In the years following 9-11 the economy recovered nicely. Federal Reserve chairman Alan Greenspan kept interest rates very low, credit was cheap, and cheap money was fueling hot real estate and stock markets. Japan, still struggling from its real estate bust more than a decade ago, had low interest rates for so long people borrowed yen to buy U.S. stocks.
As U.S. asset markets rose, Wall Street told the world to expect much more. We were on the tip of an historic new era, called the global economy. Billions of people in China, Brazil, India, and even Russia need houses, cars, televisions, and toasters. Max out the credit card and expand your productive capacity because the world is going to need a lot more product than we are producing now.
The Dow Jones Industrial Average started to move, almost straight up -- 11,000, 12,000, 13,000, even 14,000. Wall Street assured us that the growth of the world economy justified the rise in stock values. Just think of all the sterile bandages Johnson and Johnson will sell to Africa, all the computers Dell will sell to India, and all the money Wall Street will make financing the new, growing, world economy. Expect Dow 20,000 one expert said, another expected Dow 30,000, and one fellow predicted Dow 40,000.
Not only were sunny skies ahead, but Wall Street's army of brilliant Ivy Leaguers had figured out how to make our financial system safer than at any time before. In the old days a small town loses its only factory, unemployment rises in that town, people can't pay their mortgages, and local banks fail, taking down the regional economy. Thanks to Wall Street's financial derivatives, the risk of mortgage debt is now spread over the entire world. The mortgage for Tom Jones's house isn't in the local bank of Smallville, as it would have been in the 1980s. Oh, no, that mortgage is held by an investor in Norway. So when Smallvile goes, it takes down an investor here and an investor there all over the world, and since Smallville so small, nobody will even notice that it failed. And since Wall Street has reduced risk so well, it is okay to borrow much more than was thought safe in the past. Remember the old idea that a financial company could borrow $8 for every $1 it had. With modern risk management, Wall Street had figured out how to borrow $40 for every $1 of asset. So Wall Street hired mathematical genuises right out of the Ivy league, the genuises came up with models, the models said it was safe to borrow, and the more everyone borrowed, the more Wall Street made.
Social scientists agreed: The effective leader takes on risk, or at least knows how to manage it. I even worked at a place where a new CEO came in and told us we needed to take on more risk and stop being so risk adverse.
A horde of business consultants pointed to AIG as the prime example of the glory of financial innovation. Here was an insurance company issuing insurance contracts on the debt of corporate America with very little held back in reserve. Instead of reserves, they had risk management. After all, great corporations like GM or Countrywide could never fail, right?
Of course, it didn't take much to convince Washington that debt is good. We have 300 million people today, but someday we will have 400 or even 500 million, so borrow now and spead the debt over a future, much larger population. America's economy will grow and grow so that today's large debt will be nothing to the wealthy Americans of the future. Hey, growth is such a wonderful thing we can fight wars and expand healthcare while lowering taxes.
Despite good times, Detroit knew it had trouble competing with Japanese car manufacturers. Rick Wagoner, CEO of GM, brought everybody together and wrote a plan to "turn around" GM. When that didn't work he wrote another plan, and then another. Listening to him explain his plans on television, you could see a very likeable guy batting away the criticisms that his plans don't go far enough to break up GM's crony culture.
Ford named Alan Mulaly CEO, who came to Ford via Boeing. With the economy still booming, Mulaly raised every dime he could. He sold assets and mortgaged everything, raising a cash hoard. His plan went too far for some of the cronies in Ford's management ranks, but the company backed Mulaly.
You know the rest of the story. Asset values unraveled, the economy deflated, financial institutions needed government bailouts, and the economic futures of American companies and families were re-written. Looking back, the good leaders were the ones who had foresight and like Alan Mulaly prepared their company for what was to come. The leaders who didn't earn their pay were those who stuck with business as usual and bought into all the malarkey about the benefits of maxing out the credit card.
Foresight is essential for a top leader and yet it is rarely mentioned in articles on leadership. All too often articles on good leaders list out a bunch of interpersonal skills and short change the importance of competence and foresight. Both GM's Wagoner and Ford's Mulaly have interpersonal skills, but one had foresight the other lacked. Mulaly transcended the spin all around him and prepared for what he saw coming. When everyone was spending borrowed money, he was saving. When others prepared for yesterday, he prepared for tommorrow.
