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Financial Dominos

With several collections of examples of the Principle of Imminent Collapse at work categorized into chapters and demystified, there are always so many more that can be used to show why it is that we must learn to recognize the imminence of the collapse to that we can alter our course of action and thereby the outcome.

The national disaster of the credit banks in the United States and the trading partners exemplifies the dangers of being too homogeneous in character. As stated in an earlier piece, too many Democrats or too many Republicans in the House is a dangerous thing. Too much government regulation is bad as well as too little. Both economic philosophies tamper with the harmonious operation of what should be natural balances.

Over regulating finance institutions serves to create an immediate desired affect but it very well may have a long term negative impact. It is the same as with Forest Management and flood control by the Army Corp of Engineers.

If you adopt a policy of total suppression of fires, you end up with conditions that precipitate the wildfires that char 100,000 acres of forest. If you eliminate all fire suppression, you may lose a strategic resource and hundreds of homes and businesses. The practice must be to find that balance and keep the wild pendulum swing small.

If the river is strapped with levees and the channels are dredged of the silts, you can constrain the river to its present banks, save the flood plain farm land and allow people to remain close to the river banks. Or you can destroy all the levees and allow the river to take everything it wants. Too much regulation creates a bigger flood some day in the future. Not enough regulation may not stop the big flood when it comes. It will come one day.

Both total fire suppression and complete laissez-faire treatment of the forests leads to massive destruction of the forest as a place to enjoy, as a habitat for wildlife and as a resource for wood. Strapping the river and letting it flow freely both create higher levels of loss when the flood comes. The dominos that are set up on the grid that are regularly spaced and organized with artful symmetry are the most vulnerable to the Nudge.

If the Forest Service adopted a plan that allowed some fires to burn off small regions in a patchwork of sub-areas, they could also suppress fires where the stakes were high. If the Corps of Engineers protected some reaches of the river and not others, then the bigger flood would have some place to go.

Buildings that house combustible gases and liquids regularly are constructed with blow out panels in their walls to alleviate the pressures of an explosion that otherwise would collapse the building.

Financial institutions are not that different from these natural systems. They obey many of the same natural laws of physics. Laws like Conservation of Mass where mass in minus mass out equals the net difference in storage. The Second Law of Thermodynamics that proves that there can never be a perpetual motion machine. MBAs seem to thing that there is such a beast when it involves money.

When financial institutions all undertake the same business practices in the same way and base decisions on a working formula, they also undertake to bring about the imminent collapse that the Principle of Imminent Collapse embodies. The managers all line up the domino bond funds, CDOs and other esoteric investment types in a regular pattern and hope that no one sneezes.

The natural process of the progression of business is consolidation and streamlining that removes the diversity that protected them when they were a large number of little guys each operating in their own ways. That consolidation leads to a homogenous character that is susceptible to the one Nudge that brings down the whole economic sector. If instead of 10 mega banks and mega mortgage institutions, there had been 50 of 100 such smaller ones and some bore the added burden of sub-prime lending, others handled investment properties and all carried a wide portfolio of investment types, then the Nudge that knocked down some of the dominos would not take down the entire field.

Unfortunately, the planners who drafted the Big Bailout of 2008 did nothing to remedy the conditions that led to the crises in the first place. They do not understand the potency of the Principle of Imminent Collapse from the perspective that it can be modified to minimize the damage is causes and reach the New Equilibrium faster without as much pain as a laissez-faire collapse would create.

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Thank you for your comments.

Name: UBob
From: Baltimore
Posted: Oct 3, 2008 12:01
Comment: I just want to say that the bailout is a BIG mistake. It is one that we will be paying for for the remainder of our lives, and possibly longer.
Name: RickNess
From: Albuquerque
Posted: Oct 7, 2008 4:34
Comment: All the banks everywhere were up to the same bad business. Now the banks in Iceland, Ireland and Germany (to name a few) are toppling too. They were blinded by the prospects of fabulous profits, and the ran around with their financial sticks poking each ohers eyes out. Couldn't "running with sticks" lead to the PIC too?
Posted: 2008 16:21
Posted: 2008 16:21