The anatomy of self restraint

Without self-restraint, any enterprise overdoes it. Business as usual is excessive about everything in it's short term interest and neglectful of everything else. It cannot stop itself, slow down or question it's over-zealous ambitions. Two recent books make this pattern perfectly clear:

• A Demon of Our Own Design - Markets, Hedge Funds, and the Perils of Financial Innovation / Richard Bookstaber
• The Ascent of Money - A Financial History of the World / Niall Ferguson

The current mess in the US of Wall Street, consumer lending, and business borrowing -- has been a long time in the making. It's the result of standard operating procedures in the financial markets and institutions. It's not a problem with a solution. It's a culture, mode of operation and way that business gets done. It will go on like this until it's abandoned, superseded and obsolesced. The next economy I'm anticipating will do that very nicely.

When any enterprise exhibits admirable self restraint, it keeps four balls in the air:

• The bottom line, financial viability of current risk taking, and ratios that indicate how well the invested capital is performing
• The quality of the products and services offered, the metrics that indicate how good, reliable, valuable and consistent the offerings remain
• The perceptions of the customers and the resulting changes in reputation, brand image, loyalty, and word of mouth advertising
• The experiences of employees who can identify problems, expose incompetence, recommend changes and commit to improvements

All of these four balls function as restraints. They serve to question what is being done to excess, the real reasons for any dogged pursuit. They propose changes that would satisfy more of the other concerns. They raise considerations of balance between ambitions and expose those endeavors which have been blown out of proportion. Rather than rely on top down authority figures who are usually part of the problem, they call upon all eyes and ears to keep the enterprise from going to extremes or off in the wrong direction.

Enterprises that make money from money (not products, customer service or on-site assistance) routinely drop three out of these four balls. They become addicted to their own short term gains, quarterly earnings, and reduced risks combined with greater returns. They quickly become over-extended, over-committed and over-invested. They repeatedly get caught in crises of liquidity and spiraling downturns of asset valuation. To put a positive spin on their addiction, they over-sell what they're doing and over-reward those who stay on message. Meanwhile they shoot the messengers who pick up any of the other three balls and run with them. They cannot handle insightful initiatives, cautions and better ideas that jeopardize their single-minded devotion. They end up being a big disappointment to their loyal investors, customers, employees and legislators who trusted them. They create enough enemies and skeptics to end their reign in a hurry.

With the downturn of a global financial system resembling this pattern, the imminent emergence of the next economy seems even more likely to me.