Back to basics.

• Author: Martino, Rocco L.
• Position: Banking industry - Financing

Cash will be king in the 1990s, but rate will no longer guarantee a supply of cash. It's back to the banks, and no more of the 1980s' financial high jinks.

There is a growing realization that this recession is different from all the others since the end of the war in 1945. All the other recessions, no matter what their duration, were due to dislocations, mainly in supply-demand cycles. The current recession, whether it's a single- or double-dip phenomenon, is more of a complete about-face. It's back to basics, and a collapse of the structure so carefully built over the years.

The 1990s are, and will be, a whole new environment for liquidity. Cash will be king in this decade. Rate will no longer guarantee a supply of cash. Witness the problems of Westinghouse Credit and Citibank as they struggle to maintain liquidity despite their assets.

What does this mean for financial executives? Is the economy heading for a double-dip recession? Will there be an improvement soon? Or will things get worse? What advice is best?

There are many schools of thought and many opinions, but no certainty. Hence, the objective is to chart a course of action that meets today's needs without depending on any specific economic scenario in the next six to 12 months.

What, then, are the guidelines for the financial executive to meet this uncertain future?

As with most situations, the future is written in the past. A short look at financial history since the 1940s will put focus on the current situation.

THE FUTURE IN THE PAST

Just after the war, a major expansion began as family building blossomed. Growth occurred in all sectors-homes, cars, consumer goods, transportation, electronics, and even taxation revenue. The recessions of the 1950s and 1960s were essentially inventory adjustments in the absence of rigorous business-cycle control mechanisms. By the early 1960s, finance took on new dimensions with the invention of the CD. Treasurers began to move towards control over corporate cash, moving in the direction of less dependence on banks as a source of cash and more towards self-generated debt and self-placed Investment.

In the 1970s, the advent of instantaneous funds transfer anywhere, in any currency, provided the path for greater corporate control of cash, investment, and debt. By the dawn of the 1980s, the stage was set.

Corporations began placing their own instruments on the market and borrowed less from banks; banks chased high-yield loans and increased the...