On September 23, 2008, I sat with Federal Reserve Chairman Ben Bernanke in a Congressional Hearing, urging congress to enact a proposed $700bn rescue package to stabilize the US economy.
Written by: Hank Paulson, Former US Treasury Secretary
This was a financial crisis of the first magnitude. On the one hand we needed to convince Congress that emergency legislation was needed quickly so we could intervene; on the other hand we wanted to bolster the confidence of market participants and avoid exacerbating the turmoil. We knew that the words we chose would play an enormous role in determining whether we would be successful on both fronts.
The events that led to that pivotal day last fall are well documented. By mid-September, after 13 months of market stress, the financial system had essentially seized up. Credit markets were largely frozen, denying financial institutions, businesses and consumers access to vital funds. Blue chip industrial companies could only issue commercial paper with very short maturities. Small and medium-sized companies with no direct connection to the financial sector were struggling to meet payrolls, pay suppliers and buy inventory. Our system was on the verge of collapse, a collapse that would have significantly worsened and prolonged the economic downturn already underway.
Historians will argue for generations about the appropriateness of the Administration’s policy response. Here I will focus only on the communications dilemma posed by the conflicting views of financial and political audiences and the extreme sensitivity of the language which business and political leaders choose to use in times of crisis.
My challenge throughout that difficult period was always to get the policy, the politics and the market reaction all right at the same time – an often impossible task. As we pursued legislation, we knew Congress was in a tough position. We’d asked them to act quickly, just six weeks before an election, to commit enormous sums of taxpayer money to the financial system. Legislators had little time to educate their constituents as to why urgent government action was necessary.
Members of Congress inevitably put us on the spot. Repeatedly, they asked us to spell out what would happen to unemployment and the economy if they did not act. They needed us to make strong statements about how bad it would be without action so they could justify their votes. But at the same time, financial market participants were hoping for a quite different message, one of reassurance and calm. With financial and cable networks airing the hearing live, market indices streaming across the bottom of screens and bloggers providing instant commentary, we were playing for very high stakes. The manner in which we communicated was going to affect the confidence of our financial markets and the path and speed of the legislation before Congress, both of which were vital to our goal of stabilizing the financial system. How to reconcile the two?
Before the hearing, I thought about this challenge. I knew that I would have many more meetings with lawmakers, and that this hearing would not be my only chance to make the case for legislation. I also knew that if I outlined a doomsday scenario, markets would quickly plunge and do further damage to our already reeling economy. I therefore deliberately chose not to use alarming language – judging that my highest responsibility was to provide reassurance to markets. Looking back more than a year later it is impossible to know whether a different approach would have averted the initial failure of the legislation in the House of Representatives, an event (September 29) that triggered a single-day 700 point fall in the Dow Jones Industrial Average. But we will also never know whether voicing deep concerns about the impact of the financial crisis on our economy then would have simply triggered a similar or worse drop on the day of the hearing.
While our dilemma played out amid global media attention, it is a dilemma many have faced. Leaders in government and business today routinely confront the challenge of communicating to a variety of audiences, each of which hopes to take away a different message. This is more true today than it has ever been, with government more deeply involved in our economy than before. The economy’s performance has become a top concern for the public, and elected officials are therefore giving greater attention and scrutiny to economic and business news. A corporate CEO pursuing a merger, for example, faces an investor audience wanting to hear how the merger will “rationalize” operations including through job cuts; elected officials and the broader public want to hear that no jobs will be lost. Similarly, investors in a medical device company with a new and innovative product will want to hear about its future profitability, while a political audience will be hoping to hear that the innovation will be widely available to reduce healthcare costs.
In today’s 24/7 media environment, with every public utterance potentially hitting the web in real time, there’s no possibility of speaking with one voice to one group and a different voice to another. Whenever we speak, we have to assume that all interested parties are listening closely and what makes one happy can contrast markedly with what the other wants to hear.
So how do leaders make decisions when having to communicate with multiple audiences? As I write a book about the financial crisis, I’ve had the chance to reflect on communications lessons learned from being in the hot seat.
First, recognizing this communications challenge is a vital step. Leaders should be aware of multiple audiences and do some hard thinking about the concerns of each. Don’t try to send different messages to your various audiences. In today’s world of interconnected communications, you will be found out, and your credibility will not recover. You may not be able to please all groups at the same time, but if they can discern an honest attempt to speak to their needs, your chances for success are improved.
Next, use language that your audiences can understand and to which they can relate. Business leaders have for too long communicated in terms that only accountants and analysts use. In the midst of a crisis, business-speak is not comforting or clarifying, it is confusing. The right policies and decisions can sometimes fall short if they are not properly explained. Businesses need to communicate directly and simply about the challenges they face and why their plans to address them will drive growth in the years ahead.
Last fall, the vast majority of Americans did not know what it meant when they heard that “credit markets were frozen.” We had to connect the dots – banks and others were not lending, which left businesses across America unable to finance critical business, and consumers unable to access student loans and consumer credit. It was not good enough to say we needed the financial rescue package to “stabilize markets” – I had to explain repeatedly that we needed it to stem a continuing cascade of bank failures and restore access to credit.
Succeeding in this atmosphere requires consistently communicating your plans – and the reasons they will succeed – before you implement them. There is an old political adage that says “when you are explaining you are losing.” Lay out your strategy before you act, and communicate your actions before you take them. While constant communication is critical during a crisis, it is nearly impossible to educate your audiences about complex subjects in the midst of one. That work has to be done in advance.
Events last fall moved at lightning speed. Investors and taxpayers were demanding transparency and wanted to hear us spell out a single strategy for navigating the turmoil, and then take confidence from watching us implement it consistently. But with the ground shifting beneath us, we had to continuously adapt our strategy to reflect the changed situation. Recognizing there were no words that could calm the waters, I chose to be as transparent as possible about the evolution of our strategy, believing that sharing our thinking, even if it meant taking heat for changing direction, was a better choice than staying silent and not attempting to explain our actions.
Even today, the conflict between political and market audiences continues to manifest itself as policymakers address the needs of our financial system. By communicating as much as we could, laying out our strategies and the reasons for our decisions, we navigated rough waters and charted a course that succeeded in stabilizing the financial system and laying a foundation for economic recovery.
Henry Merritt “Hank” Paulson Jr. served as the 74th US Treasury Secretary and is a member of the International Monetary Fund Board of Governors. He previously served as the Chairman and Chief Executive Officer of Goldman Sachs. His book On the Brink: Inside the Race to Stop the Collapse of the Global Financial System will be published in January 2010.