It's been apparent for some time that "planned obsolescence," the strategy developed by industry to maintain stable profits in response to market saturation and the need to increase demand, has morphed into "failure by design" and infected all sectors of the economy--commerce, service and finance. After all, if stability is the object, failure is the natural route; success, being terminal, demands that we do something new.
Over the last several decades, any number of economic developments have involved making sure that someone or something fails. The conversion of farmlands into industrial agriculture sites or housing developments initially focused on getting the family farmers mechanized and indebted to the banks. Then, when commodity prices were manipulated to promote widespread defaults, their lands became available to be snapped up for pennies on the dollar. One man's investment "opportunity" was a whole family's loss.
Perhaps the reason Polonius advised "neither a borrower nor a lender be" was because, even in Shakespeare's day, a loan was likely to reveal that the lender's intent was not necessarily friendly. And, though Polonius speaks of the loan being lost, it seems that getting repaid with interest is often not enough to satisfy lenders. Indeed, one could say that the recent financial collapse is nothing more than the inevitable consequence of loans having been saddled (inflated) with an unsustainable burden of transaction fees.
I'm not sure at what point the concept of deriving a profit by increasing the volume of sales, rather than depending on better quality to justify an increase in price, moved from manufacturing into real estate. But it was already firmly entrenched during the early '90s when a reduction in the tax on capital gains was promoted to "liberate" the equity Americans had accumulated in their homes by encouraging them to sell and "buy up" with additional loans. The increase in the volume of residential transactions and the accompanying purchases of new furnishings and appliances was presumed to more than make up for the loss in capital gains, as well as generate a stream of revenue for the subsidiary financial, legal, appraisal and rehabilitation/construction services. More and more of our economy was made dependent on the housing market and then, adding insult to injury, consumers were blamed when their incomes didn't increase sufficiently to "carry" the inflated volume of fees and transactions.
I'd like to lay the blame on the profit motive. Not profit; just the motive to take one. Profit is nice; profit is deserved. It's even inevitable, if you consider that the seller is getting rid of something he doesn't want and the buyer is getting something he assumes to be good. So, the partners in the transaction are better off and that's profit. But, this scenario implies, the seller starts from a position of knowing, while the buyer is still expecting, and it's this imbalance which contains the seeds of mischief, which the seller exploits when he's motivated by profit (especially its size) alone. Because it's the motive that prompts a little or big deception by the seller to promote benefits that just aren't there--the "all hat, no cattle" strategy in action. "All hat, no cattle" is amusing when it's just a matter of a person imagining himself to be something he's not. When the markets adopt it as an operating strategy, it's a disaster. One man's imaginary prowess turns into wholesale deception and, eventually, the bubble/balloon bursts and the sizzle, which was mistaken for the steak, evaporates.
Some people boil the roll of the profit motive down to simple greed, but the collapse of our economy is more complex. Indeed, the pattern of behaviors that has brought about the collapse had energetic support from people who weren't even directly involved--people who looked at market behavior and determined, backed up with lots of graphs and models and calculations, that it was good. Now it turns out they even had a name, the quants, presumably derived from the emphasis on quantitative analysis of transactions to come up with models of how markets work on their own, automatically, without the intervention of human emotions or, more importantly, any concern for quality.
In the aftermath of Wall Street’s epic collapse, few players have come in for more opprobrium than "the quants," those supposedly brainiac financial whizzes who designed ever-more complex investment products at the heart of the sub-prime mortgage debacle and subsequent financial chaos. These products, which included complex securities and derivatives tied to the value of mortgage debt and the risk of credit default, were the result of years of research and modeling undertaken by a group of math and physics PhD's (many from MIT and the University of Chicago) who came to Wall Street in growing numbers over the last two decades. They were lured not only by big money, but also the challenge of uncovering grand theories of finance economics akin to the elegant precepts found in physics and math.
What's interesting to me is the sudden realization that in looking for a grand theory what these scientists are really after is a secular version of what the religious refer to as God, but with the same purpose--i.e. to discover a system whose automatic functions free man from being responsible for the consequences of his acts. Risk avoidance is what they're basically after. If a system is automatic, then whatever the result, it's nobody's fault and nobody's been wrong. The quants probably would like being compared to the faith-based folk, but there it is. Instead of playing with numbers, they might just as well have been blowing hot air.
Earlier this month, two of the field’s leading figures, Emanuel Derman, a Columbia professor and former Goldman Sachs managing director, and Paul Wilmott, whose online hub Wilmott.com is a water cooler for the quant community, issued what they called "The Financial Modeler’s Manifesto," a new code of conduct for quants, in the wake of the financial collapse. "We do need models and mathematics – you cannot think about finance and economics without them – but one must never forget that models are not the world," Derman and Wilmott wrote. "You must start with models and then overlay them with common sense and experience."
How about starting from experience--specifically, the experience of actually managing a household, a microcosm of the economy as a whole? Doing that might lead to the conclusion that, fortunately, there's a good chunk of the economy, usually referred to as the "underground economy," which has escaped the modelers' calculations and which, having survived on its own, is what's going to carry us through the catastrophe the brainiacs made up. That, if we're lucky, the economy that's gone "pop" will be much like the balloons at the party--a mess to clean up, but not the end of business as usual.
There's no question the party is over. But, in any event, only a few people had a good time. Most people knew there was work to do and they did it without complaint. And now it's time for everyone to chip in.
Still, the question lingers how it happened that the party of business was misled by the "all hat, no cattle," "sizzle for the steak" crowd. Was it just laziness that led to quality being discarded and the substitution of the intent for the act? How did it happen that moral standards morphed into an aversion to risk and stable profits at all costs? Where did the culture of security come from?