Monday, February 23, 2009

Causes of the crash of '08 - how much fraud?

At last count my list of contributing factors to the crash of '09 included ...

  1. Complexity collapse: we don't understand our emergent creation, we optimized for performance without adaptive reserve
  2. Mass disability and income skew: The modern world has disenfranchised much of humanity
  3. The Marketarian religion: The GOP in particular (now the Party of Limbaugh), but also many Democrats and libertarians, ascribed magical and benign powers to a system for finding local minima (aka The Market). The Market, like Nature, isn't bad -- but neither is it wise or kind.
  4. The occult inflation of shrinking quality: What happens when buyers can't figure out what's worth buying. Aka, the toaster crisis - yes, really.
  5. performance-based executive compensation and novel, unregulated, financial instruments: a lethal combination. See also - You get what you pay for. The tragedy of the incentive plan.
  6. Disintermediating Wall Street: Wall Street became a fragile breakpoint
  7. The future of the publicly traded company: A part of our problem is that the publicly traded company needs to evolve
  8. The role of the deadbeats: too much debt - but we know that
  9. Firewalls and separation of powers: a culture of corruption, approved by the American electorate, facilitated dissolving regulatory firewalls
  10. Marked!: Rapid change and the Bush culture made fraud easy and appealing

I put Marked! pretty low on the list, but maybe I should bump it up a bit. The Hall of Shame (Clusterstock) lists a lot more fraud than has made the papers [1]...

Good old fraud didn't cause the crash of '08, so I'm not going to move it up from the bottom of my list. I think it's more of a cofactor -- the primary drivers of the crash also made fraud easy, profitable, and almost culturally acceptable. In turn fraud, at more levels than we can imagine, accelerated the downturn.

One interesting note. Emily remembers John McCain's reaction when the crash began in the fall of 2008. McCain said "fire Cox". At the time that seemed rather odd, and McCain was criticized for coming up with Chris Cox (#18 on the list). In retrospect, one wonders how much political insiders knew about the amount of fraud in the system. Politicians of both parties spent a lot of time with people like Allen Stanford, and I'm guessing, despite the photographed smiles, that they felt a severe need for soap every time they shook his hand ...

[1] Inanely, we have to plow through a lot of links to get to the interesting ones, including a number of unfair listings - though this one's fair.

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