By Wes Ball. Wes is a strategic innovation consultant and author of The Alpha Factor – a revolutionary new look at what really creates market dominance and self-sustaining success (Westlyn Publishing, 2008) and writes for Leadership turn every Tuesday. See all his posts here. Wes can be reached at www.ballgroup.com.
Is there really a lending problem? I know several people who doubt it.
One is a local car dealer. He was almost dazed as he related a story to me about selling a used car to a woman who had a bankruptcy five years ago. He sold her a nice car for $27,000. She did not have the first payment she needed to make the deal. Three banks (Bank of America, Citizens Bank, and one other I can’t recall) all offered her a loan for $32,000. That’s on a car that would only give her $22,000 on trade-in, if she sold it back one week after consummating the deal.
I also know another young couple who just purchased a $19,000 van. They had no problem getting a loan despite the fact that they have very low income. The rate was 18.5% – about three times what should be available. When an older and wiser friend challenged them that they could not afford the payments needed, they said, “Well, they must know what they are doing. They offered the loan to us.” The friend helped them sell the car, pay off the debt they still owed on the van, and get them into something they could afford.
So what’s wrong with these scenarios?
In the first case, at least one of those banks is in the midst of getting a getting an infusion of taxpayer cash from the U.S. Department of the Treasury, because they lost so much money on poor-quality loans. In the second case, the justification for making a really bad decision was that the blame was really on someone else. Worse yet, someone helped them get out from under the burden, but it is obvious from talking to them that they really don’t understand what was wrong with their decision.
We’ve just gone through the scariest financial event in my lifetime, but we aren’t through the consequences of banks, mortgage companies, investment companies, investors, consumers, and the U.S. government all thinking they can get away with making really stupid financial decisions because the blame can be cast upon someone else. It’s like watching three year olds pointing fingers at each other and expecting mom to “buy” it.
What is it going to take for us to finally understand that it doesn’t work to either expect someone else to make things right for us when things go bad or to do things that enable those persons making bad decisions to go on making bad decisions?
Isn’t it time that we let people take responsibility for their decisions?
If people want to have the freedom to make decisions for themselves, shouldn’t they also be required to take the consequences of those decisions?
Or is it a pyramid?“A Ponzi scheme is a fraudulent investment operation that involves promising or paying abnormally high returns (“profits”) to investors out of the money paid in by subsequent investors, rather than from net revenues generated by any real business.”
“A pyramid scheme is a non-sustainable business model that involves the exchange of money primarily for enrolling other people into the scheme, without any product or service being delivered.”
This is what came to mind after reading CandidProf’s post yesterday; I finally decided that’s it’s both, making is a pyra-Ponzi scheme.
As CP described the situation it’s definitely a pyramid, his college is funded based on how many students are enrolled as are most K-12 schools in this country. Further, lowering standards and focusing only on retaining students in order to continue funding certainly fits the no service being delivered description of a pyramid.
The Ponzi element is seen in high promises from such initiatives as No Child Left Behind, which has done nothing to stem the downward spiral of learning—in fact, it has made it worse.
NY Times Op-Ed Columnist Bob Herbertquotes from a study published in the Notices of the American Mathematical Society that states, “The United States is failing to develop the math skills of both girls and boys, especially among those who could excel at the highest levels, a new study asserts, and girls who do succeed in the field are almost all immigrants or the daughters of immigrants from countries where mathematics is more highly valued.”
He ends by quoting “An article in Monday’s Times spotlighted some of the serious problems that have emerged in the No Child Left Behind law. Among the law’s unintended consequences, as Sam Dillon reported, has been its tendency to “punish” states that “have high academic standards and rigorous tests, which have contributed to an increasing pileup of failed schools.”
After reading CandidProf’s post, my Russian business partner, Nick Mikhailovsky, commented,
“Actually, the average education quality has significantly degraded over here as well. Although the reasons are different the outcome is the same and applies to both basic and higher education.
Our reason is simpler—low salaries in education.
Everyone who needed money or couldn’t bear living in poverty has left education. After 15 years of that, there are almost no good teachers or college professors left. The old ones retired, and young people aren’t willing to live in poverty when they have plenty of other opportunities and all their life in front of them.”
Hmmm, Russia seems to be dumbing down by salary, but considering the salaries we pay our teachers we’re trashing US education from the top down and the bottom up.
By CandidProf, who teaches physics and astronomy at a state university, shares his thoughts and experiences teaching today’s students anonymously every Thursday—anonymously because that’s the only way he can be truly candid. Read all of CandidProf here.It’s all about the numbers. Sadly, that is how many college administrators see the students: as numbers.
The college has an enrollment figure. In my state, one of the key measures that they are now implementing to rate college performance is the increase in enrollment figures.
