Rebuilding Place in the Urban Space

"A community’s physical form, rather than its land uses, is its most intrinsic and enduring characteristic." [Katz, EPA] This blog focuses on place and placemaking and all that makes it work--historic preservation, urban design, transportation, asset-based community development, arts & cultural development, commercial district revitalization, tourism & destination development, and quality of life advocacy--along with doses of civic engagement and good governance watchdogging.

Saturday, April 20, 2019

Learning the wrong lessons from risk management: GFC, Boeing (+ deregulation)

The piece, "Town-City Management: We are all asset managers now," discusses how elected officials and other community stakeholders need to take a longer term view of their actions in terms of asset management.

The flip side of asset management is risk management, which is discussed here, "DC EMS Medical Director/Assistant Fire Chief resigns with blistering resignation letter" and in terms of reputation management, "Public entities ought to be more careful of whom they do business with" and "Been to Largo lately? Sports teams often aren't very good partners...."

This piece "DC's fire department is in the same situation as WMATA in terms of the necessity of a redesign of culture and behavior through a human factors approach," describes risk analysis, which until the Boeing debacle, has been exemplified by practices in the airline industry designed to limit failure (although it's the same basic approach of engineering).


Over the past couple weeks there have been two interesting articles on what we might call risk management.

The first, by John Gapper of the Financial Times, was on Boeing's failure with the 737 Max plane ("Boeing’s hubris brought failure to the 737 Max," the first plane in the last 30 years or so to have been released with significant design failures.

The second, "What really caused the financial crisis?," by Washington Post economics writer Robert Samuelson, responds to a new book, Firefighting: The Financial Crisis and its Lessons, by Ben Bernanke, Tim Geithner and Henry Paulson, the government officials who responded to the crisis, and which they see as a definitive tome on why the Global Financial Crisis happened. Samuelson disagrees.


Gapper argues that the plane's failure came down to three reasons.

1.  Boeing's safety record had been superlative.

2.  It was "riding high commercially," having made the right decisions about what types of planes to focus on vis-a-vis it's primary competitor, Airbus, and these decisions paid off in high stock values.

3.  The changes to the 737 plane to create the Max version, including the anti-stall software needed to counter the impact of the larger engines, didn't seem particularly new or different from past systems.

The reality is that the software was different, how pilots had to respond to the plane was different, and inexplicably, the procedure could be triggered by faulty readings, because unlike most every other element of airplane engineering, where systems are designed to be redundant, with one or two other backups, the 737 Max plane was designed with only one sensor for upward pitch.

Not only were pilots not re-trained--which would have cost airlines money--but the system was faulty and could be wrongly triggered, with catastrophic effects.

Boeing learned the wrong lesson from past success:  it wasn't to take excellence and safety for granted, and reduce oversight and redundancy, it