shagbark (shagbark) wrote,
shagbark
shagbark

How did we fail to foresee the financial crisis?

I heard on NPR today that the largest Chinese bank had only 0.02% of its assets invested in the "toxic derivatives" associated with our financial crisis.

So apparently one-sixth of the world's relevant population foresaw it.

Economists used to believe that technological innovation and competition was a matter of some companies adapting to new technologies, and others failing to adapt and going bankrupt. That's still the popular view. But studies have shown that it's more profitable for some companies to continue doing what they've been doing and go out of business, than to adapt and survive, because the larger short-term profits can be invested long before the eventual profits of adaptation. Adaptation is more favorable to small companies.

Similarly, conservation groups who want to encourage African countries to conserve their endangered species out of economic considerations were horrified to discover that it can bee more profitable to kill all of your elephants this year and sell their ivory, than to keep a constant population of elephants alive so that you can sell their ivory forever.

Who "failed" to foresee this crisis by investing in toxic assets? Big companies. The same types that profit more by exploiting a resource to its extinction than by managing a sustainable system.

The "failure" to foresee the crisis is taken as proof that the market is not smart enough to regulate itself.

Maybe the market succeeded.

Has anybody asked whether the financial organizations that failed, and the people running them, made more money by failing than they would have by not failing?

If so, then the problem is not that the market doesn't work. The problem is that the incentives were wrong, and that we let the power to prevent a financial collapse be concentrated in the hands of people who had no reason to prevent it.
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