Lessons from flu and financial pandemics…
Posted by steven_spear | Under Business Strategy, Economy recovery, process excellence Monday May 11, 2009The swine flu scare and the financial pandemic were similar in the dynamics they provoked and the treatment they necessitated. This is not coincidental. Both where characterized by injections of risk into a tightly coupled ’system,’ risk unknown in location and magnitude. Until that uncertainty was resolved, normal interaction couldn’t occur. Both offer insight for evaluating the response to these crises and for guiding crisis response (e.g., health care, autos) in the future and creating regulatory/screening structures that prevent it in the future. Both crises highlight the need for increased transparency going forward, so infections are seen sooner than latter and perhaps coupled with tests of health that are ongoing and not episodic (read more below, for details).
Under any circumstances, a normal, healthy well functioning society depends on individual people and parties interacting with each other at work, at school, in social gatherings and in the streets and other corridors that connect those meeting places. However, when word spreads–and it spreads quickly–that some members of the community are sick and infectious, normal interaction shuts down. Why?
If people don’t know who is infected, with what they are infected, how contagious they are, and the consequences of becoming infected, people don’t want to accept risk to themselves of a threat that is unknown in location, timing, or magnitude. Everyone does the ‘right thing’ by themselves: hide.
In such circumstances, the public health response is clear.
1: While everyone is self isolating, screen for infection
2: Isolate those infected from those who are not.
3: Establish meaning means of infection control between the isolated segments and the rest.
At that point, society can resume its normal if perhaps cautious functioning, the uncertainty reduced considerably about the risk of becoming infected.
Then, as the healthy portion of society resumes its functioning, the isolated elements can be treated and released from quarantine.
Going forward, everyone operates a little more cautiously, expecting a little more transparency in knowing where potential trouble lies.
So too with financial crisis as with public health crisis.
In 2008, the world’s capital markets shut down. Why? It was becoming evident that financial institutions held “toxic” assets. The big problem? Not so much that this represented a significant portion of the world’s financial instruments. Rather, it was not clear who held what, to what extent. It was as if typhoid was in the community, but no one knew it was Mary who was the carrier.
The result? Everyone shunned everyone else. The problem? Everyone doing what was right thing from their own perspective led the financial markets and the economy as a whole to shut down, as if everyone had shut their doors and sealed their windows to avoid a virus.
The appropriate response? Just like with a viral infection, the key was to identify the affected institutions, isolate them from the larger community/system/network and–while the ‘healthly’ members of society resumed a more normal, albeit constrained interaction–start treating the sick institutions to return them to some semblance of health.
The need for a ‘public health’ response to systemic infection indicates why some government interventions worked and others did not in the last year.
When public awareness started growing that unknown financial institutions were in trouble to an unknown degree, people did the natural thing. They withdrew–leading to our percipitous slowdown. Not surprisingly, injections of capital into the system did little to boost the economy. No matter how sumtious the meal, would you dine with someone, fearing the possibility that they or their chef was critically and contagiously ill?
More recently, the federal government has been conducting stress tests on banks. Even though some were shown to be quite weak, the market as a whole took a sizeable bounce. Why? The risk went from unknown to known, and once located and sized, people and institutions could re-emerge to interact and transact.
There are some remaining questions:
1: Will financial stimulus be too little too late to accomplish much once normal economic forces start functioning, allocating capital through the normal Shumpeterian creative/destructive processes that are markets and capitalism?
2: How do we maintain transparency going forward on the health of individual institutions and the community/system as a whole so the unknown risk doesn’t descend in a huge bolus in the future?
Does this mean more aggressive and competent accounting, ongoing stress tests for banks as we do for people?
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