“No problem can be solved from the same level of consciousness that created it.”
Consider the very different responses to damage on the Internet– widely considered to be one of the all-time, most successful networks — with that of modern-day Wall Street, quickly taking its place as one of the worst.
On the decentralized Internet, traffic spontaneously routes around a damaged node, reconstituting itself with minimal loss of function.
On Wall Street, a damaged “node” seemingly attracts unlimited resources, threatening the viability of the entire system.
Ironically, in their resolve not to repeat the monetary sins of the Great Depression — a too late, too tepid response — today’s financial generals (Bernanke, Paulson, Geithner) have committed a far greater blunder: they’ve flooded the market’s damaged parts with capital at the expense of the healthy parts. In so doing, they’ve betrayed their “mainframe mindset” and violated three cardinal principles of today’s distributed, Internet-era networks.
“Main Frame” Thinking in a PC Age
One. Isolate the source of the damage.
Until you know what malfunctioned and why, any good system operator’s first instinct is to take the damaged part(s) off-line. Think of it this way: when the 35W bridge in Minneapolis collapses, the first priority is setting up roadblocks and routing traffic away from the wreckage, to minimize future casualties. Next, you attend to the injured.
Contrast that approach with the Treasury and Fed’s response to Wall Street’s melt-down: lavish capital on the failed financial components, with no thought to their design flaw(s), while seemingly leaving the plight of the injured — foreclosed and financially distressed homeowners — for another day.
Two. Reinforce the non-damaged parts of the network, to bolster their capacity to absorb more traffic and otherwise compensate for the damaged parts.
As evidenced by last Friday’s disastrous employment numbers, Wall Street’s melt-down is quickly causing severe, collateral damage in the non-financial parts of the economy. That is where the focus should be. Specifically, ensure that sound, going-concern businesses and households continue to have access to credit, either via solvent financial institutions, or, if need be, directly from the government.
Secondarily, scarce capital should be preserved for things like unemployment benefits, job (re)training, and foreclosure mitigation.
Three. Invest in decentralization.
The overriding goal of the Department of Defense (“DOD”), the Internet’s original patron, was system survivability. Toward that end, the Cold War-era DOD designed a decentralized system that could withstand the loss of one or even multiple nodes, should the unthinkable happen.
Contrast that with the handful of financial Godzilla’s emerging from today’s carnage: Citigroup, JP Morgan Chase, BankAmerica, and Wells Fargo, all rapidly swelling their opaque, multi-trillion dollar balance sheets, and now truly deserving of that dreaded epithet, “too-big-to-fail.” Of course, the biggest balance sheet of all — and arguably the one with the most dubious assets — now belongs to . . the Federal Reserve.
In retrospect, it does seem unrealistic to expect enlightened government policy in the midst of the worst financial crisis in decades.
Failing that, Washington would have done better to have simply heeded that old financial policy nostrum: ‘feed a credit crunch, starve a Wall Street melt-down.’
The government should not …
guarantee Citi’s bum debts
try to force down mortgage rates by buying mortgage backed securities
try to “stabilize” banks by infusing them with loans big enough to only mask their insolvency
demand the breaking of mortgage investor contracts by requiring loan “workouts” outside of the predetermined foreclosure process.
try to re-inflate stock values
try to re-inflate property values
The government should: Don’t just DO something, stand there! Let things crash that need to crash. That includes home values.