Though I've been a bit quiet on the blog due to some time-consuming projects lately, I've had a bit of travel time to get caught up on podcasts. One of them was very illuminating, as it has to do with the economy and does a great job of explaining how the current financial chaos happened. The explanation was on a program called "This American Life," and the episode was number 355, "The Giant Pool of Money." You can download a transcript, or buy the audio podcast for 95 cents (I think the podcast is much more captivating, but the written transcript is pretty good).
The story gets into some of the "behind the scenes" machinations of the credit crisis, and clearly shows the value of business controls. If better controls had been in place, we'd have been able to avoid this crisis. And by "controls" I'm not necessarily talking about regulations - just added business scrutiny and business rules to detect and manage risk.
The root of the problem
In plowing through all the data about what led to this problem, it seems the culprit is something I have written about before: lack of "Tone at the Top." If you're unfamiliar with this notion, "tone at the top" is the tone set by the leadership of any entity. Tone at the top is communicated through policies, principles and, most importantly, actions taken by management. As you might imagine, it also has a huge influence on how the organization will behave - people will often get away with inappropriate actions if they can do it without any negative consequences.
Many of these financial organizations seemed willing to suspend business rigor and accept things that, in retrospect, should have set of lots of common sense alarm bells. They often felt they were doing things "in the name of competition," or for other rationales that (on the surface) seem reasonable. But the bottom line is their management allowed significant business changes without demanding a thorough analysis of the risk involved. And now we're all paying the price for weak tone at the top.
Check out the piece by This American Life, and see if you agree. And by the way - some of the things you'll hear will astonish you at how insane and irresponsible they seem.
Note: You can subscribe to "This American Life" for free on iTunes, but they only keep the most recent episode up there at any given time.