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100 Year Crash: How did we get here? What should we do now? What about the future?

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There has been much fear mongering in Washington over the last year as the financial crisis has built to a boil. But despite the most recent efforts to scare Congress and the American people into action, there has been very little light shed on some basic questions.

And I believe that before another penny of American taxpayers money is spent, our leaders need to spend more time explaining what is going on and why change is required. What we are facing is a crisis of confidence -- we are witnessing the erosion of trust in our leaders and our financial system.

People no longer believe our leaders have our best interests at heart. In the wake of the Auction Rate Securities scandal, people doubt the basic fairness of our system. People do not know the details of their accounts -- for instance few people have read the prospectus of their money market funds. And there is a lack of powerful ideas to sustain people's belief in the system.



To overcome these important challenges, people need answers to three fundamental questions:

  • How did our system get to this point? Five basic problems: securitization, too much borrowing, skewed incentives, lack of transparency, and global interconnectedness of markets. For more on this point, click here.
  • What should we do now? The answer depends on who you are. Families need to find safe banks in which to deposit their money; banks need to reduce assets and raise capital, find a merger partner, or shut down; companies need to conserve their capital; and government needs to restore trust in the system. For more on this point, click here.
  • What should our financial architecture be? We should design a new system that solves the problems with the current one and encourages savings, innovation, and honesty. For more on this point, click here.

Peter Cohan is President of Peter S. Cohan & Associates. He also teaches management at Babson College and edits The Cohan Letter.

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DJIA-14.2810,318.16
NASDAQ-10.782,146.04
S&P 500-3.521,091.38

Last updated: November 22, 2009: 10:09 PM

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