RE: The global casino meets the millennium bug by Scott Champion, in which investment finance specialist Champion discusses investor psychology, the roles of government, banking and large global speculators in today's stock markets, and what may happen in the year 2000. Note: If you are already well-informed about Y2K you may want to skip or skim the second half of the article which is mostly about Y2K basics and potential impact on the financial system.
by Tom Atlee
9/30/1999
This brief essay explores the role of feedback in resilience and brittleness, as exemplified by our brittle financial system (detailed in above article, sent to me by Paul Swann).
A big factor in resilience is the presence of what are called negative feedback loops, balancing feedback dynamics, corrective feedback mechanisms, etc. All these phrases refer to factors that keep things from getting too far out of line, too extreme. Using healthy corrective feedback mechanisms can keep a system close to optimum functioning. For example, a fever makes us sweat, which cools us down, keeping our temperature from getting dangerously high. In ecology, coyotes and hawks provide a feedback influence that balances rabbits' famous procreative capacities: these predators eat enough rabbits to keep the rabbits from eating the plains into a desert.
Positive (or reinforcing or magnifying) feedback loops, on the other hand, make things bigger, louder, more. This is often useful, such as when we admire little Johnny's creativity, which encourages him to create more. However, reinforcing feedback dynamics are often a problem, such as when the microphone is too close to the loudspeaker and we get a rising screech.
The first half of The global casino meets the millennium bug contains a very clear description of the non-resilience of our national and international finance systems. The article describes an interesting reinforcing feedback mechanism which, like the feedback in a sound system, generates some extreme effects: Whenever giant financial institutions are on the brink of collapse due to high-risk investments, the Federal Reserve and the federal Treasury Department bail them out -- because the collapse of a major financial player could crash the whole financial system. The bigger they are, the harder they fall, and so the more resources we all must spend in preventing them from failing.
If the process stopped there (perhaps with horrendous penalties for those responsible), these bail-outs might be justified. But the process doesn't stop there. Because instead of deterring ultra-wealthy institutions from playing these risky games, the bail-out system acts as a safety-net, reducing their risk and encouraging them to take further risky investments which, when they come close to collapse, once again triggers the bail-out system. And so around and around it goes, creating ever-more-risky speculative games and ever-richer and larger financial institutions which must be bailed out... and, therefore, ever-more gigantic bail-outs. In addition to benefiting the ultra-rich at the expense of everyone else (since bail-outs are financed by the rest of us), this reinforcing feedback loop drives the whole system further and further out on a limb. We're pretty far out on that limb right now.
I want to point out that this systemic brittleness is due largely
to the existence of reinforcing feedback mechanisms and the absence
of corrective feedback mechanisms. We need corrective feedback
mechanisms that are
(a) automatic and timely [such as natural market "corrections"]
and/or
(b) intentional and ethical --i.e., purposefully designed to benefit
the public welfare. In particular, I'd like to see policy guidance
coming from collectively intelligent institutions like the citizen
consensus councils described in the article "Building
a Culture of Dialogue (among other things)" and elsewhere
on this site].
Obviously, I believe the preferred solution is the exercise of conscious collective intelligence through new political institutions such as citizen consensus councils. However, those institutions have not yet been established to govern our common affairs (in Y2K, finance or anything else). In the meantime, we should note that the sooner AUTOMATIC corrective feedback mechanisms [like market crashes] are allowed to happen, the less extreme they are likely to be. We might even consider some well-designed INTENTIONAL automatic corrective feedback mechanisms to protect the commonwealth: I can imagine, for example, a very steeply graduated tax on investment returns where the higher the return (which usually means higher risk), the higher the percentage that's taxed, with all proceeds going into a fund to pay for the bail-outs currently funded by ordinary taxpayers. This might serve to quarantine the speculative games of the very rich from damaging the rest of us.
Of course, I could be totally off the wall in this recommendation, since I'm no economist. However, I know I'm not off the wall when it comes to the relevance of feedback analysis. Although feedback is only part of the life of a system, it is a powerful factor in generating co-intelligence or co-stupidity. I thought this was a good time to explore that a bit.
Note: My father, Dr. John S. Atlee, advocates certain automatic corrective feedback mechanisms through which Congress could monitor Federal Reserve monetary policy (and thus the growth of the economy) for the public welfare. While I'm not sophisticated enough economically to understand or explain his theories or proposals, those with economics training my wish to take a look at them at http://www.iea-macro-economics.org/