Spero Consulting

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?”