when-systems-collapse-488Rethinking our current systems and
how to make them functional once again

The panic that we hear coming from Wall Street and the halls of Washington, DC is not the typical panic associated with a recession. Instead, it is the seldom heard sounds of national systems imploding, collapsing around us.

Conversation has turned to what was the unthinkable. The talk gathered momentum and now nervous whispers are heard all the way from the floor of New York Stock Exchange to the water cooler. Everyone is talking about what was unimaginable only a few short months ago. Tuesday, eyes turned to Washington. The nation breathlessly awaited word on how the U.S. will lead the world back from the brink of economic collapse.

The United States is a nation governed by systems.  Government provides the operating systems for conducting business and commerce. Everything from what types of business are allowed and how our land uses are managed to protecting our intellectual property and educating our children is governed by systems.

Centuries-old systems have been extended to include social engineering and commodity manipulation. Government tells farmers what crops to plant, prods school districts to educate challenged children and encourages research. It is perhaps no exaggeration to say government has a hand in almost everything we do.

Our systems have worked effectively for more than 200 years. In 2001, the systems began seizing.

Global commerce is suffering from a problem more insidious than the financial crisis. The systems are struggling. The news of the day is a constant reminder that the financial world has been turned on its head.

Our woes may be multiplied by the sad fact our traditional solutions are inadequate. The unprecedented stimulus money being poured into the economy only forestalls the inevitable. The system is floundering. All the attention on the treatment is merely a distraction from what is really needed – a system overhaul.

Why Do Systems Collapse?

Systems collapse for all manner of reasons. Historically, problems have stemmed from waning confidence associated with severely injured financial systems.

Economic turmoil has humbled great nations. The worst chapter in modern history was prefaced by Germany’s economic collapse. Argentina descended into a nightmare 10 years ago (and may never forget the horrors visited on its citizens). Mexico came close to collapse in the 1990s when the peso was allowed to float on the open market.

So, we find ourselves staring into the abyss. What brought us to this crossroads in history? Two key decision points have been cited as culprits. One, a mismanaged formula for calculating the risks associated with subprime loans, and two, the limitless money expansion properties of derivatives.

Like catastrophic failures of the past, both systems were designed by extremely bright people. But while they worked well as the economy flourished, a trip line was waiting at the end of all that irresponsible lending. The resulting implosion is sucking vast swaths of jobs, businesses and industries into the abyss.

So we play the blame game. As many have noted, there is plenty of blame to go around. We might even entertain the notion that we were too complacent, too willing to believe in the indestructibility of the 800 pound gorilla that is the US economy. Worse, we might have been too gullible. The exceptionally bright among us have a habit of intimidating those around them. Perhaps we were blinded by the glare of all that cerebral prowess. We actually believed risk could be diluted through hedging and hedging upon hedging. Our skepticism failed us and our guard was lowered. Now, we turn to our leaders to tame the chaos.
The Real Reason for the Collapse

The blame for collapse actually should fall at the doorstep of a governmental regulatory process ill-equipped to handle the demands of modern commerce.

Specifically, national governments are unable to regulate the global nature of business. And government has long been notoriously glacial in its responsiveness. The problems are a glaring deficiency in speed and reach.

Businesses are global, regulators are not. Actions taken by U.S. regulators, as an example, have little effect on the actions by business people in Asia or Africa.

Bureaucrats only barely managed as the Twentieth Century closed, but now they no longer are up to the tasks before them. Regulatory agencies are not designed for today’s world. A glaring example exists with regulation of nanotechnology. Properties of familiar elements such as gold are different at the quantum level. So, laws enforced by the Environmental Protection Agency don’t apply to many new products being introduced for public consumption. Commerce occurs at the speed of electrons, which is very, very fast. Government in its present form is not up to it.

The larger system flaws expose us to future problems, perhaps of even greater magnitude – if that is possible. Unless proper action is taken very quickly, governments around the globe will begin to fall like dominoes.

A Call for Drastic Action

The world is looking to the U.S. for leadership, and I have confidence that this government can respond in that fashion. The following steps will be necessary to make the corrections necessary for future prosperity.

Step One:  Break the cycle of decaying confidence. Shut down all financial markets for a short time similar to what was done after the World Trade Center bombing.

Step Two:  Convene a global crisis team to act quickly on recommended changes. This team will be charged with finding the breaking points and reinventing our current systems to meet the needs of corporate expansion and entrepreneurial activity.

Step Three:  Engage global regulatory agencies with authoritative teeth to work on curbing harmful actions of businesses around the world.

Step Four:  Develop a system of early warning indicators designed to flag problem areas in the future. Abuses in lending were well-known ahead of 2007 inside and outside the industry.

Step Five:  Reinvent the systems. Our systems today have evolved over countless decades, with patches being made every time a new technology or new business methodology shows up. It is time now to perform a ground-to-ceiling overhaul, one system at a time.

Step Six: Expand freedom of information and encourage ultra transparency in government and business. Communication from street-level observers who can tip authorities to trends like unfit mortgage borrowers can assist the government in carrying out reforms and averting future disasters.

As the recession continues, more and more of our system frailties are coming to light. This is the ultimate stress test for our systems.

The Consequences of Not Taking Drastic Measures

Civilization itself is at risk. It took thousands of years to get where we are, and it all could come unraveling in a matter of days.

The abyss yawns before us. If we blink, we could find ourselves falling.

