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E-Myth Blog
The 2008 Financial Crisis
Thank you to everyone who offered comments on the original Ship of State article. Please note we have revised the article below to better portray our original intent. We never fail to be amazed by the diversity of opinion and insightful depth of our readers and contributors. It was, however, not our intention to suggest a political position or provide comprehensive analysis of the current economic conditions, and we apologize to those who may have thought otherwise. While the economy can certainly be part of a political discussion, we believe that business (especially small, entrepreneurial business) is social, not political – and is, in fact the backbone of our economy, the future of our globe, and our sole passion here at E-Myth Worldwide.
The purpose of our Blog is to represent through a variety of voices the E-Myth Point of View, and provide a forum, resource, support network, and safe haven for the legion of small business owners worldwide who have been touched by Michael Gerber’s promise that their business should be a vehicle for more life.
It is in that spirit that we invite your continued participation and contributions to our diverse and expanding on-line community.
To more life,
Wendy Vinson
President, E-Myth Worldwide
The Ship of State
Picture the economy as a ship loaded with goods absolutely vital to the health of the world, running along in an open, free-market ocean. The ship is buoyed by natural forces of competition and personal incentive, and steered by a series of captains.
The engine has chugged along with little inspection for years, but recently shuddered uncontrollably, belched toxic smoke and froze solid. The mechanics say that engine lubrication has run dry, that the ship is taking on water and is in danger of sinking completely. A consensus of mechanics say the ship must immediately return to shore for repairs. Once problems are fixed, the ship again can sail in free open water.
All Systems Need Maintenance
Any enterprise becomes more efficient if individual processes are identified, defined, documented and formalized as a collection of systems. These systems should specify the individual steps of regularly-occurring business processes, along with the expected results, and those parties responsible for the results.
Whenever systems fail to deliver the desired results due to insufficient or inaccurate detail, changing external conditions or mis-handling, revisions are certainly required. At E-Myth, we believe that systems are always subject to revision as a component of any dynamic business development process. It is an on-going cycle of three activities:
Innovation
New ideas are applied to meet new changing conditions, new information or to increase efficiencies.
Quantification
Measurement of the new system results for quality, accuracy, stability and consistency.
Orchestration
Design and implementation of the new mechanisms.
In order to maintain maximum efficiency and meet changing conditions, this cycle of system revision needs to be constantly in process. This is as true for a small business as it is for the large financial systems currently in crisis worldwide.
That Most Precious Commodity
The current day-to-day crisis is measured by the loss of that most ephemeral and valuable economic commodity; confidence.
Colossal amounts of money can move around the world in minutes, allowing for financial results to manifest in a matter of hours. It is clear that large financial system revisions offer no guarantees, and that single, isolated revisions will not be enough to restore confidence. Only time and observation will tell what revisions to the financial systems are truly necessary, and when they need to be applied.
Some experts believe that these large financial systems have failed to deliver the expected result (economic stability) and are now in need of large-scale renovations. We certainly agree that the economic crisis at hand will require repeated and concerted cycles of innovation, quantification, and implementation of new ideas to move the financial industry ahead.
We should be prepared for multiple, potentially massive revisions to financial systems in the very near future. And then we should expect – or rather, demand -- that they be monitored, measured, and revisited continuously, even after we’ve achieved a re-leveled sense of stability.
What's a Business Owner to Do?
Learn by example. Pay attention. Don’t abdicate. And remind your people and your self that in a thriving business – like a thriving economy – the only real constant is change. Prepare for change not only in your budget, but in your overall short and long-term marketing strategies. Embrace and encourage change. Leave room for innovation If your business is slowing, you may be forced to deal with staff cuts and smaller profits. But tough times are excellent times to shine a brighter light on your business' dificiencies and internal systems. Those businesses that can comprehensively maximize their efficiency will come out of tough times in better shape than the competition.
Stay tuned for more help in thinking through this cycle in next week’s newsletter.
