In a series of actions focused on stemming what is purported to be a financial system “crisis” of historic proportions, including a freezing of credit throughout the system and a residential mortgage emergency, the Government has committed vast sums of money, and profoundly changed its relationship, to the banking sector. These actions have been defensive, without a clear publically articulated strategic context. Their long-term consequences are barely discerned, let alone weighed. The patient was seen to be threatened by a catastrophe, but this was not made more definitive, at the time, than credit had become frozen and there was a housing crisis because the banks had a surfeit of “toxic assets” caused by the securitization of subprime mortgages. More problems have been unearthed since the original alarm was sounded. The problems have been decomposed into many components including: flaws in the regulatory complex of regulators and regulations, “too big to fail” institutions, the structure of the banking sector and the role of nonbank institutions, questionable Federal Government policies, practices and structures, accounting quagmires, bond rating shortfalls, and so on. At the beginning of the crisis we were counseled by our leaders in government that there was no time to engage in long-term thinking prior to approving and carrying-out these actions. The firefighting mode continues.
We still don’t know if the remedies (programs) will stem the bleeding nor the feared coming disaster. They might make matters worse. The public hasn’t been given a stable set of strategically consistent metrics to represent the problem(s) nor to indicate that the problem(s) has/have been solved. What are the metrics to be used to describe “frozen credit” and what should be used to indicate the solution? The public needs clarity for each and every program in terms of the problem the Government intends to solve, the program’s description and cost, and the milestones with metrics and dates to allow progress to be tracked. It also needs to know where the sum of the programs is leading. What is the “big picture”? Will the public wake up some day and find that its financial system has been transformed, via a collection of murky programs, into one that it doesn’t need or want, one that is inconsistent with national values.
The Government should be, and hopefully is, employing a strategic framework to manage and control its programs. Within the framework, each program should have a plan with its objective (end purpose) and its various goals and milestones. Each plan should include its own control and reporting system, (including potential or actual unintended negative consequences, e.g. hyperinflation, and the remedies chosen to correct them should they occur). Relevant environmental factors and explicit constraints should be articulated. The constraints can be economic, legal, ethical, etc. Some examples are:, 1. no bank will be nationalized, 2. U.S. contract law will remain reliable, not subject to arbitrary changes and 3. the U.S. will continue in its leadership role in banking. All of the program plans should be integrated into a master plan. The master plan together with the program plans and control systems constitute a strategic framework which should serve as the base from which the Government manages and controls its efforts and communicates with the public. The public would have the opportunity to understand the big picture and where the various programs fit together as well as the progress towards the end purpose.
These are perilous times. The economy has been shaken and an earthquake has struck the banking system. With little examination of long-term consequences, major changes are happening challenging the Nation’s economic model. The role of the Government; the adequacy of regulation and oversight, the emergence of banking behemoths with unproven business models, the disappearance of independent investment banking, the dramatic shrinking of the number of banks, the wide dissemination of toxic securities, the massive use of credit default swaps, the near collapse of Fannie Mae and Freddie Mac, an escalation in actual and expected foreclosures, etc. are all coming together. Some basic decisions will be made over the coming year, either openly and carefully considered within a rational framework reflecting shared American values, weighing their strategic consequences or behind closed doors, reflecting narrow, transient interests. This is the time for clarity and the best thinkers to come forth and help determine the future.