Behind the Bust

Michael Fitzgerald wrote this and I liked it. Tell me your thoughts on this...just add a comment.

"Is Wall Street’s manage-to-the-numbers approach the reason we’re in the economic mess we’re in?

That’s the argument of Gresham’s Law and the Shaky Nature of Today’s Business Ethics on the Slow Leadership blog. Gresham’s Law, it tells us, is a 16th century maxim that ‘bad’ money (with not enough precious metal) will replace good (actual gold or silver) money.

This post argues that the relentless need to make the quarterly numbers and make Wall Street happy has created a Gresham’s Law of bad business ethics that is causing the current wave of economic problems here in America.

Here’s the crux of the argument:
…trouble starts when it gets tough to keep on exceeding Wall Street estimates every quarter. Faced with slowing growth, management first jumps into constant cost-cutting. When the benefit of that runs out, it focuses even harder on what seems to matter most: ‘making the numbers’. Everything else is pushed aside. Anyone who makes the numbers is praised as a hero, no matter how it’s done. Sharp management practice is accorded exactly the same value as any other approach.

It’s typically far easier to produce the required numbers by cheating than by the ‘good coinage’ of sound, ethical management. But since the numbers are all that matter, the extra effort and time needed for doing things right doesn’t seem worth it. ‘Bad money’ — creative accounting, manipulation of figures, concealed risks and other marginal or outright dishonest practices — quickly drives out good.

Perhaps Sarbanes-Oxley was just a prank played on gullible shareholders by a cunning and cruel set of government and corporate officials. Perhaps securitized mortgages were a bad joke amongst bankers that backfired. Perhaps not. As angry as it makes me to hear the bailout drumbeat around failing financial firms and lenders, I think Slow Leader goes too far. Wall Street does have a short-term focus, but many companies seem able to manage without resorting to the kinds of chicanery described here. Sure, there were bad apples, not just greedheads, but mostly it looks to me like people made terrible risk assessments."