No Pain, No Gain
Why the financial crisis was preventable, and what it teaches us about how to deal with Ebola
It has been said that one of the best ways to learn is from past mistakes (preferably someone else’s). But what if you make a mistake and then make the same mistake again? Clearly, you didn’t learn from your prior error. An old adage is that the definition of insanity is doing things the same way and expecting a different result. One of the four cornerstones of a good decision-making process is to look at pattern recognition. That means examining events that have already happened in the past to see if those experiences can help predict what is likely to happen in the future.
The Financial Crisis
We all know for a fact that the recent Great Recession of 2007–2008 was caused by the housing bubble, bad mortgages and excessive greed on Wall Street, right? Well, not exactly. The failure was caused by the domino effect. The large Wall Street institutions are inextricably intertwined. They all do big business with each other. If one company goes bankrupt, it can cause another one to fail. If AIG had gone bankrupt, it is rather clear that Goldman Sachs would also have gone bankrupt, even though Goldman actually profited from the housing crisis. It would have been one messy chain reaction — all the dominoes would fall down.
Let’s compare the recent financial crisis with one that took place in the past.
We don’t have to go back to 1908 or even the Great Depression of 1929. We can simply look back to 1998 — less than 10 years before the market started unraveling at the end of 2007 and eventually hit its full crescendo in 2008.
In 1998, Russia had a major financial crisis, with currency controls and a decision to slow down or stop payments on its debt. When a major country doesn’t pay its debt on time, it causes a great disruption in the marketplace. One of the victims was the highly leveraged hedge fund Long-Term Capital Management (LTCM). LTCM went bankrupt because it couldn’t absorb the surprising losses by the market dislocation.
This nearly brought down the entire financial system. The major financial players were all linked together in 1998, just as they were in 2007–2008. Even then they were set up like dominoes.
Did the system go down? No. Why not? Because the regulators strongly encouraged the major participants in the market to share in the losses so that no other major financial company would fail. The Wall Street titans absorbed the losses; the dominoes wobbled a bit, but no single domino was knocked over. No public money was necessary. The public wasn’t impacted, so the public didn’t care.
Did Congress or the regulators insist on structural changes that would prevent this possible financial collapse from happening again? Were there firewalls put in place that would prevent any domino from starting the chain reaction that would knock down another domino or perhaps all the dominoes? No. The pain wasn’t high enough. It’s like getting your hand only slightly burned on a hot stove. The smart person realizes not to put their hand on the stove. The person that isn’t as smart will need to have their hand severely burnt before the lesson is learned. If structural changes had been made (even if everything else with the housing market happened), and Wall Street still had excessive greed, it wouldn’t have taken taxpayer’s money to bail out the system.
What has this got to do with Ebola? Everything. The plight in Western Africa was international news, but when healthcare workers came back to the United States with actual or possible cases of Ebola, the country didn’t know what to do. This is a highly contagious disease. The New Yorker published an in-depth article on Ebola and a promising possible treatment called ZMapp.[1] Unfortunately, as of October 2014, the supply of these treatments had been exhausted, and only 20–80 new ZMapp treatments could be made each month. The possible outcome could have been catastrophic, especially if it spread in a congested urban area. The amount of people with Ebola could have vastly exceeded the available treatments, which would lead to widespread deaths, panic, and social outrage over how people were chosen to receive the limited amount of medicine.
Thankfully, a major outbreak did not happen. No one in the United States who had not been to West Africa died of the disease. That’s great news, but from a decision-making viewpoint there wasn’t any pain. No pain, no gain.
No one has started construction on new state-of- the art isolation centers. There aren’t any protocols on how to quarantine possible patients carrying a deadly disease while ensuring that these people, who are almost always healthcare workers, are treated with dignity and respect while they are quarantined. If we don’t do these things, we will be unprepared for the next crisis…and as we know from pattern recognition and probabilities, it is very likely that there will be another crisis of this type. If we are not prepared, the next crisis could be catastrophic. It could also be avoided, just like the Great Recession of 2007–2008 could have been avoided if we had learned from the financial crisis of 1998. We will suffer greatly in the future for our failure to make the proper decisions today.
© 2015 Michael Angelo Costa
Decision-making consultant. michael@neverbewrongagain.com
[1] Preston, Richard. The New Yorker. “Inside the Ebola Wars”. October 27, 2014.
