With the noon news on the television in the executive dining room, the chairman shouts that the anchor has just commented that the economy is “on the brink of collapse.”
We don’t see it. It is always true that times are difficult somewhere as old, obsolete industries contract or existing, strong industries mechanize or automate or update or relocate. For example, earlier this week, Hewlett-Packard announced that it would lay off about 24,600 workers.
It is possible that today, times are extremely difficult somewhere, e.g., in a financial center like New York City and Wall Street in particular, but we don’t see economy-wide problems that so many commentators are willing to extrapolate on so little evidence. (Of course, such talk can be detrimental in its own right.) For example, on Tuesday (9/16) we read the WSJ’s Capital column, entitled Economy’s Fate on Credit Watch. That title speaks for itself.
However, as we’ve written many times, our views are more closely aligned a sentence about half-way through that column: “Still, the biggest financial shock since the Great Depression hasn’t, at least so far, been accompanied by the usual symptoms of deep recession.”
Can one find evidence of a slow down? Yes, but we argue that it is always true when one has a multitude (of thousands) of statistics from which to choose–thousands of seasonally-adjusted, weighted, smoothed, and constantly-revised statistics. For an analog within organizations, we encourage interested parties to read our essay, If One Is Bad, 400 Must Be Good, which argues against the opportunistic use of a large number of numbers.
We suggest that the extrapolating commentators in the crowd get out more and visit areas of the country that they may likely try to avoid–like the Midwest or our own Western Pennsylvania. We suspect that it is easier for the commentariat to extrapolate than to visit, observe, question, and think? Many of these places aren’t “garden spots,” but they weren’t garden spots ten years ago or two years ago. The issue is whether they are worse-off than, say, in 2006 or last year because of the current problems on Wall Street. Many areas of the country never participated in the steep increase in housing prices, and many have not suffered the recent sharp price declines, either.
But, it is not just laziness and group think that causes such misperceptions, it is also the fact that certain parties have interests in making their problems seem more widespread and inevitable–as a way to save face or reputation or to save a stake in a firm or to avoid the responsibility for failure that should be theirs and theirs alone (or to reach for a government handout).
Regardless of the motivation, the problem with such knee-jerk extrapolation (supplemented with the above-mentioned selfish misdirection) is that it leads to the perceived ”necessity” for quick, comprehensive “solutions” to problems that may not exist at all or to the wrong problems, e.g., possibly poorly-understood symptoms rather than underlying problems, and those “solutions” may only make matters worse.
Here is a blurb from the home page of last evening’s (Thursday, September 18) The Wall Street Journal. “History has thrown a half-dozen men together with a task that seemed unthinkable just days ago: Give the U.S. financial system its biggest makeover since the 1930′s. And do it quickly.”
Let’s hope it is not true, especially the last sentence, because such central planning should always be unthinkable as it is untenable and counter-productive.
These times and settings are exactly when our conservative instincts are strongest, and it is when we encourage responsible parties, those to whom these tasks have been delegated, to take the Hippocratic Oath and do no harm. That goes hand-in-hand with remaining humble and realizing the possibility that one’s solutions may only worsen matters.
We’d argue that what remains of our market-based economy has evolved over centuries–if not millennia– of commercial transactions and experiences. To presume that a handful of desperate men could quickly remedy any failings in such a system–if those failings do, in fact, exist–goes beyond hubris and well into the realm of abject stupidity.
In that respect, we would encourage interested parties to read this essay entitled, Toddler brains, by the economist Donald J. Boudreaux. It talks directly to politicians and bureaucrats and argues against simplistic or rash actions and perceived solutions. Here is the summarizing blurb: “It’s generally not a good idea to address complex problems with solutions that you’d expect from a typical 4-year-old.” Of course, the problem with hubris is that one doesn’t necessarily know what one doesn’t know–even to the extent of offering “toddler” solutions to complex problems. (Please see our uncertainty management essay for more on this aspect of epistemology.)
Further, we would argue that a strategy of ”let’s take all the bad stuff and put one it in one place,” like a securitized version of Yucca Mountain, makes sense only if the offending firms are forced into liquidation. That, dear reader, is the true analog to the Savings & Loan crisis of the late 1980′s and early 1990′s. It is not the federal government’s accumulation of all of the crap. The government claimed the devalued land and loans because through the FSLIC, it was the residual claimant. The true analog is that, eventually, the offending firms and associations were forced to pay for their mistakes and were not permitted to survive. There must be implications for actions; otherwise, irresponsible behavior grows by leaps and bounds.
In that respect, we ask: can the dear reader imagine the size of the moral hazard problem today if those firms and organizations had been permitted to survive in the 1990′s? It is truly stupefying.
In summary, we ask: why is taking stupid bets on Wall Street any different than in any other industry?
By the way, we don’t mean stupid as in ex post, 20-20 hindsight stupid. We mean stupid as in “no thought before calculation” stupid. Stupid as in that horrible (and far too common) combination of greed and expediency. Stupid as in the lack of (or the determined ignorance of) sensitivity analyses or the lack of confidence to tell a superior that “things just aren’t right.” That means stupid as in the lack of estimation of how much would conditions have to change for it–the deal, the securitization, the structure–to fall apart, or stupid as in the careless avoidance of the estimation ”slipperiness of the slope” once conditions seem to worsen just-a-bit. (That’s what an economist might call a perturbation or off-equilibrium analysis.) By the way, that doesn’t mean that such analyses were not presented to senior managers or regulators. It just means that just parties may have been easy to fool.
In that regard, we’ll have another post in the near future about the boards and directors of many of these firms and their lack of requisite sophistication.
By sophistication, we’re not talking about selecting the right wine with dinner or using the right fork for a meal’s course. We’re talking about having an inkling of an idea of the nature of the products that the firm offers: their strengths and weaknesses and, especially, their vulnerabilities. That lack of knowledge–that ignorance–combined with pride has such serious and harmful effects in so many of our organizations because it often leads to the inability or unwillingness to ask, “I don’t understand. Can you explain it to me?”
