October 21, 2008

Why Traditional Recession Tactics Are Doomed to Fail This Time

Boardrooms need to recognize that the macro crisis requires decision makers to confront fundamental transformation on three levels, argues Umair Haque.

How should boardrooms respond to the macro crisis? Is it just a case of recession-as-usual: budget-paring, personnel-slashing, and portfolio-trimming?

Not a chance. The tactics of recession-as-usual are neither necessary nor sufficient for firms to weather the global economic superstormbecause it’s no ordinary squall, but a once-in-a-lifetime gale ripping up the very foundations of the global economic order. Rather, the macro crisis requires decision makers to confront fundamental transformation on three levels.

The first and simplest level is a change in global patterns of savings, investment, and consumption. For too long, the poor have financed the rich. China and other emerging markets have lent to the US so Americans could buy Hummers, McMansions, and Frappuccinos. But this never made senseit was deeply unsustainable; the macroeconomic equivalent of a giant planetary fossil fuel engine. The days of export-led growthand it’s flipside, force-fed consumptionare numbered.

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