Unholy Partnerships and Bubbles -- Another on the Way?

You don't have to be an economist (which I'm not) to recognize that extreme boom and bust cycles harm the economy. A market bubble such as the housing mortgage debacle has at its core some unhealthy relationships between the economic partners involved. I think those poor business relationships reflect on a larger scale what can happen to market relationships in specific industries. Unfortunately, I believe another economic bubble may be on the way.

Business/channel partner relationships that are healthy produce a "win/win/win" -- across the supply chain for original sellers, partners and end-customers. Delivering and receiving value at each chain link should be the metric for healthy partnering. Inadequate value will break the chain. Without good enough incentives or training offered by the original seller, for example, partners can't perform as well for the seller or the end customer. Or if a channel partner fails to support customers post sale, then the lousy experience for customers pings back to hurt the reputation and share for partner and original seller alike. Nobody wins.

On a larger scale, I think the housing mortgage bubble had unhealthy partnership relationships, between banks and mortgage brokers, realtors, regulators and home buyers. Housing prices became inflated because borrowing too much was made too available to too many. Fingers are still being pointed for blame. Suffice it to say that in the end, all those groups and more -- arguably all of us affected by the bad economy -- suffered as a result.

While less documented, another economic bubble disaster may be brewing, related to college lending and borrowing. I agree with analysts who say that higher education prices are inflated because too many are borrowing too much, in terms of lacking ability to pay back and/or lacking quality jobs. The enablers? Here include the usual suspects -- banks/financial aid brokers and regulators. But include as well the colleges and trade schools encouraging over-borrowing, and students and their parents who borrow more than they can pay back, and those studying for careers that can't pay enough earnings to warrant the cost.

Parenting four, college-educated children gave me a birds-eye view of seeing some of these dynamics first hand. But the broader evidence has come from analysis such as here and here (scroll down to chart comparing housing and college inflation rates with the CPI).

Unholy partnering, or a lack of true value for throughout the chain, never ends well. And as we've seen, large bubbles make big messes. I hope some behavior changes and we don't see this next one burst as some fear.





Comments for: Unholy Partnerships and Bubbles -- Another on the Way?

Name: Steve Murphy
Time: Wednesday, January 18, 2012

Jeff, so how do you suggest that the financial services industry ensure win-win-win relationships -- if the customer story is "too good to be true" (last time it was home values would only increase) what is the hubris for this bubble (don't worry you'll be able to pay for it from the increased earnings capacity you'll create)? Can you point to any other industry where the economic partners have such unhealthy relationships?
Name: Jeff Marr
Time: Wednesday, January 18, 2012

Steve:
If no single player such as the financial industry can ensure win/win/win with out cooperation from others (needing regulatory direction and some consumer responsibility come to mind); it can at least hold to basic principles. for example, banks traditionally assess credit risk, yet too-easy credit terms were given to many over a long period. Call it hubris or just tendency, but people tend to extrapolate positive economic trends -- stock price, economy, home value, etc., to "infinity and beyond." Another industry coming to mind which has had similar problems is Automobile, where OEMs, financiers, dealers and consumers have seen their share of ups and downs. Remains to be seen whether the feds will be more a problem than solution, in my opinion. thanks for the thoughtful questions....

Leave a comment







Captcha