Caging the Beast

Everywhere you turn there's news on the economy.

Unemployment rising, markets crashing, credit shrinking, banks failing, stimuli pumping, fears growing...

And always an undercurrent of wanting to blame someone. Who is responsible for this mess? Whose degenerate greed and ambition destroyed a nation's wealth? Bring his head out on a platter!

But as far as I can tell, the problem is not with individuals, but with that elusive entity made up of many individuals and yet another thing entirely--the mob.

The mob is a dangerous beast, and no man can stop it once it has become unleashed. The might of collective action is like a great breaking wave, sweeping any mere individual that dares to stand up against it under its overpowering tow.

It was a mob on Main Streets everywhere that decided to mortgage their houses to the hilt and refinance like there would always be rising housing prices. It was a mob on Wall Street that decided to sell mortgage backed securities like there was no tomorrow. It was a mob of credit-rating agencies that decided CDOs should be rated AAA despite the dubious assumptions used in their formulae. And it was a mob of politicians that pressured agencies to make mortgages more available to low-income people.

Any one homeowner, one trader, one rating agent, one politician was utterly powerless against these mobs. If you didn't follow the tide, you would be swept under. If you don't make the trades, you would post below-market returns. If you didn't rate the CDOs AAA you wouldn't get the repeat business from sellers of the securities. If you didn't back the policy of making mortgages to low-income people who couldn't afford it, you were political chaff at best and a racist at worst.

The whole economic debacle then is not the result of any one person or group's moral failing. It is, instead the result of failing to account for human nature. The nature of man is to act in his best interest (right on, Adam Smith). When you have hordes of people acting in their natural interest, you have the mob at it's finest.

Each person does what only comes natural and before you know it, it becomes impossible to do otherwise. The disincentives are too great to buck the trend.

This economic meltdown, then, was caused by the perfect storm of bad collective incentives. And then it took on a life of its own.

The blame then falls on the systemic failure to cage the beast.

The incentives of our politicians, businessmen, agencies, and consumers were aligned in dastardly precision, each one abetting and supporting the other, until the bubble burst and the party finally ended--and the bill had to be paid.

In any social system, there must be proper checks and balances to make sure the beast of human self-interest does not run amuck, all off the cliff together.