This is my analysis of the financial crisis and it’s relatively simple: The more removed you are, the less control you ultimately have.
The further you are removed you are from a situation or an object, the more difficult it is to monitor and control. Time is not your friend and things can spiral out of control quickly and without your knowledge.
Think about Americans and food. As we have become so removed from our food (we collectively eat more and more processed, fast, fake food) that we have lost respect for real food. We’ve forgotten what it takes to actually have and cook real food. As we become increasingly comfortable with this disassociation we loose our ability to make good judgment calls. We end up doing what’s easiest. We go for the quick fix. We go for what tastes good without actually considering whether it’s good for us.
The same thing has happened in finance. The main conduits controlling the money have been increasingly removed from money. To some extent they’ve forgotten what it takes to earn and make an honest dollar through sweat. Money is meant to honor an exchange. Over the past 10-15 years we’ve come to see computers manipulating huge sums of capital online and financiers using ambiguous instruments like derivatives. It’s okay for hedge funds to use bizarre arbitrage and unsafe leveraged positions because they are ‘smarter’ than we are.
Our disconnection has come back to haunt us again.
Nothing is too big to fail and from what I’ve personally seen, scale is not always better.
Here are some other posts of mine on the state of the economy:
Time to be Worried? (January 2008)