money. The customer interaction has changed significantly now with the increased use of ATM, On-line banking, call centers, and fewer visits to the teller, are these operational efficiencies making the banking culture less relevant to maintain? As the banking industry continues to consolidate and the corporations get larger an insular cultural develops with highly conforming features, this is an artificially imposed corporate strategy for social engineering that biases its own HR process to total and complete conformity of identity and removes variations in thinking by its employees. This insular thinking may pose some challenges when trying to recognize and respond to signals of slow degradation or worse rapid shifts leading to a collapse. So long as groupthink is prevalent and nonconformity is cause for being included on the next round of lay-offs who would rationally risk their jobs to suggest that maybe something is wrong with the lack of authentic sincerity of brutal honesty in the corporate interactions. The same challenges that banks that are too big to fail have existed in the politics of countries that are too big to fail. The EU finance ministers could not easily get to a consensus although they all have ideological groupthink.
Given that the rate of cell phone adoption is much greater than the growth in banking could it be the basis for alternatives to traditional banking? Could this have enabled Greece to introduce an alternative crypto currency quickly through its cellular networks? Certainly this would require much of the existing banking infrastructure to support some transition but even the largest banks in the world can only support a fraction of the activity that the telecommunications systems support. Since modern banking is dependent on telecommunications are we seeing a future where banking collapses into its supporting technology?
Societies are complex human activities and banking is one of the institutions that are at the core of its ability to conduct commerce. If society collapses then one of the first signs may be from the stability of its banking systems. Are there hidden signals that the banking industry needs to be seeking and interpreting? Who is willing to stand up and say things might be broken in order to open up the dialog on what to do to rebuild a solid foundation for the 21st century?
At Buoyant Capital we are exploring and researching a broad range of themes that will help us detect the signals that inform the strategy for creating the future for entrepreneurs to thrive. We do not view the former financial crisis or current Greek banking crisis as some anomaly or exception that is apart or separate from the banking industry and instead prefer to reflect on the events as markers and signals to learn from and drive the innovation and change that is needed to service the full financial ecosystem that is needed by entrepreneurs in the future.
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