Preventing financial meltdowns.

[jerseycajun.livejournal.com]

It's often been said of libertarians that we only tear down in a very ideological and un-intellectual way, and to that the detractors are not entirely without a case. Patrolling the old stomping grounds on the libertarian boards yields no shortage of true believers who rely only upon the mantra and never delving into the nuts and bolts that comes with the territory of actually making a persuasive argument.

I am posting this video in an effort to make an affirmative case for an alternative attitude that doesn't fit into what I would call any ideological model (it should have things in it that are disagreeable to all comers here most likely. I know I myself have to give a lot more thought on the video before I could say I agree or disagree with some specific aspects of it).


I do not know if Tim Harford is a libertarian or not and I don't particularly care. There are some conclusions he comes to later in the video that I can certainly see some of those closer to my end of the political divide might not fully agree with. He does at least make an argument in the following video for a few solutions you don't hear talked about often and hopefully by posting it here it might generate a conversation that isn't the standard one that revolves around all those infuriating mantras and the equally infuriating snarky counter-mantras.


A few ideas I hope to generate discussion around: Things that are complex and "coupled" as the video defines them. The decoupling of complex systems, the extent coupled complexity is harmful, and what can be done to mitigate those problems that can utilize the understanding of complexity to its advantage rather than just adding layers of complexity to satiate the desire for safety, be it in the physical world or the financial one.

For my part, I think that not only decoupling, but methods and ideas the focus on that as well as decentralization and diffusion are at least worth investigating seriously. I also have a preference for the idea (preferable to the one that makes up the current popular ideas of financial regulation) that dealing on an individual level with banks to determine what their institutions' required reserves should be is better than one-size fits all, in the same way I think that dealing with individual student's issues is better than zero-tolerance policies that have zero nuance to them. Many of the complexities, as Harford notes, are there for tax purposes, not structural ones. Again, that doesn't make the financial system not-complex anymore, but it may address some of the ways we end up with dangerous systemic situations that necessarily go beyond the emotional responses to the situation, which while completely understandable, are nonetheless also completely unhelpful on their own.

*Fair warning to the mods- I am not going to be able to be around very much the remainder of the week, but I may still check in to read responses if there are any who make it through the long time the video takes to watch. -

For everyone else, I do hope at least a few of the community takes the time to watch it. It's rarely boring. Harford to my ear does have a way of keeping the listener going. You can even listen to it in the background while doing other things.

Comments

[jerseycajun.livejournal.com]

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.