Comments
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Joseph M. says:
For a site that is very pro business this is a very slaned article. It wasnt not *deregulation* but the fact banks and other instutions forced to lend to unqualified by acron and barney frank, and christopher dodd. Janet Reno the attorney general for president clinton actully threatened lawsuits ig unqualified people didnt get loans.
So I was thinking to join the online course but if this anticapitalist slant and pro obama slant is indicative , I have second thoughts. For more insight please consult investors business daily.
Submitted Oct 24, 2008 9:07 AM
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Peter E. says:
Well, I agree with Frank.
The problem was partly lack of regulation - like of Fannie Mae, which Republicans like McCain were trying to get under control - but it was also because of excess of regulation wherein banks were forced to make loans to people that would not normally meet their criteria. This was under pressure from ACORN and our friend Mr. Obama. Political pressure to satisfy certain interest groups were responsible for issuing and reselling thousands of home loans totaling billions of dollars, and floating them on the international market thus spreading the risk - but obviously not reducing it.
Submitted Oct 24, 2008 9:39 AM
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Dustin C. says:
Sorry, Joseph M. Your paranoia and preconceptions are showing, not to mention your inability to spell, or maybe type. This is a reasonably unbiased report of what has happened, not a position statement. There are lots of people to blame, but let's fix the problems first and sort out the villains later. If you use this as an excuse to not focus on your own success, you'll stay where you are -- which, my guess is, isn't much of anywhere.
Submitted Oct 24, 2008 9:39 AM
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Peter E. says:
Dustin - I sugggest you read Stanley Kurtz on Obama, ACORN, and the mortgage mess.
Submitted Oct 24, 2008 9:42 AM
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Louise C. says:
Thank you for addressing this topic E-Myth. Love the blog.
The bottom line is that small business drives our economy and now is our time to shine!
There are so many people depending on my business -- my employees, my clients, my vendors... my family. This economic crises has inspired me to get better at what we do. The better my business does, the better for all of us.
Submitted Oct 24, 2008 9:45 AM
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Marcus N. says:
Sounds like Joseph M is saying the representatives and Attorney General of the Clinton Administration forced the banks and Investment Bankers to Overstate individuals' qualifications when applying for home loans. Further, they were forced to come up with all kinds of creative financing & investment instruments( CDO's & CDS's, etc.) to back it up. Right? If that is the case, then why is the FBI not on top of it and going after those people. After all, it would be on record, wouldn't it? Well, I think the FBI knows what it's doing. Just follow the money trail.
Submitted Oct 24, 2008 9:46 AM
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Justin M. says:
The biggest problem here is that the Fed has the unrestricted ability to print money regardless of whether or not there is anything to back it. This is the so called fiat money system. In other words, if you want some money you just print it and viola, there's some money. People can not do this. Governments should not be able to do this either.We should revert to the gold standard.
Meanwhile, the bail out means the government owns a huge piece of a major industry. In short, the American financial sector is largely nationalized. This is a squarely Marxist phenomenon. Marx would be jumping for joy if he were around to see this. It would be refreshing if people would at least speak frankly and say "look we are nationalizing a huge industry, we are socialists/Marxists and we do not apologize for it". Instead, people wring their hands and still insist that this a free market capitalistic system. What don't people understand about the "free" in free market? Planned economies do not work.
Submitted Oct 24, 2008 10:25 AM
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tim s. says:
There are plenty of villians in the current economic travails and I dare say they aren't all from one party, rich or poor. Yes profit was a motive and leverage was a key method to magnify earnings. I am always suspect of new financial instruments or strategies to manage risk as they always become complex and hard to follow - risk doesn't go away it is just spread to others - usually to those who don't understand it. When things go bad - taxpayers through our government end up paying for these mistakes. Will the profits reaped by the bloated market ever be returned - no. Luckily, the economy can recover. This time government needs to keep things simple and transparent and resist the cheerleaders who have some new scheme. Are we surprised that making loans to people who couldn't afford them could lead to problems?
