Played golf recently with a property developer. He’s a solid bloke who lost all of his money (and a little bit of ours as well) during the fall of the Celtic Tiger. In a dramatic period of boom and bust, Ireland entered our version of the great depression. Jobs lost, houses lost, confidence lost in a ‘Celtic Car Crash’ that witnessed enormous swings in wealth creation and depletion. Everyone has a story of ‘how it all went wrong’ and a strong belief about ‘why it went wrong’. One guy told me he had no money at the start of the Celtic tiger and didn’t lose any money when it ended, stating: “It was a good time to be poor.” But my golf-loving property developer friend wouldn’t claim it as a good time. It’s hard to be positive about losing your family home when you are now living in a small, rented apartment with no immediate end in sight.
Ecomonics & Psychology: In addition to the economics masterclass, the fall of the Celtic Tiger provides a fascinating study in psychology. At least some element of public interest in the ‘bust’ part of the story is driven by misfortune. While the Germans embrace schaudenfreude, the Irish have always had it’s first-cousin, begrudgery. Property developers and their glamorous partners attending €1,000 a plate charity dinners provide photo opportunities and titillation in equal measure. Like to take Rosanna Davidson to Marrakesh? (move to the end of the long queue on the right). But like the bad guys in a Hans Christian Anderson fairytale, the Celtic Kings got their comeuppance. Fortunes gambled and lost. Late night visits to the High Court begging for settlement time. The steep fall from ‘Master of the Universe’ to bankruptcy.
Post Mortems: But, can we actually learn anything from what’s happened and avoid the same trip wires in the future? While learning lessons from things that go wrong sounds smart, in practice it’s extremely difficult. Two roadblocks to learning occur during all crisis periods. The reduction of complexity to simplicity quickly followed by the immediate search for the guilty.
The First Law of Crisis = Reduce Complexity: Economics is a complex subject. Financial market liquidity, G.D.P. ratios and balance of payment deficits may be great lunchtime conversations in the ESRI, but they are beyond the pale for most of us. Faced with complexity, people default to the ‘dummies guide to economics’, reducing everything to a couple of sound-bites (“A handful of greedy bankers ruined it for all of us”). However, in order to understand what actually happened during the Celtic Tiger Era, we need to wrestle with complexity. Economics is akin to medicine i.e. getting the diagnosis right is kind of important.
The Second Law of Crisis = Find Someone to Blame: The second law of crisis could be labelled as ‘finding someone to blame’. Many of us who had additional money to speculate had our ‘snouts in the trough’ during the Celtic Tiger era and part-share the guilt for what happened. But, it’s much simpler if we can hang the blame on one person or one institution. Having a mental picture of ‘Ireland’s Most Wanted’ allows us to swim away from our own role in the show. Of course there’s an important distinction to be made between searching for financial progress (labelled as greed by some commentators), and criminality. I’m not trying to be an apologist for illegal behaviour. Key point: there’s a collective responsibility here; mistakes were not confined to a handful of high-profile individuals – even if we don’t like that analysis.
While reducing complexity and outsourcing blame are psychologically understandable, they ultimately shield us from learning what really went wrong. In practice the death of the Celtic Tiger had 4 central players. Banks. Developers. Government. Speculators. Let’s consider the role that each played.
The Role of Wealth Creators: In a modern economy, the dual role of Government is to legislate (control) and re-distribute wealth (care). Wealth redistribution creates a just society, in which disadvantaged or economically marginalised groups can share in the bounty. While there are always arguments about the mechanics of wealth re-distribution, this is generally accepted as a primary Government role. However, in order for wealth redistribution to happen, there has to be a group of people who generate wealth. ‘Wealth Creators’ are the engine of the economy. One argument against capitalisation is that too much wealth is concentrated in the hands of too few people. The ‘solution’ (for those holding an alternative political perspective) is to distribute wealth more equally – an analysis that neatly sidesteps the fact that no model society exists where this has been accomplished. Capitalism, while undoubtedly imperfect, produces the most benefit, for the most people. Margaret Thatcher said: “The problem with socialism is that you eventually run out of other people’s money to give away.” Within capitalist societies, wealth creators take risks and get rewards. Sometimes the rewards are huge but the downsides are awful. Like losing your home. There were some tragic personal stories, including suicides, as a result of business losses. Love them or hate them, wealth creators are a key ingredient in a successful modern economy. Where a country has boundless natural wealth (like the abundant oil in Norway), encouraging a wealth creating group may not be quite as important. In Ireland, where the only natural resource is people, wealth creation is fundamental to our economic health.
Exposing Those ‘Evil’ Property Developers: It doesn’t make sense to speak about Property Developers as a homogenous group. Like hill walkers or church bell ringers, property developers come in all shapes and sizes. Some have left a positive legacy in terms of quality architecture and infrastructure; others less so. In Ireland, people are really annoyed that ‘they’ have ended up paying for big gambles made by others. The way this narrative unfolds, heads the property developers won (if the deals worked), tails the taxpayers lost, picking up the tab for stupid decisions made by others. That’s the bar talk. Is it correct? Like all good stories, there’s an element of truth. During the boom years, I worked on a couple of philanthropic projects supported by Property Developers where sustainable jobs were key upsides. But, putting philanthropy and employment to one side, didn’t property developers lead a frenzy of development, pushing individual unit costs sky high – driving the economy so hard that, like an over-inflated bubble, it eventually burst? Laying the blame for this at the door of property developers is a good sound bite and meets the twin ingredients considered earlier i.e. it is simplistic and has a clear Villain! But accusing property developers of being profit-driven is like accusing foxes of being carnivores – it’s the nature of the beast. More importantly, it completely ignores the group with the most important role in regulating the property market – the Government. To say that the banking regulator was ‘asleep at the switch’ does an injustice to the level of brain activity underway when we are sleeping. Comatose might be closer to the mark. In my General Electric days we used to say: “You can’t send a technician to do an engineers’ job.” And that’s exactly what happened.
