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.