Submitted Oct 24, 2008 10:31 AM
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Susan B. says:
I agree with Tim S... Those with guile will, in most instances, pay the least. Despite that, we are all--each and every one of us--consumers. ...And no matter who serves as our next President, or to what extent our Government intervenes--it's time we ALL exhibit some constraint and grace and move toward consuming in a personally responsible manner: realistically honoring our available resources while supporting the businesses of our fellow humankind. In my view, our current mess is an ill which, in spite of any temporary relief gained through our Government's enormous cash infusions, will not be "cured" until properly and duly infused with generous quantites of personal rsponsibility and accountability--civilians and government alike...
Submitted Oct 24, 2008 12:02 PM
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William J. says:
When Alan Greenspan says he does not fully understand derivative securities, he is not alone. Those who designed them may know how they are put together, but they may not have the foggiest notion about their reverberations throughout the marketplace. Talk about the "law of unintended consequences!"
With respect to the making of "bad" or 'sub-prime" loans, there is much finger pointing and obfuscation. As one with personal experience (I was owner of a real estate loan company) I am absolutely certain of this much: Applicants for all conventional loans had to (and still do have to) fill out a Uniform Residential Loan Application (Fannie Mae Form 1003).
For those who don't know what "redlining" was, before it became unlawful to do so, it was relatively common practice for lenders to draw (figuratively), on a map of their business area (city), a red line around neighborhoods that had a high concentration of low income residents. The lenders did not want to make loans secured by properties circumscribed by those red lines because the financial risk was too high, so high, in fact, that the lender could not absorb it and stay in business for long. Demographically, as it happened, those who lived in those circumscribed properties were predominantly members of groups of those earning low incomes and racial minorities. You can see where this has to go.
When Congress passed legislation that forced the administration to put on a full court press to do away with "redlining" by lenders, the instructions issued from on-high actually prohibited the writing loan officer from asking questions of the applicants concerning their financial status beyond what the applicant filled in on the Form 1003. If the loan officer did ask other questions, an accusation of discrimination could be made. There was one qualifier: if the loan officer had a strong hunch that the applicant was lying he could refuse to accept the application. The practical problem with doing that was that the loan officer (most of whom were, and still are, independent contractors) and the lender could then be sued for engaging in illegal discrimination by refusing the application. Do you not think that the loan officer and the company would rather not be sued? As a result, lenders issued instructions to the loan officer to take the "safe" route, i.e., take the application and "kick the can down the road" by sumitting it to the loan underwriter.
Thus, for a lender to make loans using what had for millennia been good business risk management practices became against the law. Imagine that - if the lender tried to make a "good" loan within the redlined area it became an outlaw, and the government would put it out of business. This is how what would have been characterized previously as a "bad loan" now became a "good loan" i.e., a "sub-prime loan."
Now the lender is between a rock and a hard place. If the lender does make the now "good" loan, insolvent borrowers will end up putting the company out of business and if the lender doesn't make the now "good" loan, the government will end up putting the company out of business. What choice did the lender have if the company is to survive? Quite naturally, the lenders felt that if the government was going to force them to make these high risk loans, then the government should absorb some of that risk. The government, being all-wise, said OK. Therein, as they say, lies the spore that was the genesis of the conditions that led to the current systemic financial difficulties.
Now, it could be said that the current financial crisis is based on corporate and/or individual greed. That misses the point. It could also be said that all the companies in the loan industry did was adapt to changed conditions, which is supposed to be the mark of the good company. The system, in fact, forced them to adapt. On the other hand, it would be more appropriate to say that the system forced them to maladapt.
Submitted Oct 24, 2008 12:07 PM
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Mary B. says:
The dabacle largely start with the CRA, Community Reinvstment Act en.wikipedia.org/wiki/Community_Reinvestment_Act. , which Congress passed during Carter administration. The sloppy money lending was accelerated by legislation passed during the Clinton administration. (By the way, I am not affiliated with the Republicans or Democrats). Banks were strong armed into taking on poor quality loans by these governmental regulations. If they did not, the government could withhold banking privileges, such as denying a bank the ability to grow by opening a new branch office. The banks were strong armed into complying in many others ways. Greenspan contributed by keeping interests below market rate which opened the flood gates. The government is responsible for setting the stage and mandating that banks take on poor quality loans where income could not support repayment.
