Financial Crisis not a Mystery – Churning your Money

Recent news of the imminent collapse of the US financial system is providing plenty of grist for economic pundits. On both sides of the political spectrum, the story being woven is about incredibly complex financial instruments that “even CEO’s didn’t understand”. Like earthquakes, hurricanes, and wildfires, the picture is one of unfathomable an unforeseeable machinations of the free market. The implication is that current events are all a part of the natural cycles of business. Today’s crisis, they say is the mother of all cycles… an unpredictable hundred year flood. God works in mysterious ways.

If you believe that bunk, I have a bridge to sell you!

Complexification has long been the stock and trade of liars, scoundrels, and other con artists. I list among these Charlatans, witch doctors, religious gurus, astrologers, MBAs, bean counters, and economists. If, as Deming said, theory must be our guide, then the members of secret societies and professional illuminati are truly purveyors of nonsense. There is no mystery to the crisis before us today. There is only the willful and lazy stupidity that infects Americans living their lives in a cocoon of voodoo theory, self-importance, and feelings of personal entitlement.

It is not coincidental that W. E. Deming titled his book “Out of the Crisis”. At the time he wrote the book, the crisis most people are only now awakening too was already well underway. He knew that without transformational change, the outcome was a forgone conclusion. He could see it quite clearly but he knew that others could not see it. Without theory, he understood, “how could they know?”

Rather than writing a doomsday book (ideas that stick?) foretelling the coming collapse, he chose to deliver his message as a prescription for doing business better—for escaping the crisis. It was not the stuff of bestsellers but he hoped that his approach might sidetrack our runaway train by initiating a transformation of the disastrous business practices that were leading our national enterprise to certain doom. Although his approach—a quiet revolution—rang true for a few, in the larger scheme of things, his best efforts did not pay off.

To my knowledge, Deming was not given to remembrance. Certainly his most public messages were always forward looking. He hoped that, once understood, the sheer logic of his discoveries would compel people, especially leaders, toward transformational change. Although Deming did not do much looking backward, I find that the narrative of my own 60-years makes readily apparent many of the milestones and turning points that lend credibility and weight to Deming’s philosophy, theory, and vision. It is not a story of business cycles and “natural” economic forces, but of decisions made, actions taken, and outcomes realized, that only make sense when viewed from the standpoint of theory (SoPK).

Over the years I have written a great deal about this trajectory, mostly for my own edification, but the explanations currently being proffered by pundits are driving me crazy. I think the explanation for the current “crisis” is really quite simple when viewed through a coherent theoretical lens.

In brief, here are some simple observations.

1. The Great Depression: This was the era in which America in extremis, undertook experiments that featured government regulation and New Deal socialistic enterprises. My parents lived through the Great Depression. Deming lived through the Great Depression and gained credibility doing government work. What was the efficacy of these New Deal socialistic experiments? Read on.

2. WWII and its Aftermath: During WWII America rose from the ashes of the Great Depression to the status of an industrial powerhouse largely by default. As the beneficiary of the destruction wrought by world war, America’s manufacturing economy, tempered by the regulatory legacy of the New Deal, produced a new and powerful middle class. My family and I enjoyed the good life. Deming gained recognition and found a perfect laboratory for his ideas in war torn Japan. What was the efficacy of this period of unchallenged and unbounded opportunity? The abundant, free, and democratic America we still fantasize about today.

3. Dividing America: During the abundant and righteous 60’s and 70’s two socio-economic theories began to polarize the nation roughly along the philosophic lines that came to be called liberalism and conservatism. Liberalism was a tempered version of the New Deal, redrawn as the American ideal for creating a better, but non-utopian world. The new Conservatism was based in an assertion that the success of American business was caused by the “natural laws” of free markets and Darwinian natural selection. These, conservatives said, were the real forces and that these forces, left unfettered, would create winners and losers, but the good effects would always outweigh the bad effects, thus producing the “greatest good”. My family and I struggled throughout this period, vacillating between ideals and getting while the getting was good. As a schoolteacher, I lived with a preemptory pink slip in my mailbox at all times. My father bought real estate. Deming did his best to communicate the lessons he had learned from his Japanese experiment, but to little notice or effect.