For a long time, as a public institution, we have been funded by how many students are enrolled, so the administration has been actively recruiting students. It has not mattered whether or not the students are ready for college. That was not important. It did not matter if they had the skills to succeed. That was not important. Whether or not they enrolled was important, not whether or not they learned anything while here, nor even if they passed any of their classes.
Another key measure for the state is in access of college to minorities and Hispanics. We are advertising in Spanish. The college’s web site can be viewed in Spanish. The registration can be done in Spanish. But all of the classes are in English.
Students who don’t know English are up a creek. They have little hope of passing the classes once they get here. No matter. They enrolled, they were counted by the state, and that was all that mattered.
Going hand-in-hand with enrollment is retention. College administrators go to conferences with other college administrators, and they all talk about retention policies.
The idea is that getting students to enroll is not sufficient. They want them to enroll again next semester. So, if they flunk out, then they won’t be enrolling again.
The first strategy used by many colleges is to simply change the rules on what constitutes flunking out. When I was a student, a single F or D, or too many C’s, was sufficient to get a student put on academic probation. If you repeated a bad semester, then you were placed on academic suspension. That wasn’t meant so much as punishment, but rather to give you time to reassess your educational goals and strategies. I never had to go through that, but I knew some students who did.
Now, you can fail a class every semester, and have a whole semester of D’s and C’s, and keep that up for semester after semester. A depressing number of our students graduate with a GPA of less than 2.0. But the students keep signing up for classes and that is all that counts.
The next step in retention is to put pressure on faculty to give higher grades. After all, the administrators reason that if students get too many poor grades, they might get discouraged and drop out. If they drop out, then they won’t be registering for classes and that means, of course, that there will be less state funding for the college. So faculty are encouraged not to grade too harshly and to give higher grades.
This has been going on in the K-12 education for years, but it is now becoming more common in colleges. I have a number of colleagues who are teaching in a climate of that sort. Many faculty just give up and quit upholding standards. They just give out grades. The students don’t learn. We have a few part time faculty here who do that, too, because that is expected at other places in the area where they teach part time.
But students who take the classes of a faculty member who just gives out grades without the students learning seldom do well in the follow-up classes.
Worse, this strategy makes a college degree pretty much worthless.
Holding to standards is hard, particularly when others don’t hold to those standards.
Holding to standards is hard when funding is tied to numbers that can be improved by relaxing those standards.
But an effective leader will hold standards, even if it is the hard thing to do.
I see this getting worse. My state is now looking to change the funding formula for its public colleges and universities. Rather than giving money for the number of students enrolled at the beginning of the semester, they are looking to fund the number of students enrolled at the end of the semester.
That changes things. It means that simply getting students to sign up is not enough. Now, we need to keep them in the class all semester. It is pretty obvious that there will be extreme pressure on faculty to limit the students dropping.
That means making the classes easier.
That means giving up on tough and difficult standards and setting the bar as low as possible to make it easy for students to pass without ever having to do anything.
That means giving up on teaching.
And this is what is coming down the pike from state legislatures all over the country. They have done this sort of thing in K-12 education, making a high school diploma pretty much worthless.
Now they are working to make an undergraduate college degree worthless as well.
A lot of faculty are planning on retiring when these changes are made. I have a few years to go until retirement, and I am not looking forward to what I see in our future.
It is the rare leader who leads beyond what is expected of him.Those who do are often labeled as unfit to lead and dismissed.
There are not that many examples of such rare leaders. General MacArthur was certainly one. He stood up to President Truman, who was quite happy to play at war in Korea without winning it, which cost many thousands of lives for no real gain. Gen. MacArthur’s dismissal by the President was a terrible blow to his honorable record of service throughout World War II, an embarrassment to the Army he commanded, and the beginning of an approach to conflict that has plagued us ever since. But his dismissal was also completely rational, because he was not working to expectations.
Leaders, who wish to keep their jobs, work to satisfy expectations.
Understanding this is critical to our understanding of what has recently happened in the financial and mortgage markets.
The key here is understanding that leaders lead only with the support of their constituency (i.e. stockholders or boards of directors in the case of corporate leaders or voters in the case of politicians). A leader cannot get away with major strategic direction that his constituency does not approve, such as running full-bore into selling sub-prime mortgages. This is not a matter of a few rogue leaders who ran ahead of their organizations without oversight or accountability. Every head of every organization caught with their mortgages down was in that position with the full knowledge and support of his constituency. That includes Wall Street, banks, and both GSEs (Fannie Mae and Freddie Mac).
