What I like about Seeking Alpha is the frank expression of differing views. Less good is the predominance of articles about what is wrong over pieces on how to fix things. For example, the excellent piece by James Quinn on how we can avoid another tragic Ponzi scheme was a cry from the heart on the iniquity of Bernie Madoff, but the misfortune of the few wealthy who trusted Madoff is not the greatest catastrophe, and this article did not actually answer the excellent question it asks.
In the UK, the Chairman of Royal Bank of Scotland (RBS.) has apologized profusely, the head of Barclay’s (NYSE:BCS) is teetering on the brink of contrition and a senior banker at HSBC (HBC) (who had an alleged $1 billion exposure to Madoff) has committed suicide. I was taught, however, that it is not good enough to say you are sorry; the true meaning of repentance is making sure it does not happen again. That is what we need to be talking about now.
Muhammed Yunus, a Nobel Prize winner and a very different kind of banker, shared his thoughts on the global economy in his book "Creating a world without poverty" (2008). Muhammed Yunus lays the blame on the failure of capitalism. He argues that economic, social, and political systems, and false ideas, create poverty—not the laziness, ignorance, or moral failings of the poor.
In an interview on 13 November 2008 with Jane Wales, President and CEO, World Affairs Council (of Northern California), he talked about the global economic crisis and offered his advice for President-elect Obama. He points out that the world's three billion poor will be hardest hit by the global economic crisis. The longer it goes on, the worse will be its effect on people all over the world. Unless strong global action stops this tremor, its effects will not be limited to the economic environment; it will spill over into the political and social environment also.
He uses health care analogies to describe what we need to do. For him, it is not about treating the patient but about keeping the patient healthy. Regulators failed. Government bailout was the only means left to the whole world because there is no other agency, no other instrument you can use to address the situation. Whether you like it or not, government is the last resort.
Allowing the private sector to do anything they want, because the government will step in and bail them out when they run into trouble, should not become a habit. Now, while we are still going through the crisis, is the best time to fix the system. Once we get out of the problem, we will forget.
It is not simply about regulation. Regulation is a second order of priority. If we are going to put all our confidence in a market economy then the market itself needs to find a built-in system to correct the present anomaly that has exploded into this big crisis. We have to find a way to correct the market economy and put that system in place before we open up again for business.
The second part is regulation. Stronger regulation, which Yunus describes as stifling, is not the solution. Rather we need regulation that is more focused, specific and efficient. When a body has cancer you do not start by treating the whole body, you focus on the place where the cancer is located. The best care is not to allow this to develop - early detection - just like any disease.
We need a mechanism for early detection in the market. Thus if there is a sign of any asset getting toxic, we can hunt it down and take it out. That way the market becomes more reliable. If you leave it to the regulators to take care of everything, if regulators fail, government has to bail the market out because it is now government's failure. Regulation is only there in case your built-in system misses something.
We are all very happy about globalisation. However, if we all live in a global village we cannot have a national mechanism to take care of everything. If this is a global village, we need some kind of global overseeing mechanism, whether you call it a global central bank, whatever you call it you have to have that in position. This is not a unipolar economic system anymore; it is a multipolar economic system. You cannot rely on only simple, national-level oversight; you need a global overseeing methodology.
Technology has made this world completely different. Where we will be in ten or fifteen years is almost unthinkable at the speed the world is changing. So we had better get ready for that. When we are preparing this kind of an institution, we are not creating an institution to manage the system today but an institution to manage the system for the next fifty years. It would be very bad judgement on our part to carry on with 1940s and 1950s institutions to take care of the 21st Century world.
Coming from anyone but Yunus this could be dismissed as fanciful stuff and not very practical. But he is right, we do know a lot about early detection of the unexpected. For example, research on highly reliable organizations (such as nuclear aircraft carriers and hospital emergency departments that do risky work but remain relatively free of accidents) shows that the success of these organizations depends on a culture of collective mindfulness.
Weick and Sutcliffe, in “Managing the Unexpected: Assuring High Performance in an Age of Complexity (2001)”, observed that these organizations have five priorities.
- They are preoccupied with the possibility of failure and so encourage error reporting, analyze near misses and resist complacency.
- They seek a complete and nuanced picture of any difficult situation.
- They are attentive to operations at the front line, so that they can notice anomalies early while they are still tractable and can be isolated.
- They develop capabilities to detect, contain and bounce back from errors, creating a commitment to resilience.
- Finally, they push decision-making authority to people with the most expertise, regardless of rank.
It alarms me to see authorities, like MIT’s normally reliable Baseline Scenario, dismiss economic bubbles as inevitable. It is always tempting to dismiss unexpected events as normal, but a mistake. High reliability organizations, in contrast, track down bad news (Warren Buffett’s “tell me the bad news, the good news will take care of itself”) and stalk the anomalous. Such organizations keep asking people if they have noticed anything out of the ordinary. They praise them for an affirmative answer, and disseminate what they have spotted. The unexpected is a solid clue that your model of the world is in error.
High reliability organizations are organizations like any others, just more aware of the harm they can do. They have a big incentive to contain the unexpected because when they fail to do so the results can be catastrophic. Lives can be lost, but so can assets, careers, reputations, legitimacy, credibility, support, trust and goodwill. Consequently, such organizations persuade all their members to be chronically worried about the unexpected and sensitive to the fact that in the face of the potential for surprise, any decision or action may be subject to faulty assumptions or errors in analysis. Above all, they work to create a climate where people feel safe to question assumptions and to report problems or failures candidly.
As to President-elect Obama, Yunus points out that the US President is de facto President of the World, he can't avoid it. When you talk about poverty it is not the poverty of one country but the poverty of the World, it is a global phenomenon. The President of the USA provides leadership for the World. Yunus's message to Obama is that we should at least try to eradicate worldwide poverty.
President-elect Obama has now severely criticized the culture of Wall Street. What, however, should take its place? Weick and Sutcliffe’s “Managing the Unexpected” goes a long way to providing the answer: a “culture of collective mindfulness” that is also Yunus’s early detection mechanism.
Disclosure: I have no positions in any stocks mentioned.