When will we know that we’ve hit bottom?

There will be three indicators.

One of the questions we hear repeatedly in the press is “When will we know that the stimulus package is working?”  I think the media is asking the wrong question.  Don’t get me wrong, we need a stimulus package; the recovery, however, lies in the hands of small business and regional banks. 

The keys to the economic turnaround have less to do with the stimulus package and more with an understanding of human nature.  Economic recovery will begin when:

1. We achieve price stability
2. We achieve employment stability
3. The banking community discovers a bold leader

When companies stop lowering prices in a futile attempt to salvage market share, the public will begin spending again.  It’s counter-intuitive, but buyers postpone non-essential purchases when prices are falling in hopes of finding the lowest price possible.  When prices stabilize consumers reallocate their dollars and resume spending.

Similarly, buyers return to “normal” buying habits when the fear of lost employment declines.  Companies would be well-advised to make their layoff and early retirement offers all at once instead of spreading the announcements over months and years.  Even with 10% unemployment, 90% of the workforce is still employed and has money to spend.  Let’s help them regain the comfort they need to start spending again.  That’s the quickest way to stop spiraling unemployment.

Finally, what we need from bankers is a leader who says “this loan customer’s balance sheet isn’t strong and their profits are non-existent, but you know what, they’ve never missed a loan payment. They’re still generating positive cash flow.  We’re going to lend them the money they need to grow their sales and profits.”

We need a bank leader who, instead of foreclosing on a loan then renting that same home back to the original borrower at an affordable rental rate, says “Let’s let them keep the home and we’ll restructure the loan so that their payment is the same as the rent they would pay.”

It’s unfortunate, and counter-intuitive, but the banking community’s lack of trust isn’t in the borrower, it’s in themselves.  It’s impossible to trust others unless we trust ourselves.  Hopefully this week’s blog will reach those in the banking community so that they can discover the leadership this economy so desperately needs.

If you agree with my assessment, please pass it along to those in the business and banking communities who can effect the changes that will drive our economic recovery.

Please share your thoughts with our readers by posting a comment.  If there are issues you’d like me to address, send me a note at dale@furtwengler.com

Are we effecting a recovery…

…or postponing the inevitable?

The February 18, 2009 Wall Street Journal headline says “GM Plans to Slash 47,000 jobs; Chrysler Mentions Bankruptcy Option for First Time.”  This news hit on the heels of a speaker telling those of us in the audience that we can’t afford to let the automakers fail.  Is that true?

Let’s bring this question down to a manageable size.  I’m sure that each of you has thought “I can’t afford to lose this customer (employee, vendor, job, friend, etc).”  That mindset causes you to make concessions that you wouldn’t otherwise make, to overlook inappropriate behaviors, to tolerate arrogance and poor performance longer than you should.  Indeed, your actions give the person reason to think that they are more important than they are, triggering even greater arrogance and more demands on you.

When you made those concessions, what did they buy you?  Did the relationship improve or did it decline?  Did you finally get to a point where you said “no mas” and walked away from that relationship poorer, but wiser for the experience?

It’s counter-intuitive, but any time that we feel that we “can’t afford to lose” something we set ourselves up for a costly lesson – one that we could have avoided by simply walking away from the untenable situation. 

In the case of the automotive industry, what has the $17+ billion in bailout money provided to GM and Chrysler in December 2008 and January 2009 gotten us.  GM is planning on cutting 47,000 jobs, shutting 14 plants and thousands of dealerships.  Wouldn’t that have happened anyway if GM had been allowed to go into bankruptcy?

If that weren’t bad enough, we’re rewarding the poor performers (GM and Chrysler) while Ford continues to exercise fiscal responsibility without taxpayer aid.  Do we really want to reward bad strategy and poor execution? 

As you can tell, I believe that the automotive bailout is not in our best interests.  As long as we continue to provide taxpayer assistance there won’t be any urgency on the part of GM, Chrysler, the unions, suppliers, bondholders, stockholders and others who have a vested interest in GM and Chrysler’s success to act quickly and decisively. 

If we’re going to experience the economic pain of more layoffs, plant closings and dealership closings, let’s do it now.  It will be a shock to the economy, but it will minimize our both short-term and long-term losses.  It will also quicken the recovery.  Once uncertainty is removed from the market, buyers will come back into the market.  They’ll be served by the surviving automakers who will purchase, through the bankruptcy courts, the plants that have been closed, reopen them and rehire those automotive workers who were laid off.  This recovery in the automotive industry will happen more quickly if GM and Chrysler are allowed to fail.

Please share your thoughts with Invaluable Leader readers by posting a comment.  If there are issues you’d like me to address, send me a note at dale@furtwengler.com.

What’s the cost of group think?

A trillion dollars

This past week Congress passed a $700 billion dollar “recovery” plan designed to renew confidence in the banking system and among bankers themselves.  Add that to previous bailouts and we’re rapidly approaching a trillion dollars.  My guess is that we’ll exceed that number.

I won’t go into a lengthy diatribe about how we got here.  Placing blame is always an expensive activity – one that slows the progress on fixing the problem.  From the news reports and analysis by various Washington journalists, it seems that the plan to make home ownership possible for a greater number of citizens (a worthy goal) began in the Clinton administration and has been perpetuated through the two Bush administrations.

Unfortunately, everyone thought this was a good idea and no one asked “What will happen if…?  The executive branch didn’t ask, nor did Congress, the Federal Reserve Board, SEC or any number of other regulatory agencies.  There was a complete failure in the system of checks and balances that should have prevented this debacle.

The question is “Will Congress, once again, trust the executive branch and these regulatory bodies to implement this recovery plan well or will they set parameters to protect the American taxpayer?” 

I hope that they will be the first to establish some checks and balances into the system rather than trusting that others will do so.  It’s counter-intuitive, but trusting others to do things we’re not is a prescription for disaster.  If Congress doesn’t want to contend with more emergency actions, it needs to set guidelines for the implementation of the recovery plan.

If there are topics you’d like me to address, send me an email at dale@furtwengler.com.