Winston Churchill famously remarked that nothing concentrates the mind like live bullets. I am writing during the week that Merrill Lynch, AIG and Lehman Brothers went under, and a new Troubled Assets Relief Program is fast taking shape. While it does not seem likely that we will see a repeat of the Great Depression, changes in the way we finance our global economy are inevitable. Here is what my crystal ball sees in terms of a new financial landscape as it affects domestic manufacturing.
While it will require years for us to find a stable new model for finance, whatever emerges will be vastly different and more risk-averse than the system we have enjoyed for the past 25 years. There will be less competition, and more of it will come from foreign institutions, including sovereign wealth funds. The past 25 years saw an unprecedented expansion of credit, much of it due to leverage, and a significant part of the new capital has been squandered in unwise investments around the world. In the future, financial players will be less willing to take on risk. Financial regulators will become much more aggressive, as they should, in terms of enforcing new capital and liquidity standards, and in oversight of lending standards. Finance will revert to a more traditional model based on thrift, prudential lending and less leverage.
One result will be slower macroeconomic growth, both at the national and global levels. Credit cannot fuel bubbles in the future, until a new generation forgets the lessons we have so painfully re-learned. While global demand for manufactured goods will continue to expand thanks to the emerging economies, it will be more restrained in the developed world which was so dependent upon credit. Industries with sales models dependent upon seller financing or leasing -- such as autos, airlines and heavy equipment -- will have to find new ways to help their customers buy products.
The great merger and acquisition boom, which commenced with the creation of the junk bond markets in the 1980s, has undoubtedly seen its best days as the appetite for risk wanes and regulators squeeze lenders. Operating capital and funding for major investments, too, will be constrained by the new financial conservatism. The creative financing options that have recently emerged, such as securitizing receivables, may be more difficult to sell.
Fortunately, American manufacturers went through a painful deleveraging in the last recession and emerged with more conservative and stronger balance sheets. This is the good news in todays dismal economic environment. On a relative basis going forward, the strong balance sheets of manufacturers, along with their increasingly competitive cost structures in a world with solid demand for their products, ought to make them attractive for investors. The fast money options of the past decade will be much less alluring than fundamentally strong companies with steady growth opportunities.
Much of how this scenario unfolds will depend on the change of national leadership to be decided on Nov. 4. Hopefully the crisis atmosphere which pervaded in the fall of 2008 (partly driven by overheated political rhetoric) and which clouds our ability to think clearly about required change, will have dissipated so that sound policies can be hammered out. One can already see signs, however, that manufacturing is receiving a more favorable hearing as a pillar of our economic future. The previously remote possibilities of some help for the beleaguered auto industry, a rational energy policy and lower corporate taxes in the face of global tax competition are now viewed more favorably as policy makers envision the economy of the future. Manufacturing now appears on a fundamental and relative basis like a sound bet to play a crucial role in this future.
Dr. Duesterberg is president and CEO of the Manufacturers Alliance/MAPI, an executive education and business research organization in Arlington, Va.
