Darwin and the Credit Crisis: Lessons in
Regulation
In evolution,
nature is the great regulator. Adaptability is the only strategy for
survival. If your “secure” niche is threatened — or disappears — you
mutate, or you die. This holds for all species, and it holds for all
companies in a capitalist economy.
Take the mutations
that we refer to as derivatives. They were ostensibly created to manage
risk, but their main purpose, in my opinion, was to avoid regulation.
They became extraordinarily successful products for the banks, but the
world’s financial system was not constructed to deal with them. The
system broke down. And the need for regulation became painfully clear.
People who hate
regulation are just fine with nature as a regulator, because nature
never says, “No.” It just makes sure that you face the consequences of
acting freely. So, if we choose not to regulate, we must make sure that
our society faces the consequences that will follow, making the
unregulated transgressors pay for whatever damages they cause to others.
People act in their
own self-interest, and that is one of the reasons we need regulation.
When I was in Beijing in 1989, the air was so polluted that my nose was
full of soot, my eyes were continually tearing, and visibility was
barely a mile. By 2008, the air was crystal clear for days on end
(this, 7 months before the Olympic Games), and I realized that
some force must have taken action against those who had caused me to
cough and tear up many years earlier. We must regulate those who would
pollute the air we breathe and the water we drink so they face the
consequences of their actions and take measures to stop it.
Darwin’s theory of evolution is often confused with, “the
survival of the fittest.” That might lead one to wonder
about an America that looks more like “the survival of the
fattest”. But our genes favor the ability to store fat
through hard times, and millennia ago those genes survived
humanity’s march into the future. In an abundant world, the
result is easy to see. Misuse of any niche has
consequences. Misuse of an abundant food supply is no
exception.
Americans dislike
most regulation, so pretty much anyone can hang up a shingle and be in
business. But business success takes more than hanging up shingles, as
the mortality rate of new businesses informs us: Eighty percent over
the first five years — another 80% in the next five years. But an
Amazon.com may emerge, or a Cisco, and it is like when a million fish
eggs produce two perfect salmon. And they in turn go on to produce
another million salmon eggs.
Evolution offers
examples of how disasters caused mass extinctions of living species. A
meteor smashed into the Earth eons ago, and the dinosaurs vanished.
That made room for a crafty specie like ours to emerge, and we have been
smart enough to develop ways to engineer our own extinction, using
age-old tools like war and conflict, hunger and starvation, disease and
pestilence, and an unsafe food supply.
In 2008, the
equivalent of a meteor hit our financial system where investment banks,
very lightly regulated, had chosen to hold one measly dollar for each 33
they invested in securities or lent to clients. Borrowers had been
given loans without providing any security other than the asset they
were buying, so when asset prices fell, the required security vanished.
So did many banks and, eventually, so did many businesses. Jobs
disappeared, confidence evaporated, and growth turned negative. Since,
over time, government had acquired extensive experience with deficits,
it did not faze them to spend massive amounts of money, pulled out of
thin air. It was a man-made crisis, after all, and man could undo it .
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Good thing that it
was not a real meteor! Then we might
all have perished as well, and the next specie would
be given its golden opportunity. What specie would
that be? Quite a number of them seem to have
survived all the calamities over the known history
of the planet, among them rats, cockroaches,
microorganisms, and primeval species in the deepest
parts of the oceans.
Many systems are
creations of mankind. Our systems take on lives of
their own, whether they are economic systems or
political systems. Since nature is dynamic, systems
must be as well. The way we design institutions,
markets, democracies and safety nets must change
when the world changes. If our systems remain
static, we’ll have disasters, we’ll have
revolutions, and we’ll have what Joseph Schumpeter
called “creative destruction.” All these upheavals
serve as clean-up crews after parties — or
hurricanes. If we do not reform our systems when
they are out of balance, disasters will do it for
us.
Microeconomics, the
way we make economic decisions as individuals, is
still full of mystery. It is to economics what
quantum mechanics is to physics. At the lowest
level, nothing is predictable — people, we know now,
do not make only rational decisions, we act more
often on impulse rather than from reason. The tiny
consequences from billions of individual decisions
accumulate into tsunamis at the macro-levels —
suddenly people choose to neither spend nor save,
neither to borrow nor to lend, and work and leisure
may cease to be optional.
That’s when
leadership is crucial. Economists map these
movements, but the maps are “stupid” maps; they
don’t keep up with the intelligent terrain as it
changes at blinding speed. There are laws that work
at the seemingly chaotic level we are talking about,
whether it is microeconomics or quantum mechanics.
For people, there are laws of survival that step in
and change behaviors. For quantum mechanics, there
are laws of probability.
Here are the laws of
survival for people:
1.
Create something of value — either something
you can do better, faster, cheaper than anyone else
— or do something no one else can do.
2.
Trade it for what you need.
3.
Help your neighbors, friends, community,
country to do the same.
4.
Understand that we are in this together, and
unless we address it together, we’ll all fail.
5.
Know that this, too, shall pass.
Bright people are
working on new systems that will be better than
those we had. Help them succeed! Don’t get hung up
on what we now know did not work in the past. Adapt
to what will come.
Amazingly, the
meteor that struck with deadly force many, many
years ago, left us with a beautiful world. Our task
is to make it better. Let’s undo what caused this
crisis to happen and create a new framework for a
better future.
We know how to do
this. We don’t have to wait for Washington, D.C.
Let’s discuss what WE can do now. And
then do it!
Somewhere, Darwin
just might be smiling . . .
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