- Hamburgers – not just tasty, also helpful
Let me give you the hot tip – I have a toolbox full of acronyms that someone has read out to me from a Microsoft Powerpoint, in Calibri size 14 font, with a soothing corporate gradient footer plastered across the bottom – and I can’t remember what any of the letters stand for. Yep, CPORTS, 5 P’s, 6 P’s, AID, SMART etc. they’re all in a metaphorical toolbox that lives in the dark recesses of my mind and I have no idea what they stand for, or even what some of the concepts they’re related to are. Give me a good metaphor or analogy any day to help understand a concept or just make sure it stays present in the common body of knowledge I draw on without having to try to remember.
So when I clicked on an article by Daniel Roth, the Executive Editor at LinkedIn this morning and read this little gem by Dr Mohamed El-Erian I had to share it. It’s a great metaphor to why the banks didn’t trust each other in the 2008 GFC:
“In California, we have the most efficient McDonald’s and Burger Kings. You drive up in your car, the minute you order a stopwatch starts and within 30 seconds to 45 seconds, you’re out of there. Why? Because the system assumes that you are willing to take a risk. You order, you go to the first window, you pay, and then you go up 10 yards to the second window and you get your Big Mac.
Here’s what happened in 2008: Imagine you’re the person and you go to the first window and they say, “It’s going to be five dollars.” And you’ll say, “Fine, where’s my Big Mac?” And they say, “It’s 10 yards.” And you say, “I don’t trust those 10 yards because I heard what happened to Lehman. People lost money on this. I’m not going to give you my money unless you give me my hamburger.” And they say, “I’m sorry the system is built on the assumption that you will trust that.” So what happens? You go away hungry even though you can pay for it and at the next window, they throw away the food even though they have it.
That is what happened in 2008. It was a great kind of what’s called the Payments and Settlement. You pay and then you settle. Today, that is not a risk. The central bankers have realized that the Payments and Settlement system, if it fails you’re talking about a global depression. The risk is different.”
It’s a great metaphor to help explain and remember an important part of Chapter 1 (which hopefully you’ve read now) in Martin Turner’s ACCT11059 course :
“Trust underpins all of business. We saw the importance of this in the global financial crisis (GFC) in 2008. When banks stopped trusting each other because they could not assess the risks in each other’s businesses they stopped lending to each other.” (Turner, page 11)
The paragraph explains the foundations of trust in business and the role of double entry accounting as a mechanism or medium in which equity owners can trust a firm in which they have entrusted their resources.
Note: I’m sure acronyms are really helpful to some people – they just aren’t for me. What kind of techniques or tricks do you employ to help you remember or understand something? I’d love to hear from you in the comments.