UPDATE
INTELLIGENT DIALOGUE
BEYOND PRIME ANGST
JUST MONTHS after we published our “Prime Angst” Intelligent Dialogue paper in May 2008, the tremors of the U.S. subprime crisis
gave way to a full-blown earthquake, shaking the global financial system to its core. And as we all see, aftershocks are spreading fast
into the everyday global economy of jobs and purchases and family finances.
In keeping with our principles of Intelligent Dialogue, just as we raised questions back in May, we continue to examine the
constantly shifting environment and encourage discussion. In this follow-up, we explore the landscape by revisiting questions we asked
then, and by looking ahead.
WHAT HAPPEN S WH EN BORROWERS CAN’T REPAY TH EI R
LOAN S, AN D HOW DOES TH I S AFFECT EVERYON E ELS E?
UPDATE: Events since May have All around the world, big-name banks The focus so far has been on managing
faced collapse. As we wrote in May, the the fallout from mortgage-related debt. But
provided dramatic answers to that tiny nation of Iceland was in trouble after mortgages are only one of the ways
its aggressively expanded banks could no
question, reaching an absolute households get money on loan. The next
longer fund themselves on the money household loan crisis brewing is consumer
crisis point in September. markets; Iceland effectively went bankrupt credit, which has been the top-up fuel
October 9. The list of woes has grown
On September 7, as subprime borrowers that’s turbo-charged the booming economy
longer by the day as consumer and
were defaulting on loans in ever larger in recent years. At the end of 2007, U.S.
business confidence declines.
numbers, the U.S. government took consumers alone owed $961 billion in
credit card debt. Now that home equity
control of mortgage corporations Fannie The answer to the question is that when
withdrawal has become more difficult or
Mae and Freddie Mac, which between too many people and institutions can’t
impossible (with house prices falling and
them accounted for almost half the U.S. repay their loans, governments themselves
equity turning negative) consumers have
become the only entities strong enough to
home-loan market. Financial services
turned to credit cards to pay for everyday
step in—individually or collectively (through
companies that had bought packets of
purchases. But with bad home loans
the International Monetary Fund)—with
subprime loans bundled into CDOs
bailouts, cash injections and liquidity mounting, card issuers are anticipating a
(collateralized debt obligations) saw the
guarantees. The U.S. financial system was spike in credit card defaults. They’re
market value of their CDO portfolios
saved from collapse by a $700 billion becoming much choosier about who they
plummet, dragging them toward
Federal bailout plan passed October 3. The lend to, how much credit they extend and
insolvency. The U.S. authorities allowed
U.K. government rescued the British how quickly they expect payment.
investment bank Lehman Brothers to go
banking system October 8 with a £400 Consumers are finding that fees and rates
bankrupt on September 15. On the same billion package for eight of the country’s can land them deeper in trouble.
day, Bank of America acquired troubled biggest banks and mortgage lenders. Other
investment bank Merrill Lynch. On It’s now increasingly clear that high
countries such as France, Germany and
September 16, vast insurance corporation levels of debt have determined the
Switzerland followed suit. The IMF bailed
AIG faced a liquidity crisis and accepted headlong dynamics of whole markets,
out Ukraine to the tune of $16.5 billion on
national economies and the whole global
up to $85 billion of Federal Reserve credit October 26 and stepped in with $25 billion
economy.
to rescue Hungary on October 29.
in exchange for 79.9% equity in the group.
How long will it take for more manageable forms of debt and more sustainable dynamics to emerge? Can finance
lead the way, or will governments force the issue through intervention and regulation?
1 INTELLIGENT DIALOGUE UPDATE: BEYOND PRIME ANGST

IS TODAY’S CRISIS A PRELUDE TO EVEN BIGGER DISASTERS
IN OTHER SECTORS SUCH AS EDUCATION AND RETIREMENT?
UPDATE: We said in May that 300-year-old competitive-enrollment short-term dip in educational provision
Trinity School in New York City that their and output? Or will it inflict longer-term
all around the world, some of the kids will not be returning next year, a huge damage that harms nations’ capacity to
most profound effects of the crisis drop considering the school’s enrollment educate and results in a “lost generation”?
of only 1,000 for its entire K-12 program.
will be felt at the beginning and No matter what, young people have the
Students are finding it harder to get loans
expanse of their whole adult life to get back
end of adulthood, and this is and grants as banks become tighter. This
on track. People approaching retirement
is bad news for private educational
certainly proving to be the case. have no such prospects. Those who made
institutions because it’s reducing
provisions for retirement in pension plans
On the education front, expectations of enrollment income at the same time that
are seeing the value of plans decline as stock
ever-increasing prosperity have pushed up investments are being hit by falling stock
markets have fallen. Those who thought
demand for education as well as costs. markets. Inevitably some schools won’t
their home would fund their pension must
According to the U.K.’s Daily Telegraph, make it through the economic crisis.
