Chasing the Rabbit: Official Blog by Author Steven Spear

It is natural to think that effort determines outcome:  Try harder, invest more, and get better results.  However this is not entirely true. 

An important qualifier is that the structure and dynamics of systems can greatly magnify or dampen the impact of investments made in and through them.  Some simple examples.   If we see an engine over-heating, adding more coolant may provide a temporary salve, but only until the blockage or leakage is found will the problem’s recurrence be avoided.  The lights may blow in a building.  Using good bulbs to back fill for bad ones will offer temporary illumination, but not like checking the wiring and surge protection.

So too with the economic crisis we are now experiencing.  

Our economy depends on a few critical macro factors being in place.  One is the enforceability of contracts.  If we enter into an agreement, we should know with confidence that obligations will be carried out.  Second is the fluidity of markets.  With accurate information readily available, people can move resources from applications perceived to be of lesser value to those expected to offer greater returns.

The problems we have now are due in very large part to a corrosion in those two conditions.  Hence, the freezing of credit and in turn the constriction of business.

That some terrible credit risks exist is known.  Where, held by whom, and for what portion of their total net worth is less well established.  This uncertainty as to where pockets of fiscal illness exist cause everyone to stay away from everyone else.  Imagine people in a town known where an infectious disease is known to exist but  prior a determination of who is sick and who is not.  Everyone has to act as if everyone else is a potential vector.  However, once there is screening and the ill are treated or isolated, things can return to normal.

Without clarity about the location and size of financial risk, our system has seized up.  Pouring more resources into the system, absent any changes will not make it operate better.  It is like adding more oil to an already leaky power train.  

Until banks are examined, their diseased parts are isolated, and their healthy parts are certified, people and institutions will still be reluctant to contract with each other–who knows what obligations will and won’t be satisfied? Absent that, resources won’t flow from poor uses to better and business will remain constricted.

Last night, the President ran through a laundry list of promises.  With you and I on the hook to pay for these things, and subject to the consequences for those that fail, a fair question to ask is: Will the proposal fix the broken parts of the system. If so, great.  If not, that likely will be money poorly spent.

Related posts:

1. BusinessWeek.com Video: High Velocity Lessons in an Economic Downturn
2. The Basic Science of High Velocity Systems: Principles for generating and sustaining improvement and innovation
3. Can We Afford Quality in a Downturn? Can we not?!
4. Retail Sales Drop on Fall in Autos and the Role of Government in Economic Policy….
5. Discovering our way out of crisis…