Even the criminal actions of overstating balance sheets in order to gain the huge bonuses being offered had to be done with the knowledge and approval of a constituency. For instance, Franklin Raines of Fannie Mae could not have gotten away with overstating his balance sheet repeatedly to gain the $90 million he earned over 6 years (as the organization was actually failing) without both his board and the Congressional oversight committee assigned to watch his actions approving of it. In fact, in 2004, when Armando Falcon, the chief regulator who “blew the whistle” on these shenanigans, went before the Congressional oversight committee, he was all but tarred and feathered for his efforts. No one seemed interested in hearing about anything untoward, because the objective of increasing mortgages to low-income families was being addressed. End of subject.
Corporate executives also are being whipped for the “outrageous” sums of money they earn, primarily as a reward for pushing stock prices ever higher. As I have written many times, the tactics they use to accomplish this are more often than not the death-knoll for the long-term success of the organization, but that doesn’t stop the board of directors and stockholders from applauding their efforts.
The problem comes down to, “Who really cares before the damage starts to show?” Top executives are not stupid. Neither are politicians (the few years I worked with Washington politicians proved to me that almost all believe they have the best interests of their constituency in mind). They know exactly where their support comes from and what that constituency wants from them. Despite all the worries about sub-prime mortgages that were voiced over most of the past decade, no one really cared.
Why? Because expectations were being met. The deceit was in hiding the truth from the constituency. What made the sub-prime fiasco possible was the fact that risk was being “diluted.” Every time a package of mortgages was sold to investors, the real hidden risks were lost in the mass. That effectively removed the effect of what would have been the most vocal constituency: those who would have spoken up by keeping their checkbooks closed had they known the real risk.
The only constituency that really knew what was going on in most cases was the one gaining from it.
The same thing is going on in corporations across the country. Decisions about how companies are being run are coming from the wrong constituency. The expectations are being driven by boards of directors and stockholders, who care little about the long-term health of the company as long as short-term gains are good enough to increase their personal portfolios.
So, what is the answer? Can we expect companies to survive and do the job for which they were created, i.e. job and wealth creation for those who invest their time and money into it, when persons with no long-term interest are defining the expectations for corporate executives? Can we expect government-overseen organizations or programs to have positive long-term effects, if those defining expectations are only interested in narrow outcomes that can create far greater damage but that provide personal gain for them (even if it is only in terms of pandering to the base desires of their constituencies)?
Leaders lead to expectations. Isn’t it time we started setting expectations that don’t just “use” an organization for personal success and instead start expecting long-term success that builds the organization creating that success?
We are being asked to take a greater personal role in addressing climate change. Can’t we also take a greater role in demanding corporate responsibility? If not, we may be witnessing the end of the independently-run corporate model in America.
We are delegating far too many decisions that affect us as long as things seem to be “going right” (no matter how obvious the risks are), and then expecting someone else to make things right. Isn’t now the time for the real constituency to stand up and make its voice known?
We can do it through our investing. We can do it through our voting and regular conversations with our political representatives. We can do it in through an unwillingness to let others speak for us, while we sit back and demand that everything go perfectly right for us.
How would you address this without giving even more control to a constituency that would drive the wrong expectations?
Stephen Covey says, “We simply assume that the way we see things is the way they really are or the way they should be. And our attitudes and behaviors grow out of these assumptions.”And we, the people, did assume.
We, the people, assumed that the visions presented by the leaders on and off Wall Street were true.
We, the people, assumed that all those experts were correct when they lauded the Wall Street crowd.
We trusted them, even though it’s not the first time that the Wizards of Wall Street broke our hearts—and our economy.
Last year when I wrote about CEO pay I said, “If little girls are made of ‘sugar and spice and everything nice’ and little boys are made of ‘snakes and snails, and puppy dog tails’, then these CEOs are made of ego and greed and the skill to mislead.”
We, the people, have a short attention span and we’re lazy.
It’s so much easier to listen to the experts and then blame them when things don’t work out. Less painful than looking in the mirror and taking responsibility for our own contributions as passive followers.
But why should we? Our leaders take no responsibility.
Alan Greenspan, a great believer in deregulation, still thinks derivatives are good and puts the blame on the leaders who, he says, got greedy.
Whereas five years ago Warren Buffett called them “financial weapons of mass destruction, carrying dangers that, while now latent, are potentially lethal.”
But it’s so much easier, not to meniton comfortable, to listen to the experts who say everything is fine than to the experts sounding a warning.
Our leaders may have led us down the garden path, but we, the people, were happy to follow—being careful to keep our rose-colored glasses intact and firmly in place.
Entrepreneurs face difficulties that are hard for most people to imagine, let alone understand. You can find anonymous help and connections that do understand at 7 cups of tea.
Crises never end.
$10 really does make a difference and you’ll never miss it,
college professors left. The old ones retired, and young people aren’t willing to live in poverty when they have plenty of other opportunities and all their life in front of them.”
It is the rare leader who leads beyond what is expected of him.Those who do are often labeled as unfit to lead and dismissed.
And we, the people, did assume.
