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March 09, 2009

Hitting the Reset Button: The Silver Lining

When I was a kid, I was obsessed with the newly invented personal computer.  In 1982, I used my paper route and Bar Mitzvah money to purchase an Apple II+ PC (my parents did subsidize the purchase somewhat, I confess).  I was mesmerized by the magic of the personal computer and all its possibilities:  games, programming, communications and more.  But what I really fell in love with was this new, magical thing called the reset button.  Don’t like where you find yourself in the middle of Space Invaders?  Hit the reset button.  Frozen out in the midst of trying to log on to a bulletin board?  Hit the reset button.  Mad at your older sister for messing with your top score in Asteroids?  Hit the reset button.  This magical button represented a unique opportunity to erase the past and begin anew with a clean slate.

27 years later, the theme of hitting the reset button has come back in spades.  Moody's Economy.com projects 15 million homeowners are underwater – that is, their homes are worth less than what they owe on their mortgages.  President Obama’s latest piece of legislation in front of Congress is aimed at allowing these homeowners to hit the reset button with their lenders.  Similar debt work outs are happening across corporations.  Throughout VC-backed portfolios (i.e., small companies) and large companies, CEOs and CFOs are in discussions with lenders to renegotiate their debt and attempt to hit the reset button on a new set of terms in light of the current economic turmoil.  In foreign affairs, a similar tone is being struck.  A few weeks ago, Vice President Joe Biden declared it was “time to hit the reset button” in Washington's relationship with Russia and Iran, among others. 

Will these efforts work?  On the economic front, there are pernicious, cascading effects to these “resets”.  A rather depressing but insightful recent Merrill Lynch report, titled "Some Inconvenient Truths", suggests there is $6 trillion in private sector (household and corporate) debt that needs to be eliminated before we can embark on a fresh credit cycle.  To date, there has been “only” $1 trillion in write downs.  The implication?  We are nowhere close to hitting bottom, and hitting the reset button is a necessary but painful part of the process.

That’s the macro picture.  At the micro level, I am seeing people hitting the reset button all over the place as well.  For many, the wealth trajectory they thought they were on is no longer the case.  The expectations they may have had for themselves or their children are being re-examined.  Many are sitting down and revisiting all the assumptions they had made a year ago about their assets, retirement and job security.  My portfolio companies are all questioning their old assumptions and making tough choices about how much to invest ahead of revenue, and how many products and markets they can pursue in parallel.

But my rabbi made an interesting point to me this weekend.  He pointed out that there is a silver lining in hitting the rest button.  Rather than simply wallow in the bad news, people can view hitting the reset button as an opportunity, rather than a burden.  It allows them to let go of unrealistic expectations and focus on reality in a new way.  It allows them to reset priorities, zoning in on what really matters to them and eliminating distractions.  An economist’s view of this sage rabbinical advice would be to observe that when your opportunity cost to pursue alternative paths has plummeted around you, anything is possible.

As a result of the opportunity for deep personal growth and new direction, hitting the reset button all around the world should mean more entrepreneurship everywhere.  This trend appears to be playing out.  I met with the co-head of Harvard’s Entrepreneurship Forum last week and she couldn’t have been more excited to tell me about the burgeoning entrepreneurial culture that’s emerged at Harvard.  “The current economic environment has freed people up to do what they really want to do,” she observed, “not just follow a certain path that they think they ought to follow.”  She reports that submissions to Harvard’s business plan competition are double this year as compared to last year.  Similarly, participation at the MIT $100k competition was stronger than ever.

Many economists are pointing to the parallels between our current recession and that of the one in 1982.  That was the year I learned the magic benefits of the reset button.  Hopefully others will as well.

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Jeff, as always, an insightful post. I appreciate the link to Deb Riechmann's column comparing and contrasting 2008 / 2009 with 1981 / 1982 as I was already out in the business world at that time, making a living on commissions. Like you, in 1982 I too was just learning about the personal computer; but as a salesman who had to deal with the PC's impact on my livelihood, selling large computers and terminals to banks. (BTW we called the "reset button" the "Oh s__t key." Saved my butt many times.)

I agree with Riedhmann that things are much worse now than then, particularly in the area of confidence. I bought a house in the middle of that recession, excited that my 17% mortgage was assumable! This actually helped a few months later when I sold the house so I could move to Detroit (when rates were even higher!)

There is a hopeful nugget in her review of that recession; the worst month for job loss and unemployment was just one month before the recession ended. These things can turn quickly (though, admittedly, it's tough to think that at the moment.)

Your comments about resetting expectations is spot on. As a turn around specialist, I'm used to 'resetting' in the business world. And at home, I see it with our teenage boys who never before understood the words, "We can't afford to do XYZ." Before they argued; now they get it. And while last spring they scoffed at my buying a used Buick instead of a new SUV, this spring they proudly tell their friends, "We paid only three grand for this car, it's a tank in the snow, it holds all our kit, and we get over 26 miles per gallon."

The amount of bad debt that needs to be reset in mind boggling. But having lived through 81-82 (and 73-75, I have to admit) I'm hopeful we're near the proverbial corner.

Des

P.S. One typo: I presume your rabbi called it a 'reset' button, not a 'rest' button.

Profound! Almost poetic.

Immigration is the ultimate reset button and we are a country of immigrants.

I would argue the greatness of our country and our culture has been in part, been built on our ability to hit the reset button. We are the best at it and should derive confidence from that fact.

Excellent post Jeff. There is a silver lining here. It wont be the same...but that was not sustainable in macro terms. This is a test of our mettle, leadership and society. I am an optimist and believe that we will pull through. Our world/land in 2009 is much different than that in 1982 and 1929. We must do as others did then though and in a respectful and collegial way work to reset, work hard and rebuild

Jeff

A thought provoking message! We have an opportunity to make things even beter than before... let's hope we do it right.

right on

arguably the USA's bankruptcy laws are one of our nation's greatest gifts to humankind -- a revolutionary "reset button" under law. previously debtors went to prison - or worse!

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