Submitted Oct 24, 2008 12:21 PM
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Elijah S. says:
Knowing that Ross MacLeod advocates the socialization of industries and that E-Myth has allowed him to publish such certainly harms the good will I once directed towards E-Myth.
His positive representation of the "injection of cash," namely, the redistribution of wealth by means of debasement of the currency, as well as his praise for the price controls by means of artificially lowering the "key interest rates" should be sufficient evidence to readers that the speaker is an advocate of centralized markets. Such systems have historically failed miserably.
If you advocate communist, socialist, or marxist ideas, feel free to study. But do not dress these abominations in the garb of free markets.
Submitted Oct 24, 2008 2:44 PM
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Clint B. says:
Knowing that Elijah S. has retracted his injection of "good will" towards E-Myth, the company is probably better off.
This article is merely a report on what is happening, not propaganda for economic and governmental changes towards communism. If anything, the writer is simply stating that the economy needs to undergo maintenance and that there is obviously some changes that are necessary.
"Embrace and encourage change", something they teach you in Business 101.
Try and leave politics out of it.
Submitted Oct 24, 2008 6:57 PM
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Manoj S. says:
I believe basically it is a con job brilliantly executed & well camouflaged as a system failure by legitimate financial organisation. The way out for common man normally would be to complain against such cons to the authorities, unfortunately the authorities have to support the fraudsters by bailing them out with more funds which makes this a double con. The legitimate tax paying public are rewarded the punishment for these Cons from Financial Institutions & will pay dearly for a long time to come. People have lost their savings & earning not their potential to earn, so there is always hope that this too shall pass. However giving explainations & camouflaging a Con job is not the best way to attack the problem. To change anything thing we need to first admit that there is a problem, we have to believe we can change it & then act on this belief to see it happen. So the Con has to be seen for what it is. Though it is a smart one it can be checked with more transparency in the business processes with clear audit trails that identify the problems at its origin whenever any deviations are observed. The Alarm bells for risks have to be more sensitive to deviations in business process than ever before.
Submitted Oct 24, 2008 9:33 PM
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Syd C. says:
The only system that works is reward for good decisions and pain for bad decisions. Government intervention of any sort, propping up wrong decisions and attempting to alleviate the pain of those wrong decisions only prolongs and deepens and spreads the pain.
Much of the current pain is caused by the speculating sheep who followed the stock market believing that it could never fall. Further magnified by those entrepreneurs who borrowed heavily with margin lending against their own over inflated stock.
The current downturn will mean that some people who are cashed up will make a lot of money and those who have over-extended themselves will lose a lot of money. It has happened many times before at various levels of seriousness and it will happen again no matter what the government intervention. Just another example that timing and being able to hold on when finances are challenged is everything in business.
Enjoy the ride if you can. Take the medicine if you can't.
Submitted Oct 25, 2008 12:39 AM
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Scott L. says:
This seems to have hit a nerve with the troops.
While the blame game is a valid one, it's not the one that will fix the issue.
Paulson/Bernanke ID'd the issue, came up with a fixit plan, and went to execution. Sometimes, you just have a to do that.
Even Greenspan, who is and was much more concerned with his legacy than his wealth, didn't "get" it as things were developing, and he wasn't alone at the Fed.
Later, when the smoke clears, we can see if there were crooks, and go after them. The documentation will likely still be around.
But if this was caused by allowed mismanagement, then we need to implement oversight that the excesses and newly exposed mistakes won't be repeated.
The MASSIVE deregulation of recent years, amplified by the lack of new regulations in response to new products such as CDOs (collateralized debt obligations), is similar to running a small business with little or no policies and procedures nor executive management. You (the US Government on behalf of the people) can HOPE that operational management operating in a "free" market will act altruistically, guess what you want, why you want it, and won't hurt anything along the way, but you would be a fool to put your hope there.
