Fallows with a useful reminder:

Yesterday I mentioned a summary of the latest John Boyd conference, which included the argument that today’s lean, hyper-efficient, "just in time" economy was magnifying the effects of today’s economic collapse. Problems in one sector instantly become problems in another, since so many businesses were fine-tuned to await the next order, the next payment, the next shipment from someone else.

A few connected thoughts here. First, lots of us have been saying for years that the Chinese economy (not to mention the US housing market and other bubbles) was growing at an unsustainable pace. I am still positive about long-term growth here (as is everyone else), but things are definitely going to slow down for a while. The question remains whether this will be a hard or relatively soft landing.

No one likes bad news, so it is not surprising that the "be prepared for a slowdown" message was not well received. I recall back in 2000 when friends were hopping around from one firm to another, chasing Internet jobs. By the end of the year, some of them were out of work. Doesn’t help to name drop in an industry that crashes overnight.

I know some lawyers who moved around several times in the past few years as well, chasing ever-higher salaries. Doesn’t seem like such a smart move these days, as these guys are now the newbies whose jobs are at risk. Moreover, it never looks good to shop around a resume that includes a long list of short-term jobs on it.

Second, when the prevailing opinion is that things will continue to be great, and that economic growth is a sure thing, companies and individuals tend to take risks. Certainly there was a lot of risk taking in the financial sector, which was driven by significant excess liquidity. With businesses in China, in some cases high growth led to sloppiness and unrealistic expectations. When your forecasts are based on straight-line extrapolations and not a look at the fundamentals, there is a risk that when those fundamentals shift, you will be caught with your pants down. Some of that is happening now.

Third, concepts like Just in Time, which were definitely not about being sloppy, also had big flaws. You can only adopt some of these concepts by creating optimal systems. When everything is running well and the whole world is making money, these systems maybe can work for a while. However, it does not take much to throw everything out of whack. Supply and distribution chains, flows of funds, all the little bits and pieces of an enterprise’s global system are potential weak links, and when credit dries up, bad things can happen and risk is exposed.

I deal with legal risk on a regular basis, of course, but I have not been privy to the inner workings of risk management in a lot of industries. I wonder what the risk management professionals were telling their clients 18 months ago?