This is an e-mail that I just sent to some friends, and thought that it might be worth putting out there…
I’ve mentioned to you both how one of the beautiful (yes, beautiful) things about the fundamental design of business is the design of its flexibility.
Without going on too much of a tangent, I’d also like to acknowledge that this design has been improved by the US government’s laws and regulations of businesses. It’s my understanding that this is a significant contributor to the success in relation to the global economy that the US has seen in the past 150 years. I’ve intentionally avoided politics, but I anticipate that when I do become involved, that my position will very much be rooted in which side continues to effectively allow business to innovate. After all, it is the economy (the diverse and complex ecosystem of financial transactions) that most influences our experience with the world, both as a part of this country and as a part of the global economy.
The reason I’m sending this e-mail, though, isn’t about politics. It’s about the design of business. Particularly, how innovation, competition, and producing valuable results are part of what constitute the quality of a business.
This article is about how JPMorgan is addressing the “financial crisis” we’re in. Arguably, the housing markets are the single largest direct catalyst for the position that we find ourselves in today. The government proposed solutions that were simply band-aids. Alternatives were presented that were also band-aids.
People wanted $700B to reinvest into banks to prevent the economy from collapsing – that didn’t happen, but lower gas prices did…why that’s significant is that – assuming prices stay where they are for 12 months – that’s a savings of about $700B to the consumer economy based on how much gas is used each day in the US. This doesn’t even factor in the effect on food prices, etc. But, I digress.
JPMorgan has finally decided to leverage the innovation and creativity necessary in business to design an agreement with their customers – the very same ones who are putting their company in jeopardy – so that they can be transferred to a new loan structure that both benefits their business as well as their customers.
This is the first that I’ve seen of a bank making decisions like this to address the situation, and one that I personally believe is a step in the right direction. It places responsibility on both parties: the banks for issuing the loans, and the consumers for extending beyond their means. This is significant because people don’t often address the responsibility that a customer has to a business – and one of those is making a smart decision about how they transact (as a transaction is a mutual agreement) with that business. At the same time, the banks obviously (as obvious as hindsight is) should not have been extending the loans.
This solution allows both parties to accept responsibility in a productive way, and in a way that allows both parties to learn. The thing that concerns me about the $700B bailout is that the single most important part of the learning process – experiencing the consequence of negative effects – is nearly avoided…it nearly prevents learning from happening. By having the banks take responsibility and experience the negative effects of their loan approval standards, and by having the consumer experience the effects of foreclosure (or near-foreclosure), both parties are able to learn and move forward more powerfully.
This solution could not have been designed or imposed by the government. The government is not concerned with telling companies what to do, rather, they are concerned with telling companies what not to do.
Business thrives in the world of what to do, and provides consumers with that same power. For business – and consumers – to evolve, both parties must be allowed to learn. Which entails accepting and dealing with the consequences of the decisions made by both parties. Only then, do both parties truly have the power that each looks to achieve as is inherent in the nature of transactions.
http://www.businessweek.com/bwdaily/dnflash/content/oct2008/db20081031_008808.htm
Ben