Every media outlet has been struggling to assign blame for current financial crisis. Obviously there was greed. There was incompetence. There was dishonesty. There was arrogance. And many other human failures. Politicians have been attacking “greed” by corporate executives. Once again we have discovered that people in high places are mortal souls, mere humans with all of their failings. But, can that be fixed? A good public hanging or two may be helpful, but it is not the cure.
I am once again reminded of W. Edwards Demings’ comment that 95% of quality problems are in the nature of the system and 95% of the time we blame the person and leave the system unchanged. The problem is in the nature of the system, not whether you are a democrat or a republican, spiritual or materialistic. If people don’t start to objectively and seriously analyze and change the system it is only a matter of time before the pattern repeats itself. You can be the most honest person in the world and still incompetent to change the system in a way that will produce better results.
I am disappointed that the presidential candidates have not helped the public understand the problem more clearly. It is simple. The free enterprise system is like sports. You have competitors on the playing field and they are free to compete. But, every sport has referees, lines on the field, a rule book, and the whistle blows immediately with violations of the rules. Take the referees off the field and you will soon have chaos, broken bones, and a demoralizing contest. A good system of rules does not destroy competition, it enhances competition.
The cause of the current crisis is first, a failure to enforce rules. Second, the current rule book was written to maintain orderly play on a landscape that has changed dramatically. The landscape of competition is now an electronic global playing field in which corporations morph from investment banks to banks, from hedge funds to who knows what, and invent new products with great sounding names and no warning labels as quickly as they can see an advantage in the rules.
So, without attempting to rewrite the rule book, how does the system need to change?
- All of our regulations governing the financial system are based on the nation state, and all financial institutions operate on a multi-national or global landscape. There are now serious proposals and serious discussion about global financial regulation. The recent coordinated global interest rate reduction is one more step in the emergence of the global economy and global governance. These steps would never be taken without a global economic crisis. The debate about “bailing out foreign banks”, which is being mischaracterized by some politicians to incite public anger, points to the problem of existing regulations and the reality of the global economy. Nationalism is an impediment to progress and dealing with the reality of the world as it is. National borders have become virtually meaningless when it comes to economic activity. There is no way that nation states, any of them, can regulate the global banking-economic system. There must be uniform global banking regulation that is transparent and provides no advantage to any one country.
- Complexity leads to error. The more complex a system or task the more likely that it will lead to errors. In manufacturing, the more you can simplify the production process, reducing steps in the process, quality is increased. Similarly, in the financial system, the process and instruments created were so complex that virtually no one understood what they were buying or selling. The financial markets should be regulated so that products that are properly labeled.
- Investment banks and hedge funds migrated their business models to do essentially what banks and mutual funds do but free of oversight and transparency. The root of the financial problem is neither in traditional banks, nor in mutual funds. Investment banking and hedge funds need to be regulated in exactly the same way as traditional banks and mutual funds.
- Virtually everyone today recognizes that our political system is corrupt. Both democrats and republicans were very heavily lobbied by Fannie Mae and Freddie Mac and that resulted in an expansion of their mandates. The intention of these institutions was good. The intention of the expansion was good – to provide more access to credit by less credit worthy individuals (poor and minorities). But, their activity was increasingly unsupervised and objectivity was lost. The system of lobbying by institutions that are regulated by our government has to change.
The success of the next president and congress will not be determined by their ability to recognize personal failings, but rather to redesign the system of rule governed behavior.