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About twenty years ago, I had an early-morning meeting with an investor who expressed some interest in funding a company I had co-founded. We had seeded the firm with about $5 million, a decent sum in those days, but that was not enough to keep a good idea afloat. I had forgotten the lesson from my years in the Army: it always takes more resources than you think.
We had sent to the investor's team reams of data, including five-year financial projections and analyses of the market and the competition. He didn't bring the paperwork with him, but he sounded as if he had digested all of it. Not particularly interested in speculating about the windfall he would collect if everything went right, he instead focused on what could possibly go wrong, a smart thing to do in all human enterprises. I suppose he knew what he was doing, because over a period of decades he made a great deal of money in both good markets and bad.
After about half an hour, he announced that he was going to fund us because, he said, he invested less in businesses than in people. Numbers didn't matter, but people did. He had confidence that we would make the enterprise successful, and as time would prove, he was right. Business acumen and the confidence that is its handmaiden, not technical expertise, built his fortune.
An almost exclusive reliance on numbers was the principal cause of the huge increase in market value in the past few years, as well-educated financial engineers used various computer techniques to structure complex, highly leveraged transactions whose bases were technical, not personal. And the market's power engendered an enormous amount of confidence among both institutional and individual investors, generating ever-increasing market strength. Except for occasional profit-taking and short-term retrenchment, the long-lived bull market became its own prophecy, and few investors had the courage to get in the way of it. Even Alan Greenspan's warning that the market was dominated by irrational exuberance failed to dampen a confidence that dominated the economy for a dozen years after he made his prescient remark.
But as we have learned to our great pain, without confidence numbers mean nothing. The attempts by governments around the world to improve the availability of cash produces nothing positive if institutions have no confidence and are consequently unwilling to take risk by lending it. What little liquidity remains is leaking rapidly from the equity markets, as trillions of dollars in value, accumulated over more than a decade, are evaporating in a matter of weeks. And in an unpleasant and ironic development, the US dollar is soaring against foreign currencies, making American assets and products, unattractive at lower prices, almost impossible to attract buyers at new, exalted levels.
All signs point to a worsening economic crisis, and its root cause is not technical but a loss of confidence---in institutions, in markets, in people. Orderliness has become panic, and irrational exuberance has morphed into mass hysteria. One is reminded of Franklin Roosevelt's observation in similar circumstances: "The only thing we have to fear is fear itself."
Only confidence will pull economies from their dive, and only competent leadership can engineer it.
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Thanks. As much as an extremist as I am---and as we all tend to be on some subjects, especially as we get older---I find it useful to cut to basics, something we all learned as brand new soldiers.