By Thomas Frey

5 Responses to “When Systems Collapse”

Comments List

  1. <a href='http://freelock.com' rel='external nofollow' class='url'>John Locke</a>

    Hi, Great stuff. I mostly agree about the problem, though I don't think it's quite as dire as you suggest. But I'm not sure I agree with your course of action. I look at the situation as being near the end of a big cycle, and the start of a new one. We're in the midst of a period of creative destruction, and the economics of scale have flipped to favor the small instead of the big. So the solution needs to come from the groundswell of people taking action, not imposed as policy from above. Life is the opposite of entropy. It's a constant struggle between vitality and bureaucracy. Entropy tries to even everything out, but pesky little life pops up to make things complicated. It's really a great time, an exciting time, a nerve-wracking time to be here. The main point is, big corporations are running headlong off a cliff. Today Microsoft is suing a company over Linux--corporations are desperate to keep innovation at bay for their own self-preservation. So a call to action is great, but you should be calling everybody to action, to find ways in their own communities to make sure people can stay in their homes, have enough to eat, and reward companies who support their communities. It's time to recognize the true consequences of the accounting systems that ignore human, natural, and manufactured capital and only account for finance. No central decision-making body can do this for us, we need to do it for ourselves, stop patronizing places that destroy communities by sending jobs overseas, start helping companies who create jobs. @DaVinciDeb asked for comment, guess I got a little carried away...
  2. <a href='http://www.hiddenbusinesstreasures.com' rel='external nofollow' class='url'>Michael Benidt</a>

    Over two years ago now (the fall of 2006) - Chuck Schumer and Mike Bloomberg wrote an article in the New York Times (“To Save New York, Learn from London,”) and told the story of how New York's financial primacy was being threatened by such upstarts as London and Hong Kong. So, what did New York do about the threat to their downtown? Well, as the article says, “That is why New York has hired a consulting firm, which will issue a report in November identifying the specific variables that are negatively impacting our financial-services industry and recommending an action plan to correct them.” Be still my heart. And, how'd that work for us, anyway, huh?! At the same time, Ellensburg, Washington, was facing a dire situation in their downtown - losing business tenants and traffic to their quaint central shopping district. What did Ellensburg do about the threat to their downtown? No consulting firms, no reports - they just dug right in. They started doing everything they could everywhere they could. But since they couldn’t get Schumer and Bloomberg to help, they decided they’d have to make do with a donated web site and a cadre of volunteer college students. They started a MySpace page and got everyone involved. Today, downtown Ellensburg is thriving and growing, using volunteers, new media, friends, needles, thread and paste. Please, Thomas, no global crisis teams or agencies to study anything - just put us all to work. You've done a great job of identifying the problems, let's believe in our collective abilities to get a grip. I see little evidence of "the exceptionally bright among us have a habit of intimidating those around them." Just look at blogs and cable television - not much intimidation going on there! And, yes, thank you John for your comment above. I think you said what I just said - only better. And, thanks, Thomas, for an article that is longer than 140 characters, has a ton of intellectual meat to chew on - and one that's not intimidated by anyone.
  3. <a href='http://randommanplanetearth.blogspot.com/' rel='external nofollow' class='url'>Random Man</a>

    Do you think the economic crisis will be outweighed by the environmental crisis of climate change? The prospect of greater than 2 degrees of warming sounds far more dire (just check out the IPCC reports) than the current economic woes facing us all. The solution? "Green infrastructure (wind, water, wave and solar) and green jobs, green jobs, green jobs are what we need!" says Random Man on Planet Earth p.s. Love your site !!
  4. <a href='http://www.openworld.com' rel='external nofollow' class='url'>Openworld</a>

    Your prescription of a global regulatory regime -- a top-down move by political leaders -- is doubtful. World Bank and other estimates have pegged corruption as a $1 trillion global industry. Given the tendency of power to corrupt, why should one propose letting politicians use crises to expand their power? A far better approach will be for free economies to rapidly apply new tools for transparency and trust rebuilding. Wired's recent article at http://www.wired.com/techbiz/it/magazine/17-03/wp_reboot shows explores XBRL, a key element for countries that want to move on this path. Mark Frazier Openworld.com @openworld (twitter)
  5. PaulRevere

    I have been an entrepreneur most of my forty working years. I have been a part of a number of tech start-ups and the single biggest barrier to success, besides funding, was the extreme leverage larger competitors wield. I rarely if ever deduce analysis, most of which is way over intellectualized, that addresses the 'too big to fail, too big to exist' principle. I completely disagree with the author when he states that "The blame for collapse actually should fall at the doorstep of a governmental regulatory process ill-equipped to handle the demands of modern commerce." Like NFL linemen, size is necessary to be competitive in the NFL. As much as the players/owners would like to isolate their field of play as if it is the NFL, the truth is that their field of play must include small businesses sized from individuals on up. They have not a prayer of staying alive unless they steroid up. The idea of unlimited growth and size is relative is what must be addressed at today's juncture with catastrophe and subsequent reorder of basic economic and social principles. Consolidated and concentrated economic power is by nature completely selfish and geared toward dominance. The 'invisible hand', no matter how much transparent data is available cannot cope with concentrated (monopolistic) power. Look at how so few firms on Wall Street have actually manipulated economics to not only cover their trillions of dollars in losses, but to extend the taxpayer largess into giving them further hundreds of billions if not trillions with no strings attached. THAT is where the foundations for addressing our up and coming economic collapse must be built.

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