Mr. Niall Ferguson (2010APR23 Wall Street Journal) sums up the U.S. post-crisis financial regulation as a “trilemma” that could optimize to any two of three, but not all three: (a) efficient capital markets; (b) no bailouts to big banks; or (c) a depression-free economy.  ( Mr. Ferguson further  warns against a delusional proposition that bigger government could give us all three.)  Pick two, any two, but not all three.

Mr. Niall Ferguson (2010APR23 Wall Street Journal) sums up the U.S. post-crisis financial regulation as a “trilemma” that could optimize to any two of three, but never all three: (a) efficient capital markets; (b) no bailouts to big banks; or (c) a depression-free economy.  ( Mr. Ferguson further  warns against a delusional proposition that bigger government could give us all three.)  Pick two, any two, but not all three.

Other than the interestingly complex content ( the continuing economic debate),  we can learn from that exercise of attempting to identify the core factors of a situation.  Project managers know the classical trilemma of scope, schedules, and budget.  Or, as the sign says at mechanic shop: good, fast, or cheap: pick two, any two.

The past months have seen earthquakes and volcanic activity. It’s easy in our human conceit to forget that this ancient earth’s mantle is shifting ever so slowly but continuously, and with an occasional tectonic shudder.  In a free market, we will see discontinuous corrections, as occasionally hidden faults surface in a precipitous cataclysm.  It was too naive to think that a few bailouts could have eliminated serious structural issues.

A financial institution can be so complex and large that one part of the house touts risky instruments, and another bets against it with hedging derivatives.

Can free market enterprise regulate itself, whose fundamental premise is efficient profitability, as the incessant sea flows in and around to find advantageous crevices? No doubt better regulation is needed, and will come. But could we trust it to come from bigger government, especially one driven by polls and earmarks?

There are parallel problems as well in how national economies are managed. Economic disparities within a common currency are fracturing the European union. Greece, as it turned out, was entirely too creative in disguising its liabilities.  And as it scrambles to keep its economy together, it must do so without control over monetary policy. Unfortunately, sadly, the best Greek drachmas, uh, dramas invariably are still tragedies.

Or take current US foreign policy.  As a culture, Americans often confuse rhetoric and realpolitik. We want our oil, but, in a lack of forthrightness about our petropolitical agenda, trip on our own preachy rhetoric.  We want to curry favorable world opinion and world peace awards.   We must appease the domestic distaste for prolonged wars, and therefore the strategically dubious pre-announcement of our exit from Afghanistan and Iraq.  Yet again, those local heroes we exhorted to the fight will find themselves twisting in the post-US vacuum. Is it surprising that Afghanistan is now scrambling to realign with Iran?

No easy solutions. And no doubt some critics might say Mr. Ferguson’s trilemma is simplistic.  But though initial analyses are nuanced in sixty-four shades of grey, the process must ultimately reduce to three, then two, then a decision of one.    And let’s not feign surprise if Israel finally, preemptively confronts the Iranian nuclear program.

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This entry was posted Saturday, April 24th, 2010 at 8:12 pm and is filed under Decision Making. You can leave a response, or trackback from your own site.