Managing in a Downturn How Do You Manage in a Global Financial Recession?

Abstract

a s we write this column, global and local financial trends threaten to radically alter the world as we know it. Across the Atlantic Ocean, European countries face a debt crisis and the collapse of the euro. Here at home, the federal government amasses unsustainable federal deficits exceeding a trillion dollars per year. State budgets are severely out of balance as tax revenues decline while committed costs, including retiree pension and health benefits, continue to rise. In Massachusetts, for example, some municipal employees who retire after age 55 with at least 10 years of service are eligible for “free” healthcare benefits for life. These trends affect your institution, and healthcare leaders must be prepared to respond. As leaders consider the right course of action, they will find it helpful to understand how the financial world reached its current state. On a Monday morning in March 2008, we woke up to the news that the federal government, by way of the Federal Reserve Bank of New York, had arranged an emergency loan to Bear Stearns in hopes of preventing a market crash. It seemed to be an anomaly, reminiscent of the successful 1979 government bailout of Chrysler Corporation. That $1.5 billion government loan guarantee stabilized the too-big-to-fail, Big Three automobile manufacturer. In the 1990s, the government took similar action to rescue the failing savings and loan industry. As spring wore on, it became clear that the Bear Stearns package was not a silver bullet solution. Evidence of the problem continued to pile up, and more government bailouts followed. Fannie Mae and Freddie Mac received a weekend bailout from the Federal Reserve and the Treasury, complete with a government guarantee to cover their losses for three years, with no upper limit on the coverage. Two of the Big Three automakers hit bottom and filed for bankruptcy. The prepackaged bankruptcy of General Motors, established in 1908 and once the largest corporation in America, was a sentinel event for all who remembered the expression, “As GM goes, so goes the country.” America had led the world into a major recession. Anyone who owned a home, a 401(k) plan, or stock was suddenly a lot poorer, at least on paper. As the freefall continued, the federal government quickly developed and deployed the massive Troubled Asset Relief Program (TARP), sending some $700 billion in relief funds to