Monday, September 22, 2008
USA Financial Crisis: The Danger of Unbridled Innovation
A simple point I want to make today, in light of all that went down last week: Innovation can be dangerous. We saw it when Enron collapsed – creativity without regard for legality. This time it’s much worse.
Back when the financial markets were deregulated a lot of folks, on both sides of the aisle, thought that it was a good thing. They thought it was innovation, and, it was. For years, it appeared to be a genius move, as new financial products were created, more competition was introduced, and folks got mortgages they wouldn’t have in earlier days. The people who architected and pushed for deregulation had a real vision of the upside, and indeed it came to pass.
The bad news is not enough lawmakers looked at the downside to deregulation. And, folks, it was there to be seen, many people saw it, it was ignored. The deregulation laws that got passed were simply not properly evaluated. And further blame should be put on those who, with more data, didn’t re-evaluate and make adjustments.
It’s textbook: When you implement a new innovation, before it goes online, you need to judge/critique the idea based on criteria. One criteria that wasn’t looked at properly was risk. More precisely, nobody knew the risk, or how to calculate the risk.
If this were a Vegas sportsbook, they wouldn’t make odds, they wouldn’t take the bet.
The unintended (but I would say predictable) consequences hit the fan when factors beyond our control de-stabilized the system, and now the taxpayers of the USA are bailing out the banking industry. What happened to capitalism? I always thought like, if you failed, you were SOL (“Situation Out of Luck”). I guess that’s only true for guys like me! I’m an entrepreneur and I’ve been part of several ventures that have fallen flat on their face, and no rich Uncle named Sam bailed me out. It was months and years of eating an apple for breakfast, bologna for dinner, and bartending or taxi driving all night to pay the rent.
If you got one of those easy mortgages and don’t have the income to manage them, I feel for you, but personally, I don’t want to pay it for you. And I don’t want to bail out the banks who loaned it to you either. Looks like I’m going to do both! I’m SOL! We’re SOL! We’re SOL because our leaders didn’t generate criteria and take a hard look at the downside to regulation.
So, enough with the rant, and back to the main point: Innovations of any kind need to be critically evaluated before being put into action. Everyone considering a new innovation of any kind, hey, here’s my suggestion: Do an Evaluation Matrix. Develop some precise and measurable criteria and evaluate your idea. If you don’t know what an evaluation matrix is, well, buy Jack’s Notebook and find out!