Opinion: Feedback loop in politics


Of the 15 books I`ve read on the financial crisis, by far the most interesting is “The Origin of Financial Crises” by George Cooper. Cooper`s fundamental observation, backed up by numerous examples and detailed analyses, is that the natural behavior for asset and credit markets is characterized by “positive feedback” where, once started in a particular direction, the market accelerates, leading to a rapidly inflating bubble. Eventually, there is a crisis, and when the bubble bursts, an accelerating collapse.
What is frightening is that many societal and political processes follow a similar escalating course, perhaps far more than are self-regulating like the markets for goods and services that we all learned about in Econ 101: Markets operate with “negative feedback” and thus reach stable equilibrium as if regulated by a thermostat, historically called the “invisible hand,” which allocates goods and services to maximize societal welfare, the mantra of laissez-faire economists and free-market advocates.
As an example of a “positive feedback” loop, we are in a huge recession, where people were laid off from work, which reduced spending, which led to more layoffs, and more reductions in spending, and even more people being laid off. It was caused, at least to some extent, by the housing bubble, where low interest rates and weak loan standards led to more houses being built and purchased. More loans were made, price increased, more refinancing occurred, which increased values further, leading to even more building and even higher prices, and so on, to the inevitable collapse, when prices accelerated downwards.
To switch to the political realm, the supporters of “no tax increases without a vote” were not taken seriously by the Legislature, which led to TABOR, with its ratchet-down mechanism and other severe restrictions, becoming an amendment to the Colorado constitution in 1992. And now, with TABOR-related decisions being disputed (for example, increased auto registration fees arguably being de facto taxes to fund road maintenance), the anti-government forces are escalating the process with the venomous trio of Amendments 60, 61, and Proposition 101, an example of a political feedback loop accelerating to extremes.
Financial deregulation in the last decades allowed banks and other financial companies to become “too big to fail.” And now with the bailouts, CEOs and boards of directors may take even more risks, making them even bigger and even more impervious to being allowed to fail. Proposed policies seem to be perpetuating this feedback loop by implicitly assuming that it is impossible to forcibly shrink these mammoths, likely ensuring that there will be more crises before they go extinct.
The 5-4 “Citizens United” decision by the U.S. Supreme Court has already led to massive infusions of money into political races from people and businesses that would benefit from less government oversight and more government handouts. Of course they are supporting candidates of this persuasion, which will lead to matching laws and court appointments, which will lead to these businesses making even more money, and contributing even more to such candidates. Given that much of the media that many people base their votes on is funded by exactly these same interests, a revolution fueled by income inequity may be the only crisis that could burst this campaign finance bubble.
Finally, there is “regulatory capture,” where government entities become increasingly co-dependent on the companies they are supposed to control, like the disbanded federal Minerals Management Service. After all, the regulators wouldn`t exist without the regulated entities. And to demonstrate their own worth, the regulators (both elected and appointed) have to get the companies to do something perceived as socially worthwhile, typically requiring ever-escalating levels of behind-the-scenes horse-trading. It`s not too much of a stretch to see this as a version of Stockholm syndrome, where the hostages become increasingly attached to, and ultimately defend, their captors.
As we have just seen, when the Boulder city council had the courage to not go along with the franchise agreement proposed by Xcel, both government and corporate types were upset over the council`s willingness to disrupt their co-dependence. This dramatic step may break the feedback loop that maintains this particular regulatory capture situation. And Boulder may demonstrate what it takes open up some major new opportunities and go in a new direction without having to have a crisis first.


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