FINANCIAL BALLOON

FINANCIAL BALLOON

Wall Street's profits grew rapidly, too. During the market slump of the 1970s and early '80s, the financial sector never accounted for more than 16% of domestic corporate profits. By the 1990s, banks and insurance companies were capturing between 21% and 30% of U.S. corporate profits. During the 2000s, the figure topped 40%.

By then, the investment banks were focused on "innovation" and "financial products," including the structured finance products, collateralized debt obligations, and credit default swaps we've heard so much about. While some of these creations were well intentioned—mortgage debt was pooled, in theory, to reduce risk and enable more people to buy their own homes—much of it was overly complicated and intended to enrich the bankers at the expense of their clients.

In the rush to create new financial "products," banks lost sight of their core mission. In truth, their role is to safeguard the financial resources of their customers and to help allocate capital to productive uses in society. In the future, bankers should worry less about their own "innovation" and more about supporting the real innovations of entrepreneurs and others who create tangible value. Wall Street is supposed to be in the financial services business—that is, the business of serving others.

A society that has too much of its energy, smarts, and capital flowing to Wall Street is, by definition, underinvesting in the rest of the economy.

In the future, let's focus on the traditional strengths of the American economy. Here are three things we do well:

1. We produce trust better than other societies.

The U.S. economy has prospered because we respect the rule of law, contracts, intellectual property, and transparency. That's why it's so painful when trust is betrayed. By rebuilding trust, America will attract the capital and the people we need to thrive. Banks will again lend, investors will embrace risks and entrepreneurs will dream big—but only after trust is restored.

2. We solve problems by deploying the forces of capitalism.

While government policy is important, businesses built the railroads, created the automobile industry, enabled global communications, and generated the growth in personal wealth that, even now, after the housing bust, allows about 67% of Americans to own their homes. We need our best and brightest today to devote themselves to our big problems: the environment, health care, and education. Business can help lead the way. Many companies already are—look at Wal-Mart's commitment to sustainability or GE's new effort to help deal with the cost and availability of health care.

3. We create real value from values.

We do our best when, instead of pursuing short-term success, we are inspired by values. Most great businesses are driven by values. By that, I mean that they are other-directed; they focus on the needs and wants of their customers, workers, and communities. Just as important, they go about their business in a principled, consistent and transparent way. Examples abound: Google (GOOG) with its drive to organize all of the world's information, Walt Disney (DIS) with its desire to entertain families, UPS (UPS)with its goal of enabling global commerce to thrive.

These are among the big ideas that we can take away from the global economic meltdown. They're about more than spending, saving, borrowing, regulating, or reading the fine print in an investment prospectus. Business leaders need to have a thoughtful conversation about these ideas—and that will take time. Let's get started now.

Posted in: FINANCIAL BALLOON