Watching the dominoes


The greedy companies are getting the blame, but it's the politicians who changed the nature of the game
There's not much new to the financial meltdown that the U.S. is weathering.

Lehman Brothers, AIG, Washinton Mutual, it's all part of the same thing.

Truthfully, any government intervention will make it worse, just as it set up the mess. If firms don't have to face consequences and can hand off risk to the American taxpayer, of course they will.

But helping out some companies while refusing to underwrite the bailout of others just makes things worse. Who determines who gets the money?

Political contributions maybe?

There are a few things that I try to remind people.

When the free market is working without government interference, it's a distributed network instead of a hierarchal network. In a hierarchal network, some connections are more important than others, information is passed to these central nodes and then the central nodes exchange information, which is then passed down from the central nodes to the subsidiaries.

Think of a hierarchal network as a bunch of pyramids linked to each other only at the top of each pyramid. There is no way for a node in pyramid one to talk to a node in pyramid two except by going up through the top node in pyramid one to the top node in pyramid two, and then down the ladder.

Distributed networks don't have central nodes, each node is connected to several others. Picture a three dimensional fishnet and you're pretty close.

Hierarchal networks concentrate resources. Each pyramid is vastly more capable than individual nodes. So from certain viewpoints, a hierarchy is "more efficient."

But a distributed network is more fault tolerant and more adaptable. Huge swaths of the network could disappear and the information could work around the breaks in the chain.

If this sounds familiar, it should. The internet is the best known distributed network today. If Amazon crashes, it's not going to knock out the servers at the New York Times. Facebook disappearing is not going to make Wikipedia vanish.

And what, do you ask, does this have to do with financial meltdown? That's a very good question.

Back in the 1970s, the FedGovs (and to a lesser extent some StateGovs) started changing the rules of the game. The new rules favored building hierarchal networks over distributed networks. That is why so many Wall Street firms could build empires out of debt in the 1980s. That's why small, regional banks were were absorbed into huge corporate monoliths. And yes, that is one reason why the savings and loan industry collapsed.

One set of rules for the Average Joe. And another set of rules for the Masters of the Universe.

Of course, the Masters of the Universe could funnel huge political contributions to protect their turf...

If the whole thing sounds like a gang war, it was. The politicos extorted money to change the rules, and then blamed the companies who played by the new rules when things collapsed.

And if you know your history, you know that the same thing happened several times in the 1920s before the Big One in 1929.

The best thing the Treasury could do would be to stop bailing anyone out and let them fail. Then dismantle the remains of Fannie Mae and Freddie Mac. Then go back to a gold standard on the currency.

The chances are any of those things happening is very very small. The chances of all of them happening is nonexistent.

But I told you that before. The politicos aren't going to give up power, it's up to us to take it away from them and make government smaller than absolutely necessary. It's the only way to protect ourselves.

Keep Your Freakin' Hands Off!

— NeoWayland

Posted: Tue - September 16, 2008 at 01:33 PM  Tag


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