Some years ago I had the privilege of seeing Benjamin Zander speak. In addition to being the conductor of the Boston Philharmonic Orchestra, Mr. Zander is a motivational speaker and teacher. His method of delivery is truly unique in that he mixes wit, humour and music with a very powerful message.

His message is one of hope, of not getting caught in the downward spiral. It is a message about the art of possibilities and transformation. I was reminded of his message as I was reading the current issue of Fortune magazine. In this issue, they explain the three cycles that are spinning downward. These are the three cycles that are undermining the global economy at the present time. In this blog I would like to review the nature of these three interrelated downward spinning cycles and then share some thoughts with you as to how we can transform ourselves out of the doom and gloom that has gripped North America and the world.

The Downward Cycle of Confidence

There has been a major loss of confidence in recent weeks in a number of Wall Street financial institutions. Problems at Fannie Mae, Freddie Mac and Lehman Brothers turned into crises due in large part to a lack of confidence. As Fortune reported, “the less capital that goes into the sector, the weaker it becomes, driving capital away....” Washington’s giant bailout was intended to squelch the crisis of confidence in the whole U.S. financial sector. The lack of confidence is also apparent in the wild gyrations of the stock markets around the world. The huge dips simply reflect the panic that has gripped investors.

The Downward Spiral of Deleveraging

Many financial firms have concluded that they have too much debt. They have also concluded that they need to more vigilant about any new debt that they take on. To reduce debt, they are trying to sell financial assets. With supply greater than demand, this is reducing the value of the debt that they still hold. To further reduce debt, they continue to try to sell assets further reducing prices. This is a downward cycle in real asset values rather than a downward cycle of confidence.

The Downward Cycle of Housing

From 2000 until 2006, housing prices in the United States were on an upward gradient. Easy credit and incentives (e.g. zero or minimal down payment) launched a six year housing boom. Housing, the root cause of much of the financial mess in the United States is now in a downward spiral. Sellers are rushing to sell before the prices go lower. Many home buyers are facing foreclosure on their homes as interest rates increase. With a weakening economy and a lack of confidence, there is too great a supply of homes chasing too few “confident” buyers.

The question then is how do we transform this situation? How do we attack these downward spirals and turn them in a positive direction? Here are five “possibilities,” some of which have been implemented or are in the process of being implemented.

1. The Financial Rescue Package

As reported in the previous blog, the $700 billion Wall Street bailout, coupled with the other actions taken by the U.S. Federal Government to prop up a number of ailing institutions, was a first step. This was a major frontal assault on confidence and it was clearly intended to protect the integrity of America's financial institutions.

2. Interest Rate Reductions

The fifty basis point drop this week by a number of the world’s major banks was intended to ease credit and encourage investment. It was intended to demonstrate that several major governments around the world are working together, in a coordinated fashion, to solve this crisis.

3. Buy Equity Stake in America’s Banks

Treasury Secretary has proposed taking an equity stake in a “broad array” of banks and other financial institutions “as soon as we can.” This significant shift from buying the “toxic” debt which was part of the previous week’s bailout package to taking equity stakes surfaced this week after Britain took this more aggressive approach. The hope is that massive infusions of taxpayer-funded equity will prop up financial institutions such that they will be more inclined to lend money.

4. Buy Residential Mortgages

This was an initiative taken by the Canadian government this week. It announced a plan to buy $25 billion in residential mortgages. The intent of the cash injection is to shore up the nation’s banking system by helping them deal with sky-rocketing funding costs so they can keep providing mortgages to consumers. Commercial banks in Canada responded by lowering their prime rates. The U.S. needs to look at a similar plan which will create a floor on housing prices and instil confidence in banks to lend money and consumers to buy homes.

5. New Political Leadership

The U.S. has been operating with a “lame duck” or as one pundit stated a “dead duck” President for a long time. Most polls suggest that Barrack Obama and Joe Biden are favoured to take over the White House in January. The election of a new President and V.P. will create hope and optimism. These are two very gifted and capable leaders. With a four year mandate to lead the country, this will provide these two individuals with a unique opportunity to create a more positive, hopeful business climate. It will provide them with mandate to follow through on their campaign promises (e.g. lower taxes for the middle class) and right the ship. They will also have an opportunity to fix the tarnished image of America in economic and foreign policy.

Clearly there is a plan or plans in place to transform the financial situation in North America and around the world. A number of very positive forces are in place for the mid-term. Among these are generally low inflation, the continued positive impact of technology and innovation on productivity, the overwhelmingly beneficial effects of increasing global trade, good economic and political news from most of Eastern Europe and South America, and the inexorable momentum towards opening up markets in China, India and other parts of the developing world. Importantly, while declining oil prices have hurt stocks in the oil patch, they are helping reduce freight costs and easing the strain on our personal finances. The stage is set for the Great Recovery.