My apologies, it was the tax structure, not the regulatory one he cited. (Try 38:45 for one mention 55:38 for another)
As you said, he's not taking this from any political stance, but more from a practical one. It is very easy to read into his words, I suppose whatever preconceptions you bring to it. He describes the situation as not unreasonable from the perspective of the bank. (about 19:00 or so) The regulators requirement as it stood and still stands, is not as flexible as we both agree it would be better to have as part of it. Well, from the perspective of JP Morgan, you've got Exxon which is a reasonably good and trustworthy entity to loan funds to, but because the current inflexible requirements don't allow for your specific circumstances you 'innovate' a way to satisfy both the regulators and Exxon, and the regulators don't blink because as far as they're concerned, the new credit default swap tool is a sufficient safety valve. None of this is unreasonable from either of their perspectives and because only hindsight is really helpful here, it's hard to see why anyone at the time would necessarily have seen what is only obvious now. In fact, the transaction between JP morgan and Exxon may very well have been a safe bet depending on the individual circumstances of that company if they had the option to lower their requirements. But the creation of the credit default swap was a way to get around an inflexibility in the regulation, the same flexibility we both agree needs to be incorporated in the legislation, if we're to have it at all.
Harford also mentions that it would be better to have more players in the game, and I agree. The way I see that happening is through more frequently allowing entropy to take its course and to be less terrified of naturally occurring corporate 'death'. The same complexity which fouls attempts by state-run economies to manage their economies centrally, affects larger corporations whose scale of management rivals that of the economies of a few small countries and maybe a couple that aren't so small. Either the company learns a fair bit about humility and allows its lesser branches to have more autonomy, or it will mess up enough on an unsurvivable scale (also a theme of Harford) that it cannot survive without external life support, if it can get it, in the form of beneficial legislation, tax law carved to its particular benefit, or outright bailout. And it's not just on the government-corporate level we see this going on. State-on-state life support has its own examples, of which I think the relationship between N. Korea and China is a prime example. The latter of course, which has had to allow its market to become gradually more liberal (in the classical sense) in order to keep the engine running. North Korea, however, without infusions from it's powerful economic neighbor and supporter, would be as devoid of life as it is of electricity outside of Pyongyang.
In order for a government to approach anything complex, it too must first embrace humility. Decentralizing government authority itself would be one way to keep itself honest, or at least keep the effects of when it goes awry limited to a survivable scale. If the principle can and should be applied to large corporations in keeping itself from succumbing to the kinds of complexity + coupling + hierarchical dominance (where the solution to stopping a problem before it happens can most easily be found by someone closest to the locality, and hence needs the ability to trump the higher-ups and has the confidence to do so) then the government needs this kind of bottom's up approach as well to protect itself as an institution from the same threats. The states and localities and the people closest to the ground level should be the ones with the power to be equivalent whistle-blowers.
Wisdom of Crowds is an interesting read. Again, have much to agree with and a little to disagree with from a personal perspective. Let me know what you think of it if you read it. I'd love to have someone else's perspective on it.
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Date: 3/5/12 02:27 (UTC)As you said, he's not taking this from any political stance, but more from a practical one. It is very easy to read into his words, I suppose whatever preconceptions you bring to it. He describes the situation as not unreasonable from the perspective of the bank. (about 19:00 or so) The regulators requirement as it stood and still stands, is not as flexible as we both agree it would be better to have as part of it. Well, from the perspective of JP Morgan, you've got Exxon which is a reasonably good and trustworthy entity to loan funds to, but because the current inflexible requirements don't allow for your specific circumstances you 'innovate' a way to satisfy both the regulators and Exxon, and the regulators don't blink because as far as they're concerned, the new credit default swap tool is a sufficient safety valve. None of this is unreasonable from either of their perspectives and because only hindsight is really helpful here, it's hard to see why anyone at the time would necessarily have seen what is only obvious now. In fact, the transaction between JP morgan and Exxon may very well have been a safe bet depending on the individual circumstances of that company if they had the option to lower their requirements. But the creation of the credit default swap was a way to get around an inflexibility in the regulation, the same flexibility we both agree needs to be incorporated in the legislation, if we're to have it at all.
Harford also mentions that it would be better to have more players in the game, and I agree. The way I see that happening is through more frequently allowing entropy to take its course and to be less terrified of naturally occurring corporate 'death'. The same complexity which fouls attempts by state-run economies to manage their economies centrally, affects larger corporations whose scale of management rivals that of the economies of a few small countries and maybe a couple that aren't so small. Either the company learns a fair bit about humility and allows its lesser branches to have more autonomy, or it will mess up enough on an unsurvivable scale (also a theme of Harford) that it cannot survive without external life support, if it can get it, in the form of beneficial legislation, tax law carved to its particular benefit, or outright bailout. And it's not just on the government-corporate level we see this going on. State-on-state life support has its own examples, of which I think the relationship between N. Korea and China is a prime example. The latter of course, which has had to allow its market to become gradually more liberal (in the classical sense) in order to keep the engine running. North Korea, however, without infusions from it's powerful economic neighbor and supporter, would be as devoid of life as it is of electricity outside of Pyongyang.
In order for a government to approach anything complex, it too must first embrace humility. Decentralizing government authority itself would be one way to keep itself honest, or at least keep the effects of when it goes awry limited to a survivable scale. If the principle can and should be applied to large corporations in keeping itself from succumbing to the kinds of complexity + coupling + hierarchical dominance (where the solution to stopping a problem before it happens can most easily be found by someone closest to the locality, and hence needs the ability to trump the higher-ups and has the confidence to do so) then the government needs this kind of bottom's up approach as well to protect itself as an institution from the same threats. The states and localities and the people closest to the ground level should be the ones with the power to be equivalent whistle-blowers.
Wisdom of Crowds is an interesting read. Again, have much to agree with and a little to disagree with from a personal perspective. Let me know what you think of it if you read it. I'd love to have someone else's perspective on it.