I found a book review of Luigi Zingale's book on Capitalism to be fascinating. Here is the paragraph that describes what Zingale reports:
“He tells, for example, of a tiny section of the 2005 Bankruptcy Abuse Prevention and Consumer Protection Act that destroyed Lehman Brothers. Under the law, when Lehman went bankrupt, it couldn’t simply, as it could have before the 2005 law, pay holders of derivatives as much as possible with its assets. Instead, it had to give a derivative holder a contract identical to the one it had signed with Lehman, but with a different counterparty. Lehman would have to pay the transaction cost of the new contract. A typical such cost is about 0.15 percent of the contract’s total value. That doesn’t sound like much until you realize that when it went bankrupt, the face value of Lehman’s derivative contracts was $35 trillion! So the transactions costs alone were $52.5 billion. That’s why Lehman’s bonds paid only 8.625 cents on the dollar.”
Did you know that? I certainly didn't.
To me it is very important. I look at the unique 2008 financial collapse as a systemic problem. Most other economic fluctuations are more gradual and they include much broader segments of the economy. The 2008 downturn was uniquely abrupt, focused entirely on a narrow sector and spread in an unusual way for an economic phenomenon. Via banks, globally.
That is why I see it as a systemic issue rather than a regular pattern of growth and adjustment.
It is been thirty-five years since I have heard people talk about systems management and systems issues. It was very common among my friends around Stewart Brand in the early 1970’s.
The nature of systems is that they have many feedback loops. A feedback loop is what you're stomach tells your brain about being full and your brain tells your mouth to stop eating. Some feedback loops are very short and the system eats a little, stops and starts again. Other feedback loops are long and the person gorges to the point of collapse and goes awhile before the next gorge.
Any system is made up of many feedback loops. When any single feedback loop gets out of control and is not controlled by a higher level feedback, that first feedback loop can bring the entire system to collapse or near collapse. This happens quite often with vehicle accidents on highways and streets and it happens on electric grids resulting in blackouts.
I have therefore been looking for the feedback loops in our economy that could have brought about the catastrophe of 2008. Up until now the most significant feedback loop that went awry was the requirement to change all bank and financial records to reflect "mark to market" accounting rules. That new accounting rule required any asset on the books to be priced at current market value. Since a wide array of financial instruments had been on the books at their purchase price and had no measurable market price, many financial institutions were forced to show a stunning decline in assets.
Thanks to Zingale, I now know of another change in a feedback loop that could have brought the economy of the United States and the world to its knees.