Financial and economic crisis and crisis of values

Manuel Bermejo. Professor. IE Business School

9 December 2008

The explanations offered by economists for the financial crisis only serve to understand how the whole house of cards fell down... but the earthquake that caused the collapse is a crisis of values that affects us all.

In the last quarter and for the first time in 15 years, Spain’s GDP has fallen. Numbers are never wrong. Political debates more concerned with words and appearance than the actual situation have come to an end.

We have reached this situation thanks to a chain of different factors. A financial crisis that arises from the appearance on the market of the so-called ´toxic assets´, which generates a loss in confidence, deterioration of bank balances (to the point of bankruptcy in some cases) and a loss in liquidity.

This situation permeates the real economy. Even with business models of proven success, many companies are asphyxiated by the lack of credit they need to balance their cash flows and, in the best of cases, they decide to adapt their costs or even close down, leading to more unemployment and less business activity, which affects suppliers. On the other hand, we have individuals with less purchasing power due to a lack of confidence or the effect of the increase in the price of money or less capacity for generating revenue. A vicious circle. The Spanish economic model, so dependent on construction, which has fallen to the deepest depths, domestic demand and tourism, both affected by the consumer crisis, has inevitably fallen into a recession.

This is the explanation given by economists. I, however, understand that there is an important crisis of values that explains what has happened. We live in a world that has replaced values with the value: MONEY.
This makes it easy to understand the greed with which the financial sector has developed aggressive practices to gain significant end-of-year profits. The sensation of living above good and evil that allows room for astronomical salaries and sumptuous expenses. But let us also consider how we all behave in a desire to live beyond our means, continuously changing home, car, TV and mobile phone. And keeping an eye on the neighbour to make sure that we are in front.

Many entrepreneurs fell into the traps of investment bankers who paid two EBITDA digits for the businesses to carry out sophisticated corporate transactions. And then others, under the wings of the authorities, boasted astronomical levels of profitability from construction with no investment at all. In the media, universities and business schools, knowingly or unknowingly, emphasised these models, which have been so damaging in the long term. Meanwhile, our governors, perhaps thinking that economic growth had been assured for all time, were occupied with what really concerns citizens: whether the River Guadiana has always belonged to Extremadura, the worldwide expansion of the Galician language, the launch of the umpteenth regional TV channel, the memory of the past, paying money for farmers to stop working the land...

Beyond the technical solutions needed to correct these macroeconomic imbalances, restore the necessary levels of liquidity and review the highly deficient assessment and control mechanisms, efforts are needed to recuperate personal and corporate values: austerity, honesty, partnership, long-term vision, commitment, team-building, strategic alignment, etc.

In Spain, we need to make a huge effort to change an economic model that has been severely damaged. We need more truly entrepreneurial businessmen, which includes short-term measures to protect those who are really innovating, producing and providing high value-added economic models. But we also need long-term commitment, which should begin at school and continue through university so that our children learn to value the figure of entrepreneur and ensure a future society that is more enterprising, which, in my opinion, will be the best guarantee of progress and well-being.

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