FORTUNE MAGAZINE Value Driven by Geoff Colvin
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This isn't Armageddon

Yes, we're in a crisis. But is it a disaster? No

By Geoff Colvin, senior editor at large
Last Updated: October 3, 2008: 8:47 AM ET

Photos
The crisis: A timeline The crisis: A timeline The crisis: A timeline
A shocking series of events that forever changed the financial markets.

NEW YORK (Fortune) -- Here's what's wrong with most of what we're hearing and reading on the financial crisis: It forgets that people aren't potted plants.

Whether they're Wall Street executives, homeowners in a down market, entrepreneurs facing a credit squeeze, or politicians facing re-election, people don't just sit there and allow events to beat them up. Instead, they anticipate and they respond.

I don't claim special powers to know what how today's crisis will turn out-or what the consequences will be of the actions that attempt to solve that crisis. But I know for sure that some of what we're reading and hearing doesn't reflect clear thinking. Here are three particularly important instances:

The economy: The most troubling element of what we're reading and hearing is the constant references to the Great Depression. The error is in forgetting that all real-world situations are dynamic. The Depression itself was a dynamic sequence. It wouldn't have happened if the Fed hadn't insanely stood pat and allowed the money supply to contract, rather than the correct policy of expanding it. And it wouldn't have happened if Congress hadn't clamped down on trade through the Smoot-Hawley bill.

Those things aren't happening this time. Instead, Congress is apparently on the road to unfreezing the credit markets. More important, America is a nation of 300 million resourceful people who will find opportunities in the current situation that you and I cannot imagine.

After President Bush's speech on Wednesday evening, Brian Williams on NBC called this "the worst financial disaster in more than a generation." No, it is not that. A crisis, yes; a disaster, no. Of course, it could still become one. But for now, calling it a disaster is a dramatic overreaction.

CEO pay: Congress seems determined to make CEOs of financial firms suffer, and who can blame it? If taxpayers are going to bail out the firms at the root of the crisis, then the political imperative is that the leaders of those firms must be seen to pay a price. Fine. Just remember that CEOs aren't potted plants.

The last time Congress tried to crack down on CEO pay was in 1993, when it amended the tax code (section 162(m), in case you care) so that pay above $1 million was not tax deductible to the employer if it wasn't performance-based. No problem, said companies - we'll just cap salary at $1 million and ladle on stock options, which by definition are performance-based, in staggering amounts. There followed the greatest bull market in history, and because of all those options CEOs made far more money than they ever would have if 162(m) hadn't happened.

How will CEOs turn the new pay restrictions to their advantage? I don't know. But you just watch.

"The end of Wall Street": The premise is that seven months ago there were five major investment banks, and now there are none. Bear Stearns and Lehman Brothers failed; Merrill Lynch (MER, Fortune 500) got sold to a commercial bank, Bank of America (BAC, Fortune 500); and Goldman Sachs (GS, Fortune 500) and Morgan Stanley (MS, Fortune 500) are converting to commercial bank holding companies. Thus, no more investment banks and the end of Wall Street as we know it.

I don't buy it. Have the advantages of the independent investment bank model forever vanished? Of course not. Will the attractions of that model - avoiding the regulations and capital requirements of commercial banks - again become apparent as the current crisis fades? Certainly. Will entrepreneurs - mostly bankers fired from the former Big Five - rush to start new firms, adapting ingeniously to the new rules, as economic conditions eventually become amenable? Of course they will.

In the rush of recent events it's hard to think about the world five years from now. But that world will come, and when it does, we'll look back and realize that what just happened wasn't the end of Wall Street. Rather it was the extinction of the dinosaurs. New species are on the way. I promise you they're in gestation right now.

I certainly don't know what's going to happen. But I know for sure that it's going to be shaped by millions of players in an infinitely complex global economy. And I know that they wield ingenuity and creativity on a scale that none of us individually can imagine. You never know whether the result will be for the better, but our system seems to possess a self-correcting impulse. Most important, as we try to divine what will happen next, let's not forget that through the tumult, no one sits still. To top of page

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Apple Inc 98.56 -0.45 -0.46%
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