think again, realizing home equity won’t be
between 2001 and 2006, average British
Publicly funded school systems are less an option unless housing markets pick up,
school fees rose by 39 percent. Parents
directly vulnerable to students’ ability to and that could take a long time.
have squeezed their budgets and taken out
pay fees, but they too are facing funding
loans to give kids a running start in life Younger people have the consolation of
problems. Falling tax revenues and rising
with private education aimed at getting knowing there’s a fair chance that the
demands on public funds mean that
them into top universities. However, now economy will pick up sooner or later, allowing
schools will increasingly struggle with
that credit is drying up and incomes are them to get back to work with a reasonable
tighter budgets.
threatened, many parents are pulling their chance that stock markets and property
children out of private education and This raises serious questions about will gradually start to recoup lost value.
looking for ways to reduce educational investment in the education of future But for older people, working beyond their
costs. A recent New York magazine article problem-solvers and wealth-generators: planned retirement may not be an option
reports that 45 families have informed the Will economic strain result in a relatively in a recessionary or stagnant economy.
Will the crisis prove to be a wake-up call for consumers and governments to make more robust provisions for the
huge numbers of baby boomers moving toward retirement age? Or is it the early phase of a chronic problem of
senior short-funding?
DOES TH E S U BPRI M E CRI S I S HAVE H EALTH I M PLICATION S?
UPDATE: In the short-term, the 1.1 million people losing their coverage. changes … to potentially detrimental
Inevitably, as the economic effects of the changes, at first in cellular immunity and
impact of the crisis is expected to show crisis hit jobs and household finances, then in broader immune function. Thus,
up in matters of mental health. The more families will cut back on medical stressors that turn a person’s world upside
costs and defer medical attention. down and appear to offer no ‘light at the
World Health Organization warned
Compounding the emotional stress of an end of the tunnel’ could have the greatest
on October 9 that the global financial
economic crisis, this certainly has serious psychological and physiological impact.”
crisis is likely to cause increased longer-term implications for public health.
People who lived through the Great
mental health issues and even suicides A major meta-analysis of 293 Depression of the 1930s and other major
as people struggle to cope with the lack independent studies published by the hardships (war, internment, dictatorship)
American Psychological Association found are evidence that people have survived
of cash, the prospect of unemployment
that people’s immune systems suffer badly worse traumas. But quality-of-life
and even losing their homes.
from stress-inducing events that change expectations are much higher today. Not
their identities or social roles, are beyond only that, societies are more complex and
As we noted in May, 47 million American
their control and seem endless: “The interconnected; as the economic crisis has
adults were without health insurance
longer the stress, the more the immune shown, events in one place can set off a
and each percentage-point rise in
system shifted from potentially adaptive chain that travels far and wide.
unemployment will result in an additional
Will the economic crisis lead to a longer-term problem of more stress-related illnesses? How can the economic crisis
be prevented from turning into a health crisis?
2 INTELLIGENT DIALOGUE UPDATE: BEYOND PRIME ANGST

I F BAN KI NG AN D FI NANCE ARE TO BLAM E,
WHO WI LL PU N I S H TH EM AN D HOW?
UPDATE: Since we raised the the way down.” In fact the plan was voted England’s historic 1.5 percent point cut in
down by the House of Representatives on base rates. The banks were reluctant to
question in May, this has become a September 29 before it was modified and pass on the cuts. This prompted the
very hot topic. In allowing Lehman accepted October 3. chairman of Parliament’s Treasury Select
Committee to comment, “They are being
Brothers to go bankrupt, U.S. Rightly or wrongly, there is a
short-sighted. Given that they have had
authorities may have intended a widespread public perception in many
copious amounts of money from the
countries that the banking and finance
gesture of punishment; many taxpayer and are fully guaranteed, it must
industry is to blame. Since banks have
dawn on them that they have a social
analysts now contend that the move been bailed out with taxpayers’ money in
responsibility as well. The pressure on
was a mistake that accelerated the the U.S., U.K., France, Germany,
them will be maintained until they
Switzerland and the Benelux countries, the
meltdown of the financial system. acknowledge that responsibility.”
media and the public are on alert for any
In any event, Lehman was the exception; signs that banks are abusing the largesse of The net result appears to be a standoff.
authorities around the world quickly citizens by paying themselves too much or The financial system is absolutely reliant
concluded that banks could no longer be by sitting on cash rather than extending upon government willingness to step in
allowed to fail, since that would put the global badly needed credit. with bailouts, yet governments are
financial system at risk. In fact, far from being absolutely reliant on banks and financial-
There are plenty of accounts of PR foul-
punished, other troubled banks have either services firms to keep money moving
ups by bankers. On October 24, New York
been rescued with bailouts or guided into the through the economy.
