SPECIAL ADVISORY ARTICLES
Managing Through A Prolonged Downturn (2008)
There is a rather tasteless joke that claims that a recession is when your neighbor loses his job, but a depression is when you lose yours. The curious irony is that economists have no specific point of reference to distinguish when an economy moves from one state of malaise to the other. That said, I think most people would agree that this economy is definitely in a recession. The question then becomes: how long will this last?
Conventional wisdom, publicly espoused by a number of market watchers and legal consultants is that: “The recession will be intense, but short. Everyone wants to get back to normal. Short term, the backlog of real estate will be sold as owners accept losses; banks will end the credit crunch; layoffs will make companies more efficient.”
My view is far little less confident. I believe that unlike past experiences, this recession isn’t being caused by a downward spiral in a few isolated industries. It started with the burst of a protracted housing bubble and then metastasized into a full-blown credit crunch, eventually destabilizing the entire financial system. Therefore, I submit that for the next five years, every time you think it's safe to get up and dust yourself off from this downturn, every time you feel like you've endured the worst of it, another piece of news is going to come along to freshly bludgeon you. This time the economic slowdown is going to be a lot different and, in many ways, a hell of a lot tougher.
Whether I’m right or wrong is probably immaterial. What is relevant is whether your firm is prepared for a worst-case scenario. What is worth acknowledging is that this economic downturn could present an opportunity to introduce meaningful change, when change is not normally an easy subject to discuss among partners.