Friday, October 10, 2008

The one eyed man: "I see no icebergs..."

If the ship hits an iceberg, you don't then steer the lifeboats into the same iceberg. The ongoing shambles proves that none of the incumbents have a clue when it will end; or indeed how it began. In this economic land of the blind, the one eyed man is most certainly not king; his miracle rescue plan has got off to a very shaky start, and the value of equities (especially financial stocks) heads further south to provide the speculators an ever bigger upside.

Darling and Broon's cunning plan doesn't appear to be doing anything useful, and we plainly need a much broader ranging review of the state of markets and participants to understand how it happened before we can fix it properly.

Brown still talks of "the new global economy" and bemoans that there is no appropriate system of global regulation. But the history of the human race suggests that there will never be the sort of agreement required that will result in a sovereign state submitting their major companies to outside interference. The "unity" of the EU dissolved at the very first test of this idea when everyone broke rank and rushed for the hills as the system started to creak.

TMP has a solution; possibly the only solution; and it's terribly simple. Contrary to widespread popular belief, what we have now are not "free markets" with safety valves on the damaging effects of monopoly interests. We haven't had free markets on a level playing field for about as long as this crisis has been brewing.

The root cause of the problem is that too many companies and institutions have been enabled to grow to be too big to be allowed to go bust. The expression "too many eggs in one basket" perfectly sums up the past 30 years of creeping globalisation, a period when monopoly legislation became largely irrelevant as governments wilfully colluded with big companies out of stupidity, expedience and greed.

Those of us who have been obliged to try and deal with the masters of the banking universe will be aware that getting funding deals for new ideas is frustrated by deal size. Ten years ago venture capitalists and bankers were reluctant to get involved with any deal for less than £100k on the basis that it took just as much paperwork and diligence to do a £100k deal as it did to do a £1m deal. The benchmark crept up steadily along with the number of rules, regulations and time wasting boxes to tick, and many private equity funds could not be arsed to get out of bed for a deal worth less than £10m. (Of course, fees based on the size of deal might also have something to do with this ...)

Deals were also increasingly predicated on multiplying capital values, not boring old proven earnings ability. Preferred exits were either a fairyland IPO, or a quick flip to sell a creative and adaptable business to help a larger competitor become ever larger and less competitive.

This mindset was also tracked by lazy governments who decided it was easier to regulate and tax one £10bn leviathan, than chase around after 1000 £10m minnows. The Chancellor picks up the phone to the leviathan MD and "does a deal". That leviathan MD is generally a pretty sound "establishment" figure. A well behaved bean counter that's been through the system and emerged as a "safe pair of hands," who gladly toes the establishment line to ensure that his options and bonuses keep on turning up on time. But trying to "persuade" 1000 self-made MDs is far worse than herding cats.

A sinister take on this situation is that there are going to be bargains for those with cash when the bottom arrives. It's much simpler for a sovereign wealth fund like that of Saudi Arabia to acquire controlling stakes in a few multinational organisations than work out how to manipulate thousands of smaller businesses.

The TMP fix will mean cutting ALL companies down to sizes where they can be allowed to go bust.

Do not listen to those trying to preserve their monopoly/oligopoly fiefdoms and cosy service contracts who say it cannot possibly be done. The technology to cope with the operations of these distributed organisations already exists, and the enthusiasm of the people for small scale enterprise is undeniable following the success of celebrity business TV shows.

Let the process of recruiting the right people to head those scaled down business units begin.

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