We are embroiled in a very serious financial crisis. Banks are failing left and right, loans have dried up, and confidence in the economy is sinking fast.
Now it turns out that many of the problems at established firms were caused by complexity–driven by the use of complicated derivatives and schemes involving credit-default swaps that even many executives of financial firms didn’t really understand.
An article by Nelson D. Schwartz in the International Herald Tribune put it this way: “unlike the financiers 100 years ago, the people in the room did not fully understand what the institutions they run actually owned and were trading back and forth – at immense profit. Neither did they fully grasp the speed at which their world had changed since the last financial crisis a decade ago…”
Schwartz’s sources suggest that some company directors did not know what their companies were doing, nor did they understand the sophisticated financial tools their employees were using to trade credit. These execs signed off on schemes that they did not comprehend.
Which leads again to the importance of understanding complex ideas. It’s not enough to hear a short briefing or read an executive summary. If the math whizzes and finance gurus behind these schemes can’t explain them clearly, we need someone who can.
And above all, we need much more transparency in all realms of business. Today, we’re paying the price for not asking enough questions—or understanding the answers.
Treasury Secretary Henry Paulson’s three-page plan to “rescue” the economy—a document that asked for as much as $700 billion but contained no details on oversight of its spending—is now getting the pushback it deserves. The American people want more clarity, explanation, and accountability. And that’s the way it should be—and the way it should have been all along.
MeredithInk 