Times journalist Joe Nocera wrote of a
arms of more solvent financial firms; for
conference call with JP Morgan Chase In May, we asked whether the financial
example Merrill Lynch was bought/rescued
employees, during which the bank crisis would mean a return to stricter
by Bank of America in September.
reportedly planned to use bailout money regulation for the banking industry. As of
There was outrage and opposition to the to buy weaker banks and grow, rather November, there is certainly talk, but the
$700 billion bailout of the U.S. financial than to ease the consumer credit crunch. G20 summit of world leaders in
system proposed by U.S. Treasury In the U.K., Chancellor of the Exchequer Washington resulted in no definitive step
Secretary Henry Paulson in September—a (finance minister) Alistair Darling forward. A follow-up meeting has been
summoned big bank chiefs to “persuade” scheduled for April 30, 2009, 101 days after
move that prompted the phrase
them to pass on the benefits of the Bank of Barack Obama takes office as U.S. President.
“Capitalism on the way up, socialism on
Is it possible to design and enforce a global financial system that is more stable than the current one? Will banks
cooperate to foster greater stability, or are the interests of global financial institutions now decoupled from the
interests of the global economy?
WHO WI LL BEN EFIT FROM TH E CREDIT CRU NCH?
UPDATE: It’s very early to talk the University of Reading in the U.K.: funding for the IMF. At the very least,
“Power and ownership are shifting Gulf economies and China are likely to
about benefits from a crisis that’s a
eastward.” As developed-world economies wield much more authority in global trade
long way from finished. However, of the United States and the European and finance talks.
history will likely say that the crisis Union struggle to find cash for bailouts, all
In the meantime, down on Main Street
definitively tipped the 2008 U.S. eyes turn to countries with big cash piles. it’s hard to see who will benefit from the
China and the Gulf States have trillions of
presidential election in favor of crisis in the short term, apart from
dollars in reserves that could enable the
Barack Obama. The more the crisis insolvency practitioners and bargain
IMF to help smaller countries withstand hunters short on debt and long on cash.
spiraled, the more commanding
the present turmoil. British Prime Minister Still, with auto sales falling dramatically,
Obama’s lead in the polls became. Gordon Brown, one of the most proactive consumers driving less and economic
world leaders in this crisis, toured the Gulf activity slowing, the environment may be
In May we noted a comment from Roger
one unintentional beneficiary.
States in early November to bolster
Martin-Fagg of Henley Business School at
In the meantime the questions on everybody’s mind are: How much worse will it get before it gets better, and how
long will that take? And how will we know when the crisis is over?
3 INTELLIGENT DIALOGUE UPDATE: BEYOND PRIME ANGST

LOOKING “BEYOND PRIME ANGST”
DURING THE YEARS of economic boom, everyone came to expect high rates of growth, especially in business. Many businesses were
expected by analysts and investors to deliver double-digit growth year in, year out. In many cases, 10 percent annual growth was seen
as disappointing, even though that means doubling in size every 10 years. It’s now clear that much of that growth was dependent
upon credit, which has now become drastically less available.
As long as the downturn continues, it’s highly unlikely that many businesses will be able to achieve even minimal growth. In fact,
maintaining business at previous levels will be a major achievement for many. And once economies emerge from the crisis, consumers
will need time to regain their confidence. Who will be quick to risk the sort of credit-fueled spending that delivered the big growth in
the boom years?
This begs the question: Will consumer-focused industries lead the way out of the recession? Which industries will drive future
economic growth? U.S. President-elect Barack Obama has a clear view on this issue: “The engine of economic growth for the past 20
years is not going to be there for the next 20. That was consumer spending. … There is no better potential driver that pervades all
aspects of our economy than a new energy economy.”
In the economies that emerge from the recession, where there is no easy credit to fuel business, what rates of growth will be
regarded as reasonable and sustainable? Will the business culture become more prudent and cautious, or will it revert to the hard-
driving pre-crisis attitudes?
And finally, how will the crisis shape the attitudes of Millennials and the generation behind them? They have never experienced a
serious economic downturn, let alone one that has generated such widespread fear and angst. Will the experience traumatize them into
being cautious and avoiding risk, or will they shrug it off and get back to the future?
The Porter Novelli INTELLIGENTDIALOGUE Principle
WHAT PORTER NOVELLI UNIQUELY OFFERS can be summed up in two words: Intelligent Influence. The basis for
Intelligent Influence is Intelligent Dialogue. As yesterday’s mass media morph into today’s interactive media, people
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sound-bite answers are seductive; they give a comforting but illusory sense of resolution. Instead, we need to cultivate
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4 INTELLIGENT DIALOGUE UPDATE: BEYOND PRIME ANGST