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Courage Under Fire


How Bernanke and Paulson showed themselves to be leaders, not bureaucrats

What is the difference between a bureaucrat and an effective manager? — Brian Napoli, Medina, N.Y.

Talk about perfect timing. Given recent events, we don't really have to write a word to answer your question; we need only point at two examples that say it all. And we're pointing at Ben Bernanke and Hank Paulson. With all the pressure on them, the Fed chairman and the Treasury Secretary had every reason to act like your typical rigid, unimaginative bureaucrats over recent weeks. Instead, they demonstrated not just effective management but exemplary leadership.

Now you could stay up all night arguing about the merits of what Bernanke and Paulson have done since the economy first started slowing down. Indeed, picking apart their moves has become something of a national pastime. You have ideological purists demanding to know why Bear Stearns (BSC) wasn't allowed to go bankrupt and its executives and shareholders weren't made to suffer a more brutal flogging. Bear's share-price plummet from $160 to $10 wasn't punishment enough. You have some members of Congress and advocacy groups demanding to know why, with all that money flying around for a corporate "bailout," the government didn't also pour $30 billion into some kind of homeowners rescue fund. And you have the usual coterie of pundits putting forth a hodgepodge of fixes, demanding to know, for instance, why the Fed plan didn't involve purchasing mortgage-backed securities from government-backed agencies.

Who knows which of these "solutions," if any, would have been better than the Bernanke and Paulson plan of attack. All we know is this: Their approach worked. It averted an immediate crisis that would have had cataclysmic implications had it played out, and it stabilized the financial system of the U.S., and perhaps the world—at least for the time being. What's just as impressive to us, and this gets back to your point, are the management qualities displayed: courage, swift action, and up-front communication. Sure, these are not the only skills involved in leading effectively. But they are critical at all times and imperative in a crisis.

Take courage. It's one behavior bureaucrats shun and too many managers avoid. You've seen the drill. Something in your organization blows up. Blame is flying, and higher-ups are calling for a quick fix. The bureaucrats scurry for the nearest bunker, fearing that whatever they suggest, especially if it's bold or creative, will get shot down. The mere possibility of criticism makes them cower.

By contrast, Bernanke and Paulson, facing flak from every direction, brokered the audacious buyout of Bear by JPMorgan (JPM). Hours later, for the first time since the Depression, in a move they surely knew would instigate sound and fury, they opened the discount window to investment banks. Talk about nerve.

And talk about speed, too—again, a marked departure from usual bureaucratic behavior but a hallmark of effective leaders.

Some might argue that Bernanke and Paulson waited too long to start adjusting the discount rate, but when they launched the process, it moved fast, with rates down 375 basis points in the space of six months and nearly every decrease surpassing market expectations. Noisy concerns over inflation might have slowed the Fed down every step of the way. They didn't.

When managers—particularly bureaucratic ones—are embroiled in a crisis, the last thing they usually do is get out front with frank communication. Instead, they huddle in windowless "war rooms," surrounded by quaking lieutenants, trying to figure out how to silence the barking dogs. Here's where Paulson, especially, showed the real stuff. Drawing on credibility earned by running Goldman Sachs (GS), one of the few firms that has so far managed to escape the credit crisis, he addressed the public frequently and with candor. His message inspired confidence but stayed anchored in reality. Bureaucrats don't do that. Ever.

Obviously, the economic crisis isn't over yet. Only time will tell how "right" Bernanke and Paulson were, economically speaking. Managerially speaking, however, there's no doubt about it. They made the right moves.

Jack and Suzy Welch await your questions. E-mail them at thewelchway@BusinessWeek.com For their video podcast, go to www.businessweek.com/search/podcasting.htm

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