Saturday, October 09, 2010
Why It's Time to Reimagine How We Manage Everything
Welcome to the future that might have been. Here's an invitation: step inside a tiny thought experiment with me. Let's apply just two little, seemingly inconsequential principles of 21st century management--public, not private, and purpose, not profit--to do a counterfactual: to imagine how America's thoroughly broken real estate market could have prospered--had we been smart enough to let it do so.
Today, a wave of foreclosure fraud is one the brink of sending America's economy into toxic shock--again. It's likely that home sales will freeze, credit will dry up (more), and prices will collapse (again). So what if the paper of trail of titles, foreclosures, and evictions was totally, completely, instantaneously public, not private? What if you could Google a given home's paper trail, merely by typing in it's address? What if that paper trail was publicly accessible, by anyone, anywhere, updated in real-time, easy to search, aggregate, remix, validate, syndicate?
My guess is that the incentives for mortgage fraud would have been vaporized. If anyone could have quickly checked to see that their signature had been forged, that their payment arrears faked, or their overdue balance not quite so overdue--well, that would made have engaging in mortgage fraud probably costly enough for it not to have become a "business model" mass produced by an entire industry in the first place. Instead, it's more likely that the marginal costs of fraud would have risen: if I got wind to it, I might have alerted my folks, friends, and family, letting it go viral--before it became systemic.
Today's epidemic in fraudulent foreclosures is the mirror image of yesterday's epidemic in toxic loans that would never be made good on. Culprit number one? Fannie Mae. Fannie's was set up as a curious bastard child, a full-blown corporation that everyone implicitly knew had the full backing of the government--to backstop the mortgage market--essentially, to subsidize greater lending, by taking assets off the balance sheet of banks.
What ended up happening, of course, is that Fannie overinvested tooth and nail in lower and lower quality mortgages. Why? Not just because the government "mandated" it to (it didn't--management had zero mandate). More deeply, because it was, like every other 20th century corporations, beholden to maximize near-term profit. For Fannie, that meant an arms race with other low-end lenders and originators--ever lower lending standards, to boost market share, and amp up marginal profitability. It was a destiny written into the stars.
But what if Fannie had been a social enterprise--that elevated purpose, not profit? One that, for example, actually prioritized the goal of lending sustainably to the least rich 20% of the population--and then, of maximizing their equity? It's likely that they would have invested less--because it was taking those greater social returns more seriously in the first place. It probably would have paid a whole lot more attention to keeping people in homes they could afford, rather than merely doling out loans willy nilly--because every penny of marginal profit would have counted less than every marginal unit of equity, not vice versa. And, likely, it would have built roles (C-level offices that managed it), rewards (bonuses tied to it), and reports (information systems, disclosures, etc) to take it seriously--instead of taking it unseriously, striving only to boost near-term marginal profit.
So when you think about, Fannie as it was set up, was exactly the opposite of what should have been. It was what you might call a hypercorporation: one beholden to shareholders, but subsidized by the government--a wealth transfer machine, in other words, from taxpayers, to shareholders. But it should have been an anti-corporation: one designed to benefit to communities and society, but subsidized by shareholders, who received a secondary liquidity preference in exchange for government guarantees of some percentage of their risk capital--in other words, a (social) wealth creation machine.
Now consider: that's the power of just two principles of 21st century management at work. I'm not pretending that they would have solved every problem in the real estate market--but they would have gone a long, long way. So what might have happened if we applied the whole arsenal? I'll argue in future posts that we wouldn't have, literally mismanaged the economy into oblivion, squandered our future, and eviscerated our society. We probably wouldn't have had a bubble, and a historic crash--but maybe, just maybe would have been smart enough to seed an enduring, meaningful prosperity, instead.
So zoom out with me.
Here's the real problem. America's economy got suddenly, radically, hyperconnected. I don't mean iPhones. I mean the sudden, unprecedented, unimagined ability to trade everything from houses to entire companies--billions of times a day, and back again. It was like a volcano of interaction suddenly going pyroclastic.
But the principles of management the economy's big kahunas had grown up living and breathing? They were built for a slow, monolithic, predictable--a fundamentally disconnected--world.
When the two met, the result was history as we know it today: catastrophe, collapse--and stagnation.
Hence, it's shifting to a new of principles for how we manage, well, everything that are the real seeds of 21st century prosperity. No, we're not totally sure what they are, with perfect certainty--but here's what's for sure. Until we get serious about trying to discover them, struggling to master them, building new institutions based on them--tomorrow's prosperity is going to remain as elusive as mist.
Are you serious or just trying to get a rise out of people?
Fannie did not cause the housing bubble. It helped, sure, but, man, there was a lot of other stuff going on, too, for example:
- if you bought a house, you could deduct your interest payments from your taxes
- after '97 (I think) if you sold a house you could keep all of your capital gains (up to $250K, or is it $500K?)
- with the repeal of Glass Steagall, the same company could now be both a bank and a brokerage, which brought the wheeler dealers into the staid world of mortgage banking
- the Internet and computers rapidly expanded the way real estate assets could be traded, not only here in the US but also abroad
- post dot come bust, everyone was looking for a safer haven than stocks and real estate seemed to be about the safest thing going
- post 9/11, money got cheap
- lazy government regulators smoked dope instead of doing their job
and on and on and on and on
Was it the evil profit motive? Sure, why not. But stupid regulations and laws are far more to blame. Think of it this way: if you allow murder on the playground, you're gonna have dead bodies.
Anyway, we need to stop trying to get back to what was (an unsustainable housing market) and instead learn from our mistakes and go forward. Sadly, that's just no fun.
Please help me understand - on the one hand Fannie "was set up as a curious bastard child, a full-blown corporation that everyone implicitly knew had the full backing of the government--to backstop the mortgage market--essentially, to subsidize greater lending, by taking assets off the balance sheet of banks. "
On the other hand, Fannies management "management had zero mandate."
Who did the setting up and isn't it being set up with a purpose contradictory to your claim that it had no mandate.
Perhaps the mandate wasn't in law but was understood by everyone involved?
If everyone understood that it was there with the backing of the government, then the end point was pretty clear - moral hazard and the resulting crash - all that was left to understand was how and when.
I'm not trying to nitpick - just trying to understand your argument.
Overall, I think you are calling for a new and better type of human - which is the domain of religion. Behavior flows from who we think we are and what we think our purpose is. Institutions get formed from that thinking.
it's about common man growing beyond current paradigm of economic intelligence.
most of us today are rebel without a cause ,we are played by game theory,we learn new and new lessons from books and blogs and likes and go back to be played,till common man does not learn to apply game theory and play it for what he actually wants,he will remain a rebel
without a cause even to what he has learned.
what is the id at which you check your email.tried your gmail id no rep,tried london.edu bounced.trying to mail you may sample post wrt co-authoring the blog.cf:your tweet.
in a nutshell , on the top being right and normal is normally a matter of art,as hazards under US and other governances reflect.
Totally agreed, Umair.
As a hard-nosed capitalist and software engineer - I believe what you saying is far MORE economic. In other words, it's more efficient - cost savings, higher productivity, better economic growth.
All significantly higher, indeed a remarkably order of magnitude higher.
I'd like to talk with you by phone if possible -