Everyone Needs At Least 3 Houses (Don’t They?): To understand this final point, we need to focus on the place where psychology and economics overlap i.e. behavioural economics. Picture the scene. You have arranged a quiet pint in the local with your best buddy Mick O’Neill.
“Any news Mick?” asked casually.
“A few things bubbled up this week. To be honest, it’s been a bit of a roller coaster.”
“Yeah, like what?”
“Well, I’m just back from Dubai. We couldn’t really afford it, but I put a deposit on a stunning waterfront condominium. Our unit won’t be completed for another 24 months. We will ‘flip it’ at that stage and walk away with a 30% upside. That’s my news. Anyway, how did your week go?”
“Ah…okay” (spit out with barely contained jealousy and rage).
During the Celtic Tiger era, many people overstretched, gambling money they couldn’t afford to lose, sometimes buying ‘off-plan’ properties in countries that they’d never even visited (I wasn’t personally aware that Bulgaria was a hotbed of Irish tourism). Following the property price collapse, capital gains and rental incomes fell through the floor. Property ‘speculators’ (people buying a couple of apartments for their pension funds or for their kids) were badly stung. At the ‘bottom of the property ladder’ individual mortgage holders suffered negative equity and some lost their homes. Rising unemployment combined with inflated purchase prices, put these people in a savage pincer movement. If you have no excess financial capacity, when you lose your shirt there is nothing else in the wardrobe to cover your nakedness. While many property developers are broke, few will be homeless – unlike people with less assets who had no safety net. Lester C. Thurow (The Zero Sum Society) suggests that we can’t argue against the intent: “Economic security is to modern man what a castle and a moat were to medieval man.” But, many people lost perspective on the inherent risk and a lot of bad calls were made.
Untangling Complexity is Difficult: Faced with the bewildering task of untangling the above, most people would take to the bed with a migraine. Rather than wrestling intellectually to understand this, it’s easier to scapegoat a couple of individuals. While Government policy is always in the mix (they are ultimately responsible for drawing up the economic masterplan), blaming an identified person is more potent than lashing out at a ‘process’. Much better to have a real-life, flesh and blood person to slander. While property developers/bankers fulfil this role for many, we were all part of a game that seemed (and was) too good to be true. We collectively forgot the key life lesson that happiness is wanting what you have, rather than having what you want. And we drove blindly over the side of an economic cliff that should have been better signposted.
So What Do We Need to Do Now? Having made several poor calls myself, it seems outrageously arrogant to tell anyone else what do to. But a sense of humility never seems to win (“the meek shall inherit the shit”), so here goes. The key lessons are as follows:
- Growth Rates: Economic growth of more than 3% p.a. represents ‘overheating’ and needs to be controlled through fiscal and monetary policy.
- Wealth Generation: Wealth creators need to be encouraged – by incentives – on the working assumptions that the tax treatment they receive mirrors that of other sections of society.
- Political Leaders: Should adjust public spending to the underlying income streams, i.e. not base it on windfall payments. During boom periods there might be a ‘forced savings’ system whereby the Government keep a fixed % of income for rainy days.
- Financial Regulation: The capitalist system can only work when there are a series of checks and balances in place. While a balance needs to be found between ‘light touch’ and ‘bureaucracy’, the system cannot be self-managing (the current pendulum swing to ‘over-control’ is choking business growth).
So What? In business organisations the exact same points apply. Post-mortems need to be forensic and quick, laying simple lessons bare. The truth sets us free. If we could learn from the mistakes made during the Celtic Tiger era, the most expensive lesson in Irish history may have been worth the price. But, it’s easier to reduce complexity into bite-sized chunks. At a political level, where people have to get re-elected to hold onto their jobs, that’s not admirable (but it’s perhaps understandable). At an organisation level, where you hold an executive role, it isin’t. Don’t run away from the lessons that can be gleamed from mistakes. Mistakes have the power to turn us into something better (assuming we don’t repeat them). Institutionalise post-mortems in your organisation. Examine the bodies – before you bury them.
PS Lighter Notes: A couple of 1-liners on ‘mistakes’ to go with the this week’s theme…
*A married man should forget his mistakes. There’s no use in two people remembering the same thing.
*Thanks for explaining the word ‘many’ to me. It means a lot.
*I’ve been repeating the same mistakes for so long now, I’m starting to call them traditions.
*If you really want to know about mistakes, ask your parents.
*Turning vegan is a big missed steak.
*Some people learn from the mistakes of others. The rest of us get to play the part of ‘the others’.
Check our website http://www.tandemconsulting.ie or call 087 2439019 for an informal discussion about executive or organization development.