Financial WorldJuly 2009
The latest Minsky moment? The economist Hyman Minsky argued that the repetitive nature of recessions is an unavoidable consequence of financial fragility inherent in our economic system. The current event has been called ‘ a Minsky Moment ’ as it also seems to validate his views about the danger of economic problems being amplified by light regulation of banks. If recessions happen frequently, they should no longer surprise us. You would expect that we would have learned how to deal with their effects. Yet recent behaviour proves that we haven’t – our conduct implies the current economic turbulence is novel.
IMF data reveals that between 1960 and 2007, the 21 most advanced economies experienced 122 recessions and spent around 10% of their time in contraction. The after-effects endure for a couple of years following the resumption of growth, suggesting some 25% of our time is spent dealing with recessionary issues.
Another IMF study reveals that, on average, economists in the G7 economies failed to predict a recession 12 months ahead. It was only three months prior to the commencement of recession that forecasts caught up with the subsequent reality. Recessions remain surprising events and we tend not to prepare for unpredictable turning points but, instead, react spontaneously to the uncertainty they create. In doing so we recklessly disregard the lessons from 25% of our economic history.
As American philosopher George Santayana said, “ Those who cannot learn from history are doomed to repeat it ” . Surely if we learn from previous recessions we can mitigate the worst effects?
Historian Gerda Lerner said about the lessons of history: “ History is not a recipe book; past events are never replicated in the present in quite the same way. Historical events are infinitely variable and their interpretations are a constantly shifting process. There are no certainties to be found in the past. ”
But the raison d ’ être of management is to deal with uncertainty so, while we may not be able to derive certainties from history, why do we seemingly draw few significant conclusions and begin each recession close to the bottom of the learning curve? One reason may be that events that unfold rapidly tend be dealt with on a piecemeal basis. Furthermore, effective protocols practised by managers who are competent in turbulent times are appropriate only in times of distress and we discard this skill set for 75% of the time. Hence, after 18 years of continuous growth, we have forgotten it exists.
When companies cannot tolerate illiquidity, they fail. From this, some conclude that the only relevant lesson is that to survive a recession companies must either retain or be able to access sufficient cash. But this is too simplistic. A recession exposes a wide range of organisational weaknesses that overwhelm managers as the attendant uncertainty corrodes the reliability of the managerial toolkit that works well for most of the time.
Exceptional times require creative and counter-intuitive approaches yet, typically, managerial orthodoxy offers sanctuary only in the more stringent application of traditional control procedures, as if greater fervour offers salvation.
This is a time of uncertainty, change and elevated risk, and these are some of the lessons from previous recessions that seem to have been ignored. Pay more attention to the credit cycle. Don’t maximise income gearing during the final phase (when debt is inexpensive) to fund speculative strategic gains.
1. The out-turn trajectory is only apparent when 80% of the contraction has occurred. Avoid acting on the ‘ false dawn ’ of the central spike of a ‘ W ’ -shaped event.
2. Recessionary effects endure for some 24 months after the resumption of GDP growth and the biggest problems tend to arise in the later stages.
3. Adding layers of control limits flexibility and inhibits adaptation. Resist the temptation.
4. If refinancing is necessary, accept whatever terms ensure financial stability soonest, but structure the transaction to have minimal legacy effects so that post-recession refinancing can easily replace an unfavourable interim package.
5. Assume you will need more funds than you project, that performance will be inferior and that initiatives will take longer to work. This is not a minimum resources, maximum return scenario.
6. Refinancing is rarely all that is required.
7. A recession is not a pause and your business model may not remain valid in the subsequent environment.
8. Managing through turbulent times is a specialist skill and this is not the time for management to be at the bottom of the learning curve. Import expertise.
9. If difficulties arise, do not plan beyond becoming a survivor – at best healthy or, at worst, damaged. Focus on what is possible, not on what is desirable. Only when you know the condition in which you will emerge can you consider the next phase.
10. Acquire multiple perspectives before settling on a plan. Always prepare plan B, ensure it can be implemented with the financial resources available, and specify what will signal the move to B. Don ’ t hesitate to change direction, even if doing so means abandoning assets and programmes to which you have become emotionally attached.
11. Don’t think alone.
12. Remember that there will probably be another recession in eight to ten years ’ time and the way your business emerges from this event will, to a large extent, determine how it enters the next downturn.
Anthony Holmes (www.anthonyholmes.org) is an international corporate turnaround specialist and transitional leadership expert. He has led the revival of seven companies over 15 years, and his 30-year international business career spans strategic consultancy, investment banking and senior corporate management in a diverse range of industries. Holmes has just published Managing Through Turbulent Times (Harriman House). This is a print-friendly version of the article: "The latest Minsky moment?" from the July 2009 edition of Financial World online. Page 3 of 3 Financial World Online: The latest Minsky moment? - Printer Friendly Version 22/07/2009
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