Crunch Time Lessons

2009 is here and already the days are flying by. I don’t know about you but I’m hoping for better things, one of which is an end to the uncertainty that characterised the economic landscape last year.

For a number of reasons.

First, I happen to work in the financial services industry, and it is disconcerting when one hears of thousands in similar and related occupations who lose their sources of livelihood on an almost-daily basis.

And before you scoff, maybe even swear and mutter “Serves the fat cats right” self-righteously under your breath, consider this: a significant proportion of those affected are people like you and me, people who strive to make a living for themselves and their families. Now, their bosses may be fat cats, but they are not the ones whose lives could suffer a major disruption if they happen to find themselves out of a job.

The second reason is down to a recurring annual resolution of mine, which is to maintain control of my finances and plan for the future. I think this is key because far too many of us focus on short-term gratification instead of long-term investment. Having had my fingers burnt years ago (I’m pleading youthful exuberance!) I am far past the stage of succumbing to the temptation to purchase on impulse by flashing red signs in shop windows that say “75% Off”. Plus, I am no longer into the concept of acquiring debts today which will need to be paid off tomorrow.

For me, the current economic conditions translate into unmitigated risk for any savings or pension plans. No more are banks to be considered safe havens; I for one am starting to consider keeping what little cash I have under my mattress! To say that this amount of volatility is unsettling is a gross understatement, and I must confess that it is very much an unwelcome guest at my (usually) very organised table.

On a third note, the bell tolls on very personal and emotional levels. People close to me are bearing the brunt in different ways and it’s not pretty to watch, especially as there’s not much I can do to help.

So there you go. I go through bouts of feeling vulnerable and exposed - sometimes even afraid – and going into the City every day doesn’t help. Tales of doom and gloom dominate news headlines on every corner, playing havoc with minds and threatening to shoot nerves to pieces.

Notwithstanding all this, I’m trying hard to look for the positive. When I make personal mistakes I go through a process of analysis, so I can learn from them and make sure they never happen again. I’m keen to dissect this credit crunch and dig out the lessons hidden within. They’ve come at a high cost, which is all the more reason to do some soul-searching and take them to heart.

First, it is a mistake to equate credit with wealth. Mr. X may have a credit card with a £50,000 limit; however that is nowhere near the same as if he had £50,000 in his current account. We have erred by putting credit allowances (overdrafts, loans, credit/store cards, mortgages) on a pedestal, and when these facilities are reduced or withdrawn we are dismayed and perplexed. I’ve also been amazed to discover that it isn’t just individuals who operate on this basis; seemingly successful enterprises that look good on paper fold like a pack of cards once their banks or backers get the jitters and call in their debt.  Logic would suggest that a booming business should be able to survive the revocation of a line of credit. But Western business models are no longer that simple; a company can have millions of pounds’ worth of liability on its balance sheet and still be categorised as profitable.

The second lesson is linked to the first. As part of the resolution of these problems and to prevent a recurrence we must accept the collective blame for the mess the global economy is in, because we are all culpable.

We are happy to point at City bigwigs, blaming them for lending indiscriminately without correctly assessing risk. But I ask you this: who were they lending to? It must have been us, surely? Truth is, we all borrowed far more than we should have. We demanded more and more credit as our need to buy bigger houses (with smaller deposits), replace our cars with newer grander models, and travel further and wider grew. And of course, the financial institutions were more than happy to provide the credit to fund our tastes for grandiose lifestyles we could ill afford.

I wonder what happened to the concept of saving, and putting money aside each month until one had enough to make a purchase? We have fooled ourselves into thinking we must have everything we desire, the very minute the idea pops into our heads.

Which takes me to the next lesson. The demarcation between needs and wants has now become very clear. Suddenly, it is apparent that most of the things we hanker for are “nice-to-haves”, and do not come close to being essential for survival. I’ve become acutely aware of the things I can cross off my shopping list, and I do so without hesitation. And – surprise, surprise! – the things I have to have aren’t actually that many. It is certainly my hope that the pruning we are going through will make us less frivolous and materialistic.

Fourth lesson I’ve learnt. I automatically assumed all the high-flying bank bosses were really clever, well versed in the language of high finance and way out of my league.

Actually, they’re not.

The credit crunch has proved to me the fallibility of man’s intelligence and judgement, as well as the limitations of his knowledge. I had planned at some  point to study for an MBA at Wharton, the Philadelphia-based business school that is ranked the best in the world. You know what? I’m not so sure anymore. Going to Wharton, LSE or Harvard does not seem to provide any assurance of integrity or prudence, virtues which will be of much more benefit to me in the long run than a grasp of securitisation or short selling!

While I’m all for capitalism and generating wealth, it has become clear that greed and deceit have been the driving forces behind much of what has been masquerading as science, methodology and intellect. Those two vices have had a ripple effect across companies, industries, sectors and national borders, and are direct causes of the job losses and home repossessions we now see daily.

When this is all over I hope we will remember that, while there is no crime in making money, it cannot be made at any price. Never again can the end justify the means.

And finally? The over-arching reminder for me is that everything we see around us in man-made and by definition, fallible. Each with its own merits perhaps, but fallible nonetheless. Economic and political systems, ideologies, governments, regulatory bodies, companies, and even religions all have their pros and cons and as such, are not worthy of the amount of faith we invest in them. The only one deserving of our trust and complete faith is our Creator, the Almighty God, whose share price is not impaired by a two hundred-point drop in the Dow industrials.

I don’t have any specific financial advice to give you, or a “7 Ways To Survive The Storms” type message. All I can tell you is that this credit crunch has given me focus and perspective by reminding me of what’s really important.

My prayer is that it does the same for you.

P.S. I came across a rare thing in the Times the other day: an article that isn’t all doom and gloom! Maybe I’m being naive and am just desperate for some good news??

Have a read and see what you think…

It’s a bitter chill but Britain is not Iceland