Dilbert - Two Pigs Who Flail

 

Four years ago today the world witnessed one of the biggest corporate failures of all time ushering in a new age of persistent failure that haunts us today. Lehman Brothers embraced vulnerability a bit too far, and sadly at everyone else expense. They were not the sole or even the main cause of the economic meltdown and subsequent malaise, but they were the poster child for it.

While I praise President Obama’s Leadership and Management, and I appreciate the fact that job #1 is keeping the economy afloat (necessitating measures like TARP). Nonetheless, one criticism I have of his administration is he has not done enough to embrace the failure of badly behaving banks. Not enough to let even more banks go under. Not enough to let more bank executives feel the downside of their failed management.

John Lanchester’ book ‘Whoops! Why Everyone Owes Everyone and No One Can Pay’ dissects the dynamics and delves into the details of this economic failure decades long in the making…

  • “Without getting into technicalities — the credit default swaps and other arcana that were at the heart of the crisis — the answer can be summed up in a single word: risk. Moneymen don’t see risk in the same way that civilians do. To most of us, risk is for the most part a bad thing; at best, it’s something we seek out under specific circumstances, to generate a feeling that things are just dangerous enough to be exciting. In the world of money, risk is different: it’s desirable. It’s a basic law of money that risk is correlated to reward — the amount of money you can make is determined by the amount of risk you are willing to take on. But humans, even expert humans, are chronically prone to make certain sorts of cognitive mistakes. We have hard-wired difficulties with probability and risk that go very deep. The bankers made inaccurate calculations about the mathematics of risk. They thought they had engineered risk out of existence. That mistake destroyed banks, forced others into public ownership, put taxpayers on the hook for hundreds of billions of pounds and brought the world financial system to a juddering, panicky standstill.”

In short, the banks miscalculated that they had engineered away failure. Jay P. Greene’s post In Defence of Failure provides an articulate prescription to Lanchester’s diagnosis…

  • “Conversely, if these firms had instead been allowed to fail by going bankrupt nothing would have been destroyed. All of the financial capital held by these firms would still exist. And all of the human capital of the people who works for those firms would still exist. Bankruptcy doesn’t mean that you take all of the capital of a firm, put it in a pile, and blow it up. It’s all still there. What bankruptcy does is it forces people to reorganize what they will do with that financial and human capital. That is, they are forces to recognize their failure and figure out a better way to do things. And even more importantly, failure forces people involved with these firms to experience the consequences of their actions. Those people — and everyone else — learns from those consequences and hopefully changes their behavior in the future. To prevent failure is to prevent learning.”

We need an adaptation of John Lennon’s classic ballad of acceptance, but perhaps a bit more explicit for the politicians’ sake…

  • When I find myself in times of trouble, Mother Mary comes to me
    Speaking words of wisdom, let it fail
    And in my hour of darkness she is standing right in front of me
    Speaking words of wisdom, let it fail…
    And when the broken hearted people living in the world agree
    There will be an answer, let it fail
    For though they may be parted, there is still a chance that they will see
    There will be an answer, let it fail

 

John Lancaster Whoops Why Everyone Owes Everyone

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