Tuesday, November 4, 2008

Lessons from the meltdown

Vineet NayarA few days ago i posted an article by my future boss Vineet Nayar { CEO - HCL Technologies Ltd} where he showed the silver lining of this recession phase and now when every country is working on the bailout packages and there's a bit of stability in the economy here's another great post by him about the Lessons from the meltdown >

· Courage to walk away: The very first learning that emerged from what is now being termed as a financial Armageddon was the need for courage: The courage to carve your own path and walk away from the herd. We in India were born with this lesson as we gained independence with ‘non-violence’ in an era of World Wars. In the US financial world, we saw Warren Buffet display the courage to walk away. Back in 2002, when companies began toying with exotic derivative instruments, Warren Buffet termed derivatives ‘financial weapons of mass destruction.’ Few listened to him then but today he stands out as the voice of sanity.

· Save it for a rainy day: The second lesson is the forgotten power of savings. The ‘savings mentality’ has always been a hallmark of the Asian culture. India, for one, has always had a high rate of savings – a phenomenon that is getting eroded with a new culture of consumerism sweeping across our cities today. Interestingly, America, which is home to 5% of the world’s population, accounted for 30% of global production and 37% of global consumption during boom times! On an individual level in the recent crisis, the ninja loans reflect this mentality, but collectively it made the entire country vulnerable to risk. And there were those who saw the warning signals.

In 2005, when the times were good, economists Paul Volcker and Clyde Prestowitz, pointed out that America was vulnerable due to all the leveraging, and predicted that a financial crisis could soon hit its shores. This has come true and – be it at a macro level or a micro level - it highlights a forgotten lesson on the power of savings and that that we should leverage only to the extent we can afford to service our debt. Its time for a “back to basics” approach, old fashioned as it may seen. Save and plough back in good times, and not fritter liquid assets away.


No comments:

Post a Comment