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Time for True Economic Innovation...

With the speed of a thunderstorm and the force of a glacier, the massive deleveraging of global markets is reshaping the face of American finance. The venerable system of Wall Street investment banks was carved from the map in a matter of weeks. The unwinding is not over of course. But a way forward must be found.

There will be a moment in the months and years to come, when our culture will look back and realize that it is over. That we survived a very black time and that better days are finally upon us. At that moment, without a doubt, we will have an entrepreneur to thank. An innovator. A free thinker. Teams of them in fact.

Some would argue that innovation got us into the mess in the first place. They cry out - It was the derivatives! The credit default swaps! It was those complicated and new fangled financial instruments that made all of this happen!! In a way they would be right. There is little doubt these financial innovations amplified risk to an astonishing degree rather than democratized risk as they claimed. But the answer is not so easy.

Deeper problems have been building for years. Our central bank was too cozy with our politicians and too archaic in its structure. Our affordable housing mandates were pushed too far and they injected poison into the financial bloodstream. Our energy policy was tumbling headlong into dangerous addictions. The price tag of our social aspirations outstripped the income of our tax system. Our national obsession with stuff eclipsed our cultural heritage of rugged individualism.

Not surprisingly, the creation of sophisticated financial instruments coincided with the maturation of computation. Financial wizards fed data and ran programs as fast as their processors could handle it. Currency arbitrage could be tracked and bet upon. Fluid commodity markets like oil and wheat could be understood in new and different ways. By the height of the credit bubble, Wall Street was selling a piece of a piece of a piece of a debt insured by someone who was insured by someone who owned a security. The math was unfathomable. Turns out the risk was unknowable and the damage unthinkable.

The innovations were not without benefit of course. The securitization of mortgages lowered borrowing costs for millions of people for decades. The explosion of building brought an explosion of jobs. Marketers had people to pay them. Brand builders had people to brand. Web designers had sites to build. There was money to fund the tech start ups. There were customers to buy computers and pay for internet access.

But the system was still the same. The innovations were just still the playthings of the old guard. Profits were maximized and risk was forgotten. But the bones of the system could not handle the new weight that was being created. Remember, the horse drawn buggy was improved with newer wheels, better axels, and better suspension right up until the automobile relegated it to history forever.

And so it comes to you. To us. The destructive force of unwinding is clearing out a new space upon which to build a new financial model. The task to us is to build nothing short of a new cultural identity. The architects of this new model have not yet revealed themselves. But make no mistake; the new model will be as different from the old as the car is from the buggy.

Eric Hoffer observed, ‘In times of change learners inherit the earth; while the learned find themselves beautifully equipped to deal with a world that no longer exists.’ The denizens of Wall Street and the tired politicians in Washington are beautifully equipped indeed. It is time for the learners to step forth.

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  • Karla Diehl

    Steve - I see you are smart as well as a good musician!

    You hit the nail on the head on several issues. We mis-fired in politics, regulation, culturally as we basically followed the slippery slope of wanting more than we can afford.

    However, like you I am an optimist and believe that Mankind can solve all our challenges with a few good ideas from the ranks of our entrepreneurs!

  • Steve Curnutte

    To Bart H -
    The US Central Banking system was born at a time of crisis - was shaped by overly political posturing - and has been nurtured by corrupt politicians for decades. Even though I believe it is one of the best in the world, I think it could be better. But if we focus all the attention on the Central Bank or the roll of the Fed (big issues to be sure), then we are missing other important parts of the equation. Accounting regs need to be cleaned up. Overall, the markets should be regulated less, but more evenly. This is heresy to say these days of course. But right now, some areas of the economy are over-regulated, while other are under-regulated. Washington is on a witch hunt (hoping they will remain in office) and they will try to over regulate everything. This will be a terrible mistake. We need sensible regulation across the board (credit default swap market reined in for example, hedge funds made more transparent, leverage reined in).

  • Steve Curnutte

    To M Lynch -

    Yes, technology is one of the solutions. But it is far more than simply software. Technology could provide significant transparency to the actions of hedge funds for example. It could also help us track the amount of leverage being used by individuals and by institutions. Moreover, the fed needs to do a better job of tracking data, defining what constitutes inflation for example. A new banking system will be built on the bones of a technology platform not yet designed I think.

  • Bart H

    Would you see the whole central banking system redone? If so, I agree. I also think that your comment that banking and politics have been too cozy is dead on. Congress is made up of a bunch of lawyers with no business or banking experience. They try to solve everything with complicated legislation and suitcases of cash. It is really a bad system. Nice article!

  • M Lynch

    I could not agree more. Do you think the solution is in technology? Meaning that some new software to monitor everything is the way to go? Or are you saying someone will actually come up with a new way to set up the federal banking system. Great post by the way, thank you.