Well, we have made it through the first year of the new millennium. This year was more tumultuous than we could have imagined at the outset – marked by the start of a national (if not global) recession as the tech/telecom boom of the 1990’s ground to a halt, followed by stunning acts of terrorism and then a war to root out the terrorists. These events, and others as well, have had a fairly severe impact on everyone’s economic endeavors in the form of heightened uncertainty. There is almost a conspicuous sense of collective relief that 2001 is over. As difficult as the year proved to be for many, it succeeded in discrediting much of the investment hype that flourished during the boom and reacquainted most of us with the concept of risk.

Risk (risk) n 1. The chance of something going wrong; 2. The possibility or danger of suffering harm or loss; 3. The quantifiable probability of less-than-expected returns or loss; 4. The volatility of returns from an investment.

In case we had forgotten during the great run of the 1990’s, 2001 reminded us that the American economic system is quite untidy. Lots of mistakes are made. Financial markets go down almost as readily as they go up. Certainly, the past year has been punctuated by a startling set of crash-and-burn stories— the demise of Enron, the dot-com implosion (which pulled under a host of formerly high- flying Northwest companies), the telecom industry’s unraveling, and the growing list of casualties within the retail, travel, aerospace, and insurance sectors due to the events of 9/11. In times such as these, the gut reaction of bankers and investors is to tighten up and eschew all opportunities with even a hint of uncertainty or controversy. Accordingly, business investment and lending has plunged.

To be fair, the conservatism that now defines the thinking of lenders and investors is, to a degree, appropriate. The signs of financial weakness are abundant. Corporate debt as a percentage of total capital has been steadily building for the past five years. At the same time, corporate earnings have been rocked. After taking into account the massive write-offs of non-productive investments made during the boom, net earnings were down more than 50 percent in 2001. Across the spectrum, default rates on corporate debt have surged. Obviously, the environment has been ripe for credit problems and they have been coming in waves. It is time to clean up the debris that always accumulates during a long period of economic expansion.

The solemnity of these financial train- wrecks tends to obscure the fact that economic failures are often the foundation upon which future success is built. The key characteristic of economic growth is that it is an evolutionary process of building up, tearing down, and building up again. Two steps up, one step back, two steps up.

Economic progress is risky. To paraphrase the early 20th century social commentator, Gilbert Chesterton—capitalism is a dangerous trade. Recently, in the financial press, and even closer to home in conversations with local bankers, the word “risk” has joined the ranks of those other four-letter words that we were taught in our youth to avoid. One might easily conclude that risk must be shunned at all costs. The ideal state of affairs would be a tidy, highly predictable world in which risk and uncertainty are regulated into submission. In fact, for the past two years, the Treasury Department’s Office of the Comptroller of the Currency has been working hard to regulate the risk out of commercial lending. No doubt, in the aftermath of a boom,

there were lending excesses that needed to be addressed. Nevertheless, we have some fear that this regulatory effort has gone overboard by prodding already conservative lenders into rationing credit for small and middle-market businesses. Most private companies cannot borrow on the same basis that they could two years ago. If your business falters in the downturn, your lender may make a concerted effort to show you the door.