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74Martin Theyer is a manager at the largest printed circuit board manufacturer in Europe, a financial expert, book author and speaker. Martin Theyer is a business economist, lecturer and financial expert. He developed the concept of the “tsunami model” of the financial crisis. It is based on his intensive research over several years in the USA, Switzerland and at the London Business School. The tsunami model offers new insights and views on the origin and development of financial crises and their long-term effects. Martin Theyer has always been in the “center of the action” in the financial world. His 12 years with Shell - three of them in London - enabled him to better understand the international financial markets - and to learn to assess them. From 2006 to 2009 he was Head of Group Development at Volksbank AG in Vienna. Today he is “Director Strategy Development and Communication” at ATundS, the largest printed circuit board manufacturer in Europe. He also advises companies on important strategic financial issues. Since 2001, Mag. Martin Theyer has been giving lectures on corporate governance at the Karl Franzens University in Graz. He is the author of the book “Lost Trust - The Tsunami Model of the Financial Crisis” and blogs about current events in the financial markets at www.mtconsult.blogspot.de/.

Crisis Management and Prevention in Business: Combating Causes in 4 Steps

In the financial sector in particular, crises are practically the order of the day. But they can be prevented if you tackle the causes.

Financial crisis: why it is emerging

Although the media and politicians are busy telling us something different, financial crises in particular usually do not come as a surprise. And we can arm ourselves against them.

The crisis of 2008, for example, did not start with the real estate bubble in the USA, as is rumored everywhere. Its origin is much, much further back, its destructive power is much greater than imaginable and previously thought. Hardly anyone speaks about it. I do it. On the occasion of my seven years of research on my book “Lost Trust - The Tsunami Model of the Financial Crisis” I dealt intensively with a question that has persisted since then: What really triggered this crisis?

My tsunami model is based on the fact that there must be a trigger that started this wave. A tsunami. Tsunami means “wave in the port. The term was coined by Japanese fishermen who returned from fishing and found everything in their port completely destroyed. Even though they hadn't seen or felt for a while on the open sea.

A small event causes the entire economy to collapse

Similar to a sea or earthquake, which can set a wave under the sea surface for the time being unseen, a small, locally limited event in a globally networked financial world can trigger far-reaching consequences up to breakdowns of whole economic systems.

And that's exactly what happened. Now I had understood how a financial crisis arises in principle. However, the trigger was not one step closer. I only knew one thing: Somewhere, something had happened that had caused this wave.

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From the Fall of the Wall to the Financial Crisis

The wave had then spread underground for a long time, at first small, then expanding. Until, yes, until we could no longer overlook her because she was already overrunning us and causing a mess in the financial markets.

So I had grabbed and did not let go. After long and intensive research in the USA, London and Switzerland I came close to the core The same force that brought the Berlin Wall down, triggered the most severe financial crisis of our century!

Reaganomics

It is called Reagonomics. To be more precise, the neo-liberal economic course of the Reagan era and the belief in the market's self-sufficient market forces, The Reagan era forced the Soviet Union to its knees by the tremendous contest.

The communist system of planned economy was ultimately subject to the capitalist system of the free market economy and had to be defeated by 1989. This was the way to the reunification of Germany and thus to the fall of the Berlin Wall!

Ronald Reagan is guilty!

Recalculated on the financial market, this means that the officials of the Reagan era and their successors, led by Alan Greenspan, were firmly convinced that the dismantling of controls and barriers would not only stimulate the economy.

They also believed much more that this would lead to a fair distribution of capital and resources in a society. Ronald Reagan was a supporter of Neo-market liberalism, mentally supported by Nobel laureate Milton Friedman with his laissez-fair principle.

Lack of regulation of the capital markets

How horrendously wrong this assumption was and to what catastrophic consequences it led, turned out much later. Unknowingly, the Reagan era triggered so long ago a seaquake whose waves today threaten to tip the existing financial world off its hinges and which still keeps us breathless with its full destructive power.

Alan Greenspan, incidentally, admitted at a hearing in the Committee of the Parliament 2010 that it was a mistake not to regulate the capital markets more strongly! A late insight from which hopefully for the future was learned.

Because my tsunami model says that a possibly unnoticed event can often only cause a financial crisis over several countries or even continents years later, similar to the way a tsunami is triggered by an earthquake in the sea. And how does it continue? How does this huge, powerful wave come about from the moment of triggering, how does it spread? How does it reach all of its destructive power?

4 steps for effective crisis management

In order to counter the crisis, we must first recognize: How does the impact of the wave come about? There are essentially these four elements that contribute to the development of a tsunami-like financial crisis - and this is exactly where we find the essential steps towards prevention:

1. Too high speed due to global networking

In the early 60s, Stanley Milgram developed a theory. He hypothesized that everyone in the world is connected to everyone through six contacts. The theory entered social research as the “small world phenomenon”. In a world where everyone is already connected to everyone via a social network, this phenomenon applies even more to the financial world.

Instead of people, machines trade with each other there and are networked around the clock - 7 days a week, 24 hours a day. As a result of this strong networking, innovations in the financial sector can spread much faster than regulators ever have the opportunity to intervene. This fact very quickly leads to catastrophic aberrations.

2. Risky financial innovations

Innovation is closely linked to finance. By developing options, risks could be better hedged, for example. The development of credit default swaps has allowed bank limits to be extended.

The downside of all these innovative developments was that it opened the door for speculators. Similar to a pyramid game, a few very rich and many investors were very poor. Not otherwise, Warren Buffet described these instruments as weapons of mass destruction. These financial innovations finally found their way into the financial sector and caused enormous damage.

3. Greed is a vice

This is a driving force that is all too human. The immeasurable pursuit of wealth and power. In my book I describe how geniality (the human side of innovation) coupled with greed could unfold to a tremendous destructive force.

I had the opportunity in personal interviews, with people such as John Meriwether or Andy Krieger - both of which will be discussed later - to shed light on this dark side of finance.

4. The butterfly effect

That small causes can have great effects, Edward discovered. N. Lorenz in his modeling of the states in the earth's atmosphere for the purpose of long-term weather forecasts. This effect, also known as the butterfly effect, plays an important role in our financial systems today and explains, among other things, why bubbles can increase rapidly over the years by positive feedback.

A new innovative one Business Model or the product can spread quickly through permanent adaptation and positive feedback. The risks and implications on which the business model is based are mostly overlooked at the beginning. In the course of time, however, they come to the fore and grow in size until they can finally no longer be brought under control. So it is the initial underestimation of the consequences of a financial innovation that later becomes a problem.

The builder of the financial crisis

As my research has shown, all four elements play an important role in the creation of a tsunami and are thus the builders of today's financial crisis. The prerequisite for this is the global networking of the trading systems, as well as the inexperienced practice of soliciting entire teams in the financial world and thus simply copying successful products and business models, regardless of the associated risks.

By means of financial innovations, one is usually one step ahead of the existing set of rules and can thus bring risky financial products to the people. In addition, the human weakness of overconfidence, coupled with the pursuit of even more wealth, plays a crucial role. Together, they ensure that the wave picks up more and more speed.

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12 responses to "Crisis Management and Prevention in Business: Combating Causes in 4 Steps"

  1. Henry Kürzeder says:

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  7. Marinda Seisenberger says:

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  8. Martin Theyer says:

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  9. Monika Paitl says:

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  10. Holger Froese says:

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  11. Liane Wolffgang says:

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  12. Simone Janson says:

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