DAVID LEONHARDT is among my favourite writers, and when my RSS reader showed me that this weekend he got a slot in the New York Times Magazine to talk about “What the oil spill and the financial crisis have in common,” I got all excited. Then I read it, and it’s…pretty good. Leonhardt’s premise is that what the Deepwater Horizon blowout has in common with the global financial crisis is heedlessness of tail-end risk. Black swans, an unwillingness to take seriously the consequences of very low-probability, very high-damage eventualities, and all that. And this is certainly true. As Leonhardt writes, BP executives had never seen an oil rig blow up, so they didn’t really believe it could happen, just as Ben Bernanke didn’t really believe a nationwide real-estate crash could happen.
But this isn’t the main theme the two events have in common. The main theme they have in common is much simpler than that, and has more moral valence. And it’s the main theme not just for the oil blowout and the financial crisis but for the Katrina disaster and the Enron collapse and the Chinese melanin milk scandal and an extraordinary array of scandals, disasters and tragedies so far this century. The main theme they have in common is regulatory failure. The regulations weren’t strong enough, and the regulators didn’t do their jobs. Oil companies were allowed to self-certify, and MMS inspectors let them hand in their own inspection reports in pencil, then traced over them in pen * approved their design changes within five minutes with no real review. Non-bank financial institutions escaped regulations that had been written to cover banks, and when SEC inspectors were sent in to banks to monitor suspicious debt-hiding activities they spent their time downloading porn. Dyke safety standards established by the Corps of Engineers were inadequate, and officials at FEMA were incompetent. And, obviously, the people’s elected representatives chiefly clamoured for weaker regulations and tried to stop regulators when they did attempt to enforce the rules.
We may not be heading towards an End of History, but Hegel was right that sometimes there’s such a thing as a weltgeist that moves directionally from decade to decade, and what we’re seeing here is comeuppance (or, as Hegel would put it, the antithesis) for the deregulatory exuberance of the 1980s and 1990s. Leonhardt concentrates on the unfortunate human tendency to discount the highly unlikely. This is certainly a factor, but as advice, it’s only partially useful. If the lesson of the catastrophes of the noughties is to pay attention to tail-end risk, then we should all be running around building nuclear fallout shelters and working out deflection strategies for massive asteroid strikes. And that’s not going to happen. (Though in the case of climate change, one of Leonhardt’s examples, it is useful: we should be paying more attention to the risk that global temperature rise by 2100 will be near the catastrophic 6-degree-celsius high-end estimate, not the merely awful 2-degree median estimate.) But I don’t think that is the main lesson. The main lesson is simpler and more concrete: government regulations need to be more restrictive, regulators need to be more aggressive, better-paid, and more powerful, and they need to stop people and corporations more often from doing things that may be profitable but pose unacceptable risks to the public. We had this theory for a while that economic self-interest would prove sufficient disincentive to foolish risk-taking. But now the Gulf of Mexico is on fire, so I’m afraid we need to go back to the old-fashioned system with the rules and the monitors carrying sticks. Sorry.
* It turns out this probably isn’t true. The Interior Dept. Inspector General’s Report says there were reports with pencil that were then traced over in pen, but it’s likely that the inspectors themselves filled them out in pencil for convenience in case of corrections, and they couldn’t find any evidence that any had been filled out by the oil company. They had apparently heard a rumor that this had happened, but couldn’t substantiate it.
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