Rethinking our current systems and how to make them functional once again
Thomas Frey: The panic that we hear coming from Wall Street and the halls of Washington, DC is not the typical panic associated with a recession. Instead, it is the seldom heard sounds of national systems imploding, collapsing around us.
Conversation has turned to what was the unthinkable. The talk gathered momentum and now nervous whispers are heard all the way from the floor of New York Stock Exchange to the water cooler. Everyone is talking about what was unimaginable only a few short months ago. Tuesday, eyes turned to Washington. The nation breathlessly awaited word on how the U.S. will lead the world back from the brink of economic collapse.
The United States is a nation governed by systems. Government provides the operating systems for conducting business and commerce. Everything from what types of business are allowed and how our land uses are managed to protecting our intellectual property and educating our children is governed by systems.
Centuries-old systems have been extended to include social engineering and commodity manipulation. Government tells farmers what crops to plant, prods school districts to educate challenged children and encourages research. It is perhaps no exaggeration to say government has a hand in almost everything we do.
Our systems have worked effectively for more than 200 years. In 2001, the systems began seizing.
Global commerce is suffering from a problem more insidious than the financial crisis. The systems are struggling. The news of the day is a constant reminder that the financial world has been turned on its head.
Our woes may be multiplied by the sad fact our traditional solutions are inadequate. The unprecedented stimulus money being poured into the economy only forestalls the inevitable. The system is floundering. All the attention on the treatment is merely a distraction from what is really needed – a system overhaul.
Why Do Systems Collapse?
Systems collapse for all manner of reasons. Historically, problems have stemmed from waning confidence associated with severely injured financial systems.
Economic turmoil has humbled great nations. The worst chapter in modern history was prefaced by Germany’s economic collapse. Argentina descended into a nightmare 10 years ago (and may never forget the horrors visited on its citizens). Mexico came close to collapse in the 1990s when the peso was allowed to float on the open market.
So, we find ourselves staring into the abyss. What brought us to this crossroads in history? Two key decision points have been cited as culprits. One, a mismanaged formula for calculating the risks associated with subprime loans, and two, the limitless money expansion properties of derivatives.
Like catastrophic failures of the past, both systems were designed by extremely bright people. But while they worked well as the economy flourished, a trip line was waiting at the end of all that irresponsible lending. The resulting implosion is sucking vast swaths of jobs, businesses and industries into the abyss.
So we play the blame game. As many have noted, there is plenty of blame to go around. We might even entertain the notion that we were too complacent, too willing to believe in the indestructibility of the 800 pound gorilla that is the US economy. Worse, we might have been too gullible. The exceptionally bright among us have a habit of intimidating those around them. Perhaps we were blinded by the glare of all that cerebral prowess. We actually believed risk could be diluted through hedging and hedging upon hedging. Our skepticism failed us and our guard was lowered. Now, we turn to our leaders to tame the chaos.
The Real Reason for the Collapse
The blame for collapse actually should fall at the doorstep of a governmental regulatory process ill-equipped to handle the demands of modern commerce.
Specifically, national governments are unable to regulate the global nature of business. And government has long been notoriously glacial in its responsiveness. The problems are a glaring deficiency in speed and reach.
Businesses are global, regulators are not. Actions taken by U.S. regulators, as an example, have little effect on the actions by business people in Asia or Africa.
Bureaucrats only barely managed as the Twentieth Century closed, but now they no longer are up to the tasks before them. Regulatory agencies are not designed for today’s world. A glaring example exists with regulation of nanotechnology. Properties of familiar elements such as gold are different at the quantum level. So, laws enforced by the Environmental Protection Agency don’t apply to many new products being introduced for public consumption. Commerce occurs at the speed of electrons, which is very, very fast. Government in its present form is not up to it.
The larger system flaws expose us to future problems, perhaps of even greater magnitude – if that is possible. Unless proper action is taken very quickly, governments around the globe will begin to fall like dominoes.
A Call for Drastic Action
The world is looking to the U.S. for leadership, and I have confidence that this government can respond in that fashion. The following steps will be necessary to make the corrections necessary for future prosperity.
Step One: Break the cycle of decaying confidence. Shut down all financial markets for a short time similar to what was done after the World Trade Center bombing.
Step Two: Convene a global crisis team to act quickly on recommended changes. This team will be charged with finding the breaking points and reinventing our current systems to meet the needs of corporate expansion and entrepreneurial activity.
Step Three: Engage global regulatory agencies with authoritative teeth to work on curbing harmful actions of businesses around the world.
Step Four: Develop a system of early warning indicators designed to flag problem areas in the future. Abuses in lending were well-known ahead of 2007 inside and outside the industry.
Step Five: Reinvent the systems. Our systems today have evolved over countless decades, with patches being made every time a new technology or new business methodology shows up. It is time now to perform a ground-to-ceiling overhaul, one system at a time.
Step Six: Expand freedom of information and encourage ultra transparency in government and business. Communication from street-level observers who can tip authorities to trends like unfit mortgage borrowers can assist the government in carrying out reforms and averting future disasters.
As the recession continues, more and more of our system frailties are coming to light. This is the ultimate stress test for our systems.
The Consequences of Not Taking Drastic Measures
Civilization itself is at risk. It took thousands of years to get where we are, and it all could come unraveling in a matter of days.
The abyss yawns before us. If we blink, we could find ourselves falling.