Umair Haque: Not a Great Depression, a Great Rebalancing:

The striking thing about today’s economy isn’t that lame, soul-crushing industrial-era business is imploding into a black hole of economic nothingness. That was predictable. Rather, it’s that while the so-called value created by, for example, investment banks, is proving to have been largely an illusion, revolutionaries bringing new DNA to the table are able to create authentic, durable, meaningful value. [Umair's emphasis]

… As numerous observers has rightly pointed out, we face a great deleveraging — a tsunami of debt is being sucked out of the financial system, as confidence in counterparties implodes.

… The great deleveraging is really a great rebalancing: a rebalancing of the roles of equity and debt in the global economic system. Though in hindsight, it’s easy to see that debt was unsustainably cheap, it’s the flipside that reveals a source of tremendous institutional decay: equity has been unsustainably costly. [Umair's emphasis]

My comment:

There’s also the consideration of how companies started to use equity as a replacement for cash compensation: making the cost of equity even more expensive and changing the incentives and relationship between the company and it’s equity-compensated owners-managers.

Given how equity became an important part of compensation it’s not surprising that managers use their positions (of power, of information, of asymmetrical information) to use whatever capital structure fits their individual benefit. Imagine all the ways we’ve seen this issue crop up: stock option expensing, stock option backdating, golden parachutes, change of control payment clauses, accounting and earnings manipulation, etc, etc.

It all points back to institutional decay: the financial phenomenon we’re living through is a result of how we all acted according to the incentive systems we face very day. Many, many small decisions to maximise end up leading to global minimisation.

How do we fix it? Create institutional systems that force more interaction between inter-linked parties and their economic streams, increased information and decision transparency, greater interaction with customers?

Companies can choose not to participate in that system or not, maybe they need it, maybe they don’t: but their choice sends a signal.

Change incentives, change the system, change the DNA, change the game.

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