We see crashes coming but carry on regardless
Now that most businesses have joined the commentators in claiming they saw the crash coming, why didn’t they act? Because they have lived through enough crises they thought they could cope.
It is not only in hindsight that the folly of the last boom can be seen as a bubble bound to burst. There were evident madnesses like mortgages of five-times income and 125 per cent of value, or private-equity purchases at impossible multiples of earnings and a premium to net assets. Who could visit Dubai without forecasting it would all end in tears? Yet such evidence can be witnessed without worry: crashes happen and economies survive.
Even in the decade before the credit crunch, bankers and businessmen had seen the Asian crisis, the Russian crisis, the demise of Long-Term Capital Management, the dot.com boom and 9/11. Yet the world never ended. So even seasoned risk managers would watch the credit boom inflating, know it must end, but assume this was another rainstorm they would weather.
When the storm would break was a harder prediction. If markets looked overheated in 2005, then by 2007 the risk of collapse ought be so much greater – except that if economies and corporations had proved sufficiently robust to withstand that 2005 strain, people wondered if they would be resilient to the even great later tensions.
And when the predicted rainstorm came it turned out to be a torrential tropical tempest or even a tsunami. It was the severity of the crash and its timing that was the surprise. And for much of the financial sector it would have proved fatal if governments had not intervened on an unprecedented scale.
But for most businesses, even this crash is just another inconvenience that they can cope with. That government intervention – for which business will pay – prevented the crisis claiming fatalities among general traders. There has been recession, but there have been plenty of those in the past half-century and most companies survived them. Statisticians can claim this is the longest recession since records began, but few firms consider it as severe as the 1990s downturn. Even the housing slump lasted only 18 months this time compared with six years in the previous decade.
So have lessons been learned from the experience of 2007? Crashes are always a reminder that markets can go down as well as up. Regulators are changing their procedures to prevent a similar collapse recurring but still allow different ones to happen in future. We may be more wary of mad markets – but did dot.com warn us against Dubai? But the main lesson will be that so far, most of us get through crises with only a minor bruise. The 2007 credit crunch will be added to that list of long-ignored crises and we will happily walk into the next one in the belief we will get through that too.
