The last week has confirmed what entrepreneurs have long
suspected: the politicians, bureaucrats, bankers, and big businessmen who dominate
our lives are not as smart as they pretend.
They admit that they have no idea how to deal with the cash crisis.
Yet they could end it very quickly and easily. All it takes
is nerve and common sense – the defining characteristics of the entrepreneur –
in following four basic strategies.
Remember, you read it here first.
1 Stop panicking. Do
not do things simply for the sake of doing them – or for the sake of being seen
to do something. Emergency measures have proved counter-productive, because
they underline the lack of confidence in the markets. State clearly that the
markets are going through an irrational phase. Do not attempt to deal with them
while they are still in that phase. Wait for them to settle, then start
between depositors and shareholders. Guarantee all deposits – but make it clear
to bank shareholders that, like all shareholders, they must bear their risk. In
any case, most bank shares are in need of revaluation. For a long time, share
prices have reflected overvalued assets and unrealistic expectations. They need
to decline to a value that reflects what they are worth more accurately. Prices
will continue to fall while the markets are in their irrational phase. Then
most will return, perhaps gradually, to a more natural level. Meanwhile, remember that share price need not
interfere with operations, and that it is a symptom of financial weakness, not
a cause. Focus on the cause.
3 Governments will
need to inject money to restore liquidity into the banking system – but calmly,
at the right time and in the right place. The panic interventions wasted a
great deal of money. Government purchases of bad debts and shares simply reinforced
the banks’ own tottering balance sheets: it was not lent out to others to
restore liquidity. Government intervention should be more flexible. It should
take the form of loans, not purchases. Those loans should be secured by
priority creditor status, and should be carefully targeted. They should be
conditional on the money being lent out in turn to viable businesses and
4 In the longer
term, there must be changes to the regulatory system. It is untrue to suggest
this crisis was caused by deregulation – banking is the most tightly regulated
sector in the economy. The fact is that the regulators – politicians who pass
laws and bureaucrats who enforce them – were way behind the game. The solution
is not more regulation but better regulators. It might also discourage reckless
lending if debt laws were made more creditor-friendly.