When banks go wrong
20 August 2007
There is no question that capitalism sharpens the business instincts of every industry and every successful company within it. But when taken too far it turns stable financial foundations into quicksand that even healthy companies can sink into. In the electronics industry we have seen it before – are we about to see it happen again?
As an engineer turned engineering journalist I have allowed the financial world to largely pass me by. When you get past the obvious disadvantages of not understanding it properly, it gives me the advantage of being able to look at it from afar and ‘call it as I see it’, as it were.
And when I do take a look at it, as we have been forced to this last week, I find the speed at which it has twisted and turned quite terrifying. As I understand it some American banks lent money to people who were never going to be able to pay it back, and then in a convoluted way this debt was passed from one financial institution to another. When people got nervous and started looking for these debts to be repaid, the financial chain proved to be very weak, and there was no money at the end of it. So the financial markets go into panic, stock markets crumble and consequently the value of individual companies tumbles. Not just in America but across the globe.
And this is where I step back from reality, look at it through my idealistic eyes, and wonder where the justification for this bizarre behaviour comes from. For example, an electronics company may one day be making a CD player with set material costs, manufacturing costs, personnel costs etc and then sells the product for a set price to make a set profit. The next day that manufacturer might have the same costs, sell for the same price, make the same profit, yet the company is no longer worth as much as it was on the previous day. It may no longer have enough value to allow borrowing for investment in new equipment or R&D – it may no longer fit in to a financial model that decides on the viability of a factory. I find it abhorrent that such dramatic changes to the manufacturing sector, whose job it is to create wealth, can be decided by the financial sector, whose job it is to redistribute wealth to their advantage.
At least the stock market seems to rise and fall as a single entity. In fairness I have not been so aware of this happening to such a destructive effect in recent years, but it struck me that the activities of currency traders in the past were even more destructive, and guided by the sort of moral code you might expect from a hungry tiger. Pick on the weakest whatever the consequences – although those consequences could mean the economy of an individual country in turmoil, and if the currency became completely devalued, what happens to manufacturers who rely on buying components and materials from abroad? They can’t afford to buy them, or if they do then the end product is no longer viable.
From an engineering point of view it would be perfect if the financial turbulence would stop, leaving firm and level foundations on which to build. Then at least the success of a company could be determined by its ability to design, manufacture and sell, rather than by the opinions of the city vultures that are just looking to make quick profits, whatever the cost.
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