Albert Einstein defined insanity as “doing the same thing over and over again and expecting different results.”
I would expect letting the same people design rules and regulation on how complex systems ought to behave after failing over and over again would fall into a similar category. When regulators tell us things are risk-free we are being fooled by an illusion of knowledge, one that leads us to stop thinking about the inherent risks. It should be clear that the world isn’t risk free but rather filled with an abundance of risks.
Creating and defining frameworks that aim to regulate things at the micro level can have unseen repercussions on the macro level. Regulation, even though almost always well-intentioned rewarded investors for buying subprime mortgages and European sovereign debt. Banks are/were required to use more capital when making a loan to corporation that they have enjoyed a long-lasting relationship with than when buying Greek government debt.
At the same time, the largely quantitative risk models of the institutions were flawed, based on the accepted notion supported by economists that the markets naturally tend towards an equilibrium. This belief stems from the almost drastically distorted premises such as perfect competition and rational agents and did not allow for much qualitative analysis about the actual behavior of people.
This lack of common sense was already described in the early 18th century by Isaac Newton, who after losing a significant amount of money in the South Sea Bubble acknowledged: “I can calculate the motion of heavenly bodies but not the madness of people.”
Asset bubbles have been a continuous and frequent reoccurrence from the Tulip Mania in Holland in the early 17th century, to the current financial crisis and rather than trending towards a stable equilibirium markets tend towards unsustainable bubbles.
300 years after Newton’s statement we are still not able to calculate the madness of people yet we are being lulled into a false sense of knowledge that makes us believe we can. Rather than accepting “uncertainty”, as Erich Fromm puts it, “the very condition to impel man to unfold his powers” we are on “The quest for certainty which blocks the search for meaning”.
Representative of this, was the answer of Ben Bernanke, Chairman of the Federal Reserve when asked how confident he was that he could combat inflation once it exceeded an acceptable level. Bernanke answered that he was 100% confident that the Fed could.
100%? Really? That seems very confident. However it makes me think of another political figure (Jean Claude Juncker) who claimed when dealing with rumors about European debt markets: “When it becomes serious, you have to lie.”
I am not sure what is more dangerous, politicians who publically acknowledge that lying is a necessitiy of self-preservation or those who are 100% certain of their own capabilities to influence complex systems. I guess the distinction between them is very blurred today.