4. Adam Smith runs Amuk: During the Reagan era of the 80’s an unfettered free market ideology of religious certitude took hold in America. “Liberal” become a slur. The political and popular theoretical consensus was that “greed is good”. Business interests pursuing this greatest good devoted all of their resources toward steering public opinion and political action to deconstruct the regulatory and socialistic legacy of the New Deal. The new credo of caveat emptor assured that the middle class producer/consumer would increasingly net less in every transaction. Unions were busted, mental hospitals were emptied, key industries were deregulated, and pension systems were privatized. Unfettered competition was the goal, greed was the engine, and every person was free to participate by risking what little money they had in America’s financial markets. Meanwhile, the Japanese automotive industry was well on its way to burying American products. My career was propelled by this deregulation. Over and over again, I was retained as a training guru for deregulated industries—banking (B of A and Wells Fargo), telecommunications (Baby Bells), and transportation (Southern Pacific). Deming lamented the deregulation of key industries as a bad idea. He was right.

5. The Destruction of the Middle Class: In an atmosphere of unfettered, free-market competition, all actions were driven by the bottom line of maximizing profits in the near term. As wealth was accumulated by some, the power to make the rules gravitated to those with money and an “anything it takes” game plan became de rigor. US manufacturing moved offshore and American workers were relegated to “service sector” jobs. The new “Global Economics” became an excuse for abandoning all responsibility for the nation’s wellbeing. Unbridled competition was given as the reason for the collapse of the Soviet Union. The production of competitive products gave way to the easier and faster profits that come from (in Deming’s words) “churning money”. The middle class bailed out the corrupt deregulated savings and loan industry. The risky casino environment of the stock market became the haven for the pension savings of the middle class. The DotCom “bubble” followed in which the prices of companies that produced nothing skyrocketed. The rich grew richer and the bubble burst. Billions in savings disappeared into the pockets of money churners. Enron et. al. went belly up and the remnants of the middle class grew poorer. Deming’s message about quality, productivity, competitive position, and the responsibilities of leadership, became irrelevant. Deming was dead and his crisis was now a foregone outcome.

6. Fear and Greed Reign Supreme: With the real wealth of the middle class in steep decline, Bush’s business lobby driving financial sycophants lowered interest rates to fuel a credit-diriven boom in consumer spending. Consumer spending of borrowed money to buy products built by Chinese 5-cents on the dollar labor, increased and further enriched “Global” corporations even as the real worth of the middle class declined. Congress ceded dictatorial powers to Bush in the fear boom of 911, allowing the Neocons to pursue wars of financial adventurism in the Middle East. Their aim was to use America’s raw military might to create a sphere of influence in the Middle East and thus gain control of oil production. The unconscionable cost of the war in lives and wealth was irrelevant given the imagined gains. Much of the war effort was privatized, funneling yet more national wealth to industrialists and further bankrupting the nation. Middle class wealth, no longer in the unprofitable stock market, now moved to real estate. Manipulatively low interest rates drove a boom that made real estate prices more than double. The money-churning financiers made money on every transaction. Then the bubble burst as the “gotcha” clauses in predatory mortgage agreements came home to roost. Homes sold at exorbitantly high prices for exorbitantly low monthly payments went into foreclosure. Housing prices plummeted. The middle class lost their homes and the value in their homes.

Now the money churners, creators of nothing, have gotten caught with worthless collateral, but they’re not really worried. The middle class taxpayer will bail them out—must bail them out! —- or our economy that produces no real value will collapse.

The current trillion dollar plus bailout might stem sudden disaster, but the long-term outcome is already foregone. The gluttonous greed we substituted for useful theory gave us the excuse we needed to stop creating value in the form of real products and valuable services. Now our middle class miracle is bankrupt. The parasitic money churners are hiding in their mansions. Our political leadership is confounded and without theory. Other nations will now step in to provide the world with value in much the same way that we did following WWII. We may not look like post-war Germany or Japan, but you can smell the smoldering ruins created by our hubris. The great American experiment is in an irretrievable economic decline. All that remains is to see whether it goes belly-up with a bang or a whimper.

On a slightly less hopeless note—- Small businesses and worthy enterprises may still flourish here and there. Some will go on to create good jobs, good products, and good services, but it seems clear to me that as a nation, our chance for greatness has been thoroughly squandered. (We are the system and the system is us.)

Is there a road out of this mess? What do you think Deming would have said at this point in the game?