In Praise of Lucidity

Following the 2008 crisis, there was a wise decision, in hindsight, by regulators that forced most western banks to check whether they had the means to be resilient if faced with another crisis. It led many of these banks to increase their capital requirements, and to get rid of risky loan portfolios and risky subsidiaries.

Today, the threat of a global financial crisis is looming again, in large part because banks, companies and governments have once again taken ill-advised risks. In particular, companies are more indebted than ever and must primarily serve the important interests of investors willing to take every and any risk to obtain anything other than a zero return.

If the economy were to hit a downturn, many of these companies could find it very difficult to finance themselves; they would go bankrupt and the recession would accelerate. Unlike what occurred after the crisis of 2008, governments would not be able to implement a recovery plan that include a massive increase in public spending, which has already hit excessive levels. Similarly, central banks would not be able to lower interest rates, which are at their lowest levels, or massively buy treasury notes. The shock will therefore be severe.

It is therefore urgent for all companies, not just banks, to check what would be the impact of a sudden drop in orders and a credit crunch. And to put in place the means to protect against their effects.

Such caution is also required of other entities, meaning other than companies: governments, which never think about putting aside enough provisions to respond to future shocks; households, which should check their ability to respond in the event of an increase in borrowing rates and a fall in their income; savers, employees; the European Union, which is not immune to an explosion; civilizations, which still refuse to seriously prepare for the ecological crises that threaten them.

More generally, everyone should regularly check their resilience to events that could harm them. And not only to economic crises, but also to ecological, social, migratory and political crises; and even to personal crises of any type.

Few people or organizations, have the courage to write a clear list of the risks they run and the disasters that can affect them. And they have even less courage to create the conditions to prevent such risks, or prepare to mitigate their consequences, should they occur.

It is, however, a very beneficial exercise. It requires reviewing all types of scenarios, quantifying their likelihood as much as possible, reducing the probability of the least desirable outcome, and the impact of their occurrence.

For example: what is the probability that my main customer will default? That I lose my job? That I am left by my partner? What can/should I do to prevent it? How should I react if this were to happen?

It is human nature to refuse to see the darkest clouds, even when they are already above our heads; to think that every problem eventually tends to find a solution by itself and to refuse to engage in this type of preventive exercise.

History, however, teaches us that civilizations, nations, companies, families, disappear when they combine pusillanimity, blindness, and procrastination. And to survive, they need to combine courage, lucidity and willpower.

j@attali.com