COPING WITH CHANGE IN BUSINESS

Issue : June / July 2014 Risk Managment
 

            A Global Map of Credit Cycles

            The 1920s was an exciting time for post-war America, full of novelties like the radio and mass-produced automobiles. Readily available credit fed into the boom on Wall Street and the housing market, and right into the heart of American homes. How could such an ideal time be the birth of a decade-long hardship?

 

            The credit cycle by now is a familiar story. There are always warning signs before a crunch, like surging house prices and rising debt. It all begins, just as in the 1920s, with a favourable climate for investors: good prospects, easily attainable credit, lax regulations and a swinging economy. Rising living standards make restrictive policies unpopular. Soon risky investments are being underwritten. And the country’s economic power seems invincible.

 

            Then it becomes a case of desperate businesses needing to unload their products on consumers who first need to be employed to buy them. Like all trends, the credit cycle is not something that just happens. We may have once been led into believing in a free market, where all is a measure of demand and supply. But even the biggest booms and busts in history have been correctly predicted before they happened. So the cycle may be controllable. But by whom?

 

            The mighty financial institutions. From their inception, these banks have had their hands firmly on the lever, giving the world its riches and then taking away in plummeting GDPs. They do so with their mightiest of weapons. Credit.

 

            The credit cycle played out in Japan, where rapid expansion ended with the “Lost Decade” of the 1990s. While the impact of Japan’s crisis was mostly limited within its shores, another collapse brought the whole world tumbling.

 

            Irresponsible banking practices, coupled with investors’ insatiable appetite, made the United States’ economy a crash waiting to happen. In 2008, with financial firm Lehman Brothers filing for bankruptcy, it all came to an ugly end.

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