Wednesday, December 17, 2008

A 'hard reset'?

Garbage in / Garbage out. The consequences?

That's a link to a bit of a worrying article on the verygood ArsTechnica site. It's an interesting analogy - the one between a computer programme and an economy. Squillions of transactions resulting in a defined outcome. The difference being that a programme has been designed for a pre-determined purpose and an economy has evolved.

Is a game a better analogy?

1 comment:

Tim Almond said...

It doesn't really work because the economy isn't a simple top-down controlled program. It isn't uniform and while you do get herd-like behaviour in markets (and too much, for various reasons), there are always people who will break from the herd.

I personally don't buy into "the market failed and need rebooting". What failed is the management of risk in both the USA and the UK.

I'm a big believer in the necessity for creative destruction in markets. Ford, GM and Chrysler can all go to the wall if someone makes a better car.

The problem is that the government guarantees the savings in banks and building societies, and therefore that means that the government should either regulate the behaviour in terms of the risks that those organisations take, or hand the responsibily for guaranteeing savings to insurance companies.

Sadly, neither of the main parties will do this. They'll always love a boom because of the (artificial) economic growth which gets people to go out and borrow money to buy new kitchens and plasma TVs, and all the jobs that that then creates, regardless of the risks. The problem is that when the bubble bursts, all of that unwinds. All those extra bubble-powered jobs disappear and with them go a whole bunch of other businesses and jobs.

We need government to be responsible. We need government to build in mechanisms like land value tax which, when land booms start, help to disincentivise land speculation. We need government to regulate how banks lend in terms of risk (the government should do this already if it's going to underwrite their savings).

One of the reasons why this economic collapse is worse than the one in the late 80s is that nearly all lending was from building societies who were highly regulated and had restrictions on things like where they could get money from. This meant that they couldn't grow like Northern Rock could, by getting nearly all their money from money markets. So, there was no "credit crunch" because there was far less interbank lending. One Building Society got into trouble in that recession, the Town and Country. The rest had a couple of bad years, but comfortably rode things out. The demutualisation meant that most of the mortgage market went from being highly regulated by tight BSA rules to being regulated by the FSA who did almost nothing about their behaviour.