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America’s sneezing fit rocks the world

What on earth happened to the world economy? Reading the opinions that are pouring forth from the learned and the experienced, it is clear that very few people have the slightest clue.

The scale of the meltdown that is occurring seems barely possible. Could anyone see a situation in which Bear Stearns, Merrill Lynch, Lehman Brothers all hit the buffers? Or one in which the famed Goldman Sachs has to run for cover? Or AIG, one of the world’s biggest insurance companies, having to be bailed out like a third-world banana republic? Remarkable indeed – and it’s far from over.

America itself is in some disarray, as can be discerned from the confused noises coming from its leaders, both political and financial. I still wake up amazed that I have lived to see America needing a $700-billion “Marshall Plan” type rescue – for itself! The Germans are predicting the end of America as a financial superpower, and seeking a “multi-polar” system; the French are blaming the crisis squarely on America’s “crazy financial system”.

What went so very, very wrong? At one level, this is just par for the course. Capitalism does this to itself: it goes a little crazy in the good times and starts bingeing, and then has to undergo an emergency “detox” every 8-10 years or so. The so-called “Internet Boom” was not so long ago, after all.

One of the best (and most readable) descriptions of this phenomenon was written by Robert Shiller, renowned economist at Yale University, in the July/August issue of The Atlantic Monthly. The professor points out that America has been subject to waves of speculative mania throughout its history. Booms and busts are part of the culture. Shiller asks us to look away from the suspects being lined up to explain the current housing bust in America: unscrupulous mortgage lenders; irresponsible borrowers; sleepy regulators.

He asks us instead to examine the “contagious optimism, seemingly impervious to facts, that often takes hold when prices are rising”. We must understand bubbles as social phenomena, much like epidemics. Professor Shiller says that we are all prone to “new era” stories – the mistaken belief that this boom is unlike all previous bubbles, and will go on forever. He reveals that his research in 2005 showed that a quarter of respondents believed that San Francisco house prices would grow by 50 per cent per year for the next 10 years!

As the contagion of irrational exuberance spreads, the voices of sceptics become drowned out. Nobody likes a wet blanket, after all. But when the very people responsible for oversight (business leaders, boards of directors, regulators) become infected, trouble brews. When those who should know better start beating the drums, those with little experience or sophistication join the game. That is exactly what happened in America: the famous “Protestant work ethic” was abandoned in the 1990s, and a whole generation began to believe it could prosper simply by buying shares and houses.

America’s party is over, and it is caught in a sneezing fit that is rocking the world. We are no doubt going to feel the effects here in Kenya: through the withdrawal of investment and aid; through the effects on the dollar and the oil price; through the collapse of demand for our exports. But what worries me more here in the homeland is something else: that we are just as prone to irrational exuberance as our Yankee brethren.

Here, too, we imagine that when we encounter good times, they will continue unchecked. Our economic growth chart for the past 40 years is a wild landscape of sharp peaks and deep valleys, but we still imagine that we are going to achieve Singapore-like sustained growth. Yet we do not want to entertain the game-changing transformations that might make that possible.

Here, too, those who should know better are the biggest cheerleaders. Brokers entice even the humblest village herder to part with what was under his mattress to buy a few miserable shares in some mediocre company – with the idea that the money will double! Treble! Sky’s the limit! It’s the same with house prices: we have had a real-estate boom for several years now, but it’s hard to find a builder, lender or borrower who wants to forecast a slowdown, let alone a reversal.

The least sophisticated investors are already in (and often leading) the market, and their numbers are going to grow. So I am ready to say that we have all the ingredients (naive investors, unscrupulous agents, sleepy regulators, cultural hubris) in play to cause a severe crash some day. The only question is when.

In the meantime, a suggestion: what America really needs right now is a few old-fashioned bankers. You know, the ones who never lend without collateral, who call you every day about your overdraft. We still have a surplus of those right here. Can we not ship some across the Atlantic as part of our aid package to the USA?

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