Microsoft could have prevented this mess.
No, not by buying Lehman Brothers, pumping cash into Fannie and Freddie, or counter-lobbying for increased regulation. An Excel model of the financial sector would have done the job — a model of the various financial instruments used to create the trillion or so dollars of sham wealth that vanished last week.
An accurate model would have flagged the whole mess as a circular reference.
I can’t prove this. I’m pretty sure, though, that a whole bunch of financial instruments owned by the failed former financial titans included each other in their portfolios — fundamentally no different from a spreadsheet that has the formula =B1+1 in cell A1 and =A1+1 in cell B1.
Their assets increased every time they pushed F9.
In addition to possible circular references, inside this crisis are lessons — not only for the future of the financial sector, but also for IT organizations that want to prevent problems instead of dealing with frequent crises. Among them:
Excessive deregulation is as bad as excessive regulation. Maybe worse. In spite of all the bleating about the awful bureaucracy of it all, I know of no company that failed because of Sarbanes/Oxley, PCI, HIPAA, or building codes.
Lesson for IT: When developing IT policies and procedures, establish a healthy balance between a free-for-all and excessively tight controls. As is so often the case, danger lives in the extremes.
Wishing doesn’t repeal arithmetic. The core premise of recent financial instruments: Aggregating a thousand loans, each with a one percent probability of failure, creates a very safe investment.
Risk calculations don’t work that way, as anyone who has taken Statistics 101 knows. The only difference is that with one item a one percent chance of failure constitutes risk. With a thousand, it’s nearly certain that ten or so will fail.
Lesson for IT: Entrepreneurial start-ups live on risk. They run thin, and hope nothing goes wrong. That only lasts so long — after awhile, hope becomes a very bad strategy for managing risk.
No matter how implausible, logic that rationalizes what we want to be true is compelling. Conversely, no matter how airtight the logic and evidence, anything that debunks what we want to be true is implausible. See “wishing doesn’t repeal arithmetic,” above. It’s one of the two reasons anyone believed this nonsense. (The other: The greater fool theory — I don’t believe it, but as long as I can sell the junk to a greater fool before it falls apart, I don’t care.)
Lesson for IT: Just because we’re technical doesn’t mean we’re immune. We’re just as vulnerable as anyone else.
The bigger we let companies get, the more unstable the economy becomes. When small companies fail, policy makers see it as capitalism in action. When AIG was about to fail, the alternative to Paulson buying it was serious risk of total economic collapse.
Maybe unfettered mergers and acquisitions weren’t such a good idea after all. Size might have improved efficiency and economies of scale, but it also decreased overall economic stability.
Lesson for IT: This is the theory behind using distributed systems instead of mainframes — each component has a lower level of performance, but the impact of one component failing is much smaller.
The desire to blame is stronger than the desire to survive. We got lucky — Paulson and Bernanke took care of business, including themselves out of the blame-fest. They might have been the only two in Washington who did so.
Lesson for IT: Same as the lesson everywhere. Blame doesn’t matter. Taking responsibility does. If the root cause of a problem happens to be a personnel problem, take care of it after you’ve dealt with the crisis.
When principles and practicality conflict, it means the principles aren’t practical. I’m not the first to point out the irony of a Republican administration effectively socializing the world’s biggest insurer and mortgage companies. Irony notwithstanding it was the best available choice.
Lesson for IT: Be as principled as is practical, and no more so.
And finally, if you think you’re smarter than your predecessors, you’re probably more foolish. To prevent a recurrence of the Great Depression, the Glass-Steagall Act kept investment and commercial banks separate, creating a firebreak between the high risks of the former and the requirement for safety of the latter.
We’re approximately the length of the Roaring ’20s after the act’s repeal. Draw your own conclusions.
Lesson for IT (and everyone else): Before you tear down what your predecessors built, be certain you don’t need it anymore.