Tuesday, May 5, 2009

My Comment To "First, Blame the Regulators"

A comment that I posted today, May 5, in the New York Times Economix Blog. It was in response to Catherine Rampell's piece called, "First, Blame the Regulators." In the blog, she mentions what Gladwell, Taleb, Kuttner and Steiner blame for the cause of the current economic and financial crisis. My post was in response. Also, see my previous post on regulations.

My complete comment is republished below:

Only journalists, writers, academics, politicians and others that have not managed or owned a business in a challenging economic environment could believe that a single, simple solution, a finger in the dam, could have prevented the financial crisis and recession. When a stressed economic and financial system reaches its breaking point, it will break. Afterward, the obvious cracks need repair, but other cracks, just as likely, could have occurred in their place. Only looking at the aftereffect cracks in the wall will miss the accumulated winter snow on the roof that contributed to the problem.

Our economic and financial system cracked under stress and was on the verge of breaking from, among other things, a credit lockup. It will be many years, if ever, that the causes of this worldwide economic downturn will be understood. Experts still debate the causes of The Great Depression, let alone the best preventive and corrective measures. No knowledgeable person believes that causes of recessionary economic cycles are fully understood or preventable.

No one really has a consensus, confirmed idea as to what happened with sufficient economic impact to cause the excessive stress to our financial system or what caused the housing market to overheat and then collapse. To use terms such as "bubbles" or "animal spirits" are not explanations, but they are a linguistic trick that rephrases the problem. It is like a doctor who diagnosis a red rash by telling you that you have a disease that is just the Latin phrase for red rash. It says nothing about causes, treatments or solutions.

Strengthening a weak link of an overloaded tow chain, does not stop the chain from snapping. It just snaps at another point. Strengthen every link in the chain and under enough force, the items attached at the ends of the chain will tear apart, instead of breaking the chain. Continual structural reinforcement will eventually just push the overloading stress to cause the engine doing the pulling to burn out, etc. Extremely stressful forces are too great for any system, including our financial and regulatory systems. Extreme stress will always find the breaking points.

To believe openly that thousands, if not millions, worldwide were lemming-like, economically suicidal, self-destructive and too dumb is beyond arrogance and naiveté. Do these self-aggrandizing pundits think that their simple solutions, such as different probability distributions, different regulations, or wiser elected officials were enough to avoid the crisis, and save the jobs, wealth, prestige and institutions of those affected? Are we so unwise in the ways of the world to believe that if we had only worn the blue shirt (blouse) instead of the white one on that important day, we would be happier today? Did the prospects of a golden calf lead the millions of residential construction workers, bank-lending officers, mortgage originators, homebuyers, mortgage borrowers, investment bankers and the regulatory examiners astray? If only we had listen to the sage advice of these chosen few who saw the light before it was too late, we all would have been saved.

Of course, I wonder how many of these wise men lost money in their home values, retirement accounts and investments. None I would guess. Most of these wise men make some money in the struggling newspaper, magazine or book publishing industries. I cannot wait to hear the great advice they have to tell the struggling companies in this industry. Aw shucks! I forgot. I have to wait until these publishers go out of business to hear the correct solution to the industry's problems. If only publishers had used a cheaper blue ink instead of black and a different font.

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