100% free markets don't work anymore than giving all the spoils to the strongest and the biggest and letting the same strongest and biggest decide what the spoils should be....like YOUR stuff!
We need reasonable controls of excesses, adaptation and reasonable regulation of new products, and some kind of moderate redistribution of wealth over time (so tha wealth does not continue to consolidate in the top 2% as it has), by use of something like inescapable death taxes.
Submitted Oct 25, 2008 4:43 AM
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Susan B. says:
I don't mean to be dense here; but anyone, please, help me out:
Though a free-market seems to provide the greatest advantages for the privilaged (that is: those already possessing, by whatever means, the key resource of $$$)--doesn't it also provide the greatest opportunities for the average-joe entrepreneur?
Also; cannot we have (essentially) free-markets executed in the spirit of growing personal wealth while supporting the common good? Are the two concepts really so at odds? ...Is it so unreasonable to expect a measurable success for both an organization's interest holders and upper echelon as well as for the multitudes of others intertwined within that organization's community (employees, underlying suppport businesses, end-users, etc...)? Is this simply an absurd notion? If so--is there not some way to generate this, artificially, via some formulary balance between free-market principles and government intervention/control?
In a free-market are we not relying on our consumer's health ("joe the buyer" vs. "joe the taxpayer") for our own health? What is wrong with taking steps to ensure healthy consumers? That being said--is there no way for the governement to issue regulations which prevent/deter the corrupt from degrading the health of consumers--while simultaneously allowing/encouraging unfettered growth of those responsible companies who take a win-win (profits + communal stewardship) approach?
Submitted Oct 25, 2008 11:00 AM
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Rory G. says:
Scott L. -- do you actually run a business? Do you "redistribute" the bonuses of your best-performing employees to your worst-perfoming employees?
"Free Markets" means one thing: people are free to choose where, why, and how to spend their money.
Milton Friedman puts it more eloquently: "The most important single central fact about a free market is that no exchange takes place unless both parties benefit."
Equality is not the objective of a free market. Freedom and opportunity is. If you want equality, try Cuba.
Submitted Oct 25, 2008 12:59 PM
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William P. says:
Louise C. hit the nail on the head.
I live in Australia and it is clear from the outside one of the facts of a successful life and business is emotional stability.
Outside of Louise C.'s comments the rest of you need to focus less on the salesman called politicians and more on your small business sales.
It seems the next phase in growth will be small business as the foundation.
The best thing about a great small business is you can reduce your reliance on the system and set yourself free to live the way you want!
Will.
Submitted Oct 25, 2008 6:51 PM
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Mike H. says:
One school of thought believes World War II brought us out of the Great Depression and another believes is was the advent of mass media advertising (in the then new form of national radio). Since we are already at war let's look at the new media advertising revolution as another potential means to bring us up and out and introduce the new trimmed down versions of our businesses. The cost of video commerce advertising including both long and short form TV (and Radio) advertising to get leads along with long and short form online videos to help close more sales has dropped dramatically. This is a great new opportunity because consumers have caught on and hate the fake short form brand ads and so TIVO right through them. They want real, helpful, authentic information (like this info from e-myth) and will watch stories about real hard-working business people telling real stories about real businesses. After 9/11 Bush told us to shop, shop, shop but now is the time to advertise, advertise, advertise to tell your new business story and motivate the masses to believe that all will be okay if we do not allow fear to paralyze us. Each small business owner is a leader - so lead.
Submitted Oct 26, 2008 3:55 PM
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Tom B. says:
Based on the all the political banter I'm reading, I thought I'd simply share a message I received the other day that I found very interesting. All we can hope is that everyone who votes in November will take the time to understand the issues and then vote with your mind, not just your heart or emotion.
Here it is-enjoy!
During this election year let's be reminded of these words:
* You cannot help the poor, by destroying the rich.
* You cannot strengthen the weak, by weakening the strong.
* You cannot bring about prosperity, by discouraging thrift.
* You cannot lift the wage earner up, by pulling the wage payer down.
* You cannot further the brotherhood of man, by inciting class hatred.
* You cannot build character and courage, by taking away men's initiative and independence.
* You cannot help men permanently, by doing for them what they could and should, do for themselves.
Do you recognize the author?
It was Abraham Lincoln ... Very, very wise words, written years ago and we still don't seem to get it.Submitted Oct 26, 2008 5:28 PM
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olu b. says:
Working on and in your business is applying almost the same resources to solve challenges but with different level of confidence born out of the potency of the tools on hand which of course determine success.
The three components of dynamic business development process are able to put the required confidence in the business owner which alone can carry himm/her a good distance along the line of success.
Submitted Oct 29, 2008 6:41 AM
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sankar h. says:
All of us are attempting to deal with the symptoms---
and getting NOWHERE( heading towards ZERO) in the process---
In the Knowledge
driven Global economy , the root cause appears to be the
Corruptive / Greedy MIND of the Top Leadership.This Greed
fuelled by Intelligent Arrogance in Partnership with
DESIRE / TEMPTATION based on Arrogant Stupidity
founded on a PREMISE of Unreasonable Wealth generation
has brought the Global Financial System to its near Total
Eclipse.The only lasting solution for Humanity is to PURIFY
the MIND on a foundation of TRUTH--LOVE ( NOT to POSSESS
BUT to SERVE) and creating Lasting JOY.
Any one serious to travel this path please refer to the book
" SRIMADPURUSHARTHA" by Dr.ANIRUDDHA JOSHI ( "BAPUJI").
Write back to hsgwpi@yahoo.com for details.
Submitted Oct 29, 2008 8:24 PM
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David A A. says:
Diversity of ideas and knowledge are strength to any country and I believe America already has this in place. So, no matter what the complexities are, solutions are just around the corner. Money making by all means without due considerations of consequences to other aspects of life is at the base of the financial crisis. Everything is connected, politicians want to do favor, marketers want the sales, enterpreneurs want the contract etc without regard to the health of the business environment, and the egos continue unabated. Americans should refocus attention and the problems will be solved.
Submitted Oct 30, 2008 11:20 AM
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Peter T. says:
Many of you seem to be forgetting some of the pricinciples of the E-Myth. "Focus on your business, not in your business". You seem to be focusing around (or in) the issues of the economy, rather than focusing on how your business can travel through today's economic waters.
With all due respect to the ideals espoused by Lincoln, he didn't know much about the economy and he surely couldn't pick his generals. That's because he focussed to much on the details of the war and not enough on the big picture. He had the economic might and manpower (population). What he needed was a general that could outthink Lee. It took him three years to find one.
What's stopping your business from growing? Is it things intrinsic to the business or is it external factors such as the economy? If so what can you do to change or mitigate the picture? That's where your attention needs to be focussed. Be it Obama or McCain, neither of them will help your business thrive. Only you can do that.
Submitted Nov 3, 2008 9:57 AM
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Robert E. says:
The downfall of our economy started in the Clinton administration. With 9-11 and major hurricanes compounded the problem. When the price of oil reched $4.00 + a gallon, the cost of all goods and services increased along with the cost of gas, leving less expendable income. The government in the last two years did little to adjust the rising prices until it was to late. During this time I was a loan officer in the mortgage industry.The policy of re-financing to over 100% of appraised value set the industry up for failure along with the rising property value making cash out loans profitable.Market speculators seen the downfakll coming andbailed out leaving the greedy financial institutions holding the bag, then passed the worthless loans worldwide.Nowit is hard for a small or new business toobtain capital to grow. I plan to control growth to reduce taxable income, reducing the numbers I hire by at least 50% and grow assets of the business, thus not producing as much taxable income. America spoke during theelections and now must livewith whatthey get. Hello high unemployment. I do not want to support those who choose not to work with the work I perform.
Submitted Nov 11, 2008 7:28 AM