We use analogy as a supplement to reasoning because sometimes the required reasoning is simply too difficult. There may be too many variables, or the causal links from one state to another are too poorly understood to confidently employ. This is when analogy comes into play. We find a system that seems to look and operate like the system upon which we’re trying to settle some predictions, and about which we have some known conclusions, and then we try to map those conclusions back to our system of interest. It’s a crude style of reasoning, but, if nothing else, the other system can offer insights into our system of interest.
In this spirit, let me offer an analogy. It occurred to me while reading about the queasiness some banking experts, as well as ex-officials, are feeling about the banking sector right now:
Actions by federal regulators and Republicans in Congress over the past two years have paved the way for banks and other financial companies to issue more than $1 trillion in risky corporate loans, sparking fears that Washington and Wall Street are repeating the mistakes made before the financial crisis [of a decade ago].
The moves undercut policies put in place by banking regulators six years ago that aimed to prevent high-risk lending from once again damaging the economy.
Now, regulators and even White House officials are struggling to comprehend the scope and potential dangers of the massive pool of credits, known as leveraged loans, they helped create.
Goldman Sachs, Wells Fargo, JP Morgan Chase, Bank of America and other financial companies have originated these loans to hundreds of cash-strapped companies, many of which could be unable to repay if the economy slows or interest rates rise. [WaPo]
These officials are drawing very credible analogies with the banking system’s behavior prior to the Great Recession and how today’s seems similar in many respects. This seems very credible to me, as the arena and many of the particulars seem to correspond. As a member of the economy and working dude, this of course interests me – as it should my reader.
But I’m more interested in an more outré analogy, and that’s to cancer. Cancer is characterized as a corruption of a part of the body which is experiencing an abnormally high mutation rate of the DNA of the cells in question. Cell death is delayed or not permitted, resulting in rapid growth and monopolization of resources to the detriment of the host organism; the termination of the host organism is calamitous both to the host and to the cancer.
My analogy is to how investors relate to the companies in which they invest. A company whose profits and revenues are static is considered to be a company that is in trouble; only those that shoot for the moon, continually increasing profits, or have the potential to generate sudden and immense profits (think Little Pharma, or Apple), are considered to be healthy companies.
This is, from an evolutionary perspective, evolutionary pressure. We know, from biological evolution, that an evolutionary pressure results in one of two things: termination of the species, or the evolution of a survival mechanism to counter that pressure. One thing we do not see is a non-response, a static organism. The probability the organism does not change and survives is zero.
What does this mean in business? The pressure is for more and more profits. Companies respond, first beneficially (if you’re an economist; if you’re some other –ist, such as an environmentalist, then it may be neutral or even disastrously negative), by finding more efficient processes, replacement materials, and the like. But at some point, the gains dry up – they cannot go on forever.
I suspect the banking sector has reached its limits and is now dancing on the line of disaster. My Arts Editor saw this when she was a Wells Fargo employee and they were using an internal program called Eight is Great to encourage more selling of financial products to customers, without regard to the customers’ needs. The company culture, such as it was, was to simply make money. This has resulted in a number of scandals over the last several years.
Sector wide, we saw the termination of the Glass-Steagall legislation in 1999, which removed regulation of banking behavior and permitted ownership of investment services that contained inherent conflict-of-interest. This was motivated by the banking sector, which, like most regulated segments of the private sector, continually seeks to ‘capture’ its regulatory agencies, as well as influence Congress. With the accession of President Trump, much progress has been made by the banking sector on this front, as can be seen by the strongly bally-hooed deregulation, the subsequent Great Recession, and the continued pressure of the banking sector to remove the Glass-Steagall successor, the Dodd-Frank legislation. The banking sector players, which are all run by human beings susceptible to the usual human emotions of fear, pride, and the like, are pressured to continue to increase profits.
Think about that, and add in the time element.
It’s rather akin to the Malthusian conundrum: a population will continually expand until it runs out of resources. There are only so many profits to be made, yet the thirst for them is unquenchable, once that becomes the focus of investors. I say that as an investor myself.
So let me get to my point: in the future, we may have to accept that a company that is merely static in the profits and revenue results may be more desirable than those companies that are driven to continually increase profits. This would be a monstrous sea-change in the attitude of all investors but those in the low-risk category; indeed, I wonder if the entire stock-exchange concept has been entirely healthy for society as a whole, because it focuses on money rather than service. Remember, the oil of the economic machinery, which we call money, was not the original goal of capitalism. The original aim was to escape the evils of the the enforced status quo. If you weren’t born into the dominant banking family, the system would damn well make sure you would never be a significant competitor to it, either, and that applied to all other sectors. In a sense, the private sector hardly existed. The concept of money was a necessary but not sufficient part of making capitalists happier than the downtrodden of the status quo.
Today? Too many worship money. Look at who’s President.
I think it’s worth considering the behavior of economic actors, especially corporations, through the lens of cancer. Cancer’s dynamically changing DNA leads to it becoming immune to treatments which had formerly shut it down (remission). Similarly, for a while the banking sector was kept under control, but through its lobbying, agency capture, and other efforts, it’s gradually becoming immune to efforts to control its behavior.
And, like cancer, there’s little reason to believe its out of control behavior is good for the society within which it exists. The last time the corruption exploded, we had a Great Recession which scared the shit out of us. But now it’s shrugging off its restraints again, and it’s entirely possible that the next explosion will lead to even worse results than before. Don’t forget: the institutions that were Too Big To Fail are now even bigger. The financial craters may turn out to be even larger.
