Saturday, 18 October 2008

Credit Crunch - My theory

I have stayed quiet on this issue for some time, because the media has been screaming like a headless chicken for months, and I did not want to add to it. Now the world governments are doing something about getting liquidity moving, I feel it is time to add my two-penneth.

The financial industry (and pretty much every other industry) has had corporate bonus packages based on single-year metrics. These measures are pretty crude - New Business Volume, Payment Income (£) and New Business Profit. In one year, all the exec needs to do is any of these 3 things:

1. Sell more products.
2. Reduce costs.
3. Charge more for services.

Any other (more sustainable) methods of business improvement - like customer engagement, retention strategies and risk mitigation are difficult to measure, costly to implement and the benefits may not be realised over a single year. 

So it is the blinkered obsession with new business acquisition and increasing market share that has led financial institutions in America to overlook the customers ability to pay back their credit (conditions of the market). 

However, before we steam in on the bankers of the world for their lack of sustainability, just take a look at how our society generates energy. In fact, look at every area of society, and you will find a distinct lack of restraint. When we do something, we want to do it more and more until everything is used up, and we don't seem to be able to see it coming in time.

This is nothing new. The pre-historic population of Easter Island wiped themselves out by cutting down all the trees - and therefore removing all their food and energy source.

It is the present curse of mankind that we are unable to gauge growth, sustainability and balance with our environment. What concerns me now is that people will use this recession as an excuse to cut back on our progress towards cutting carbon emissions.

I'm sure I will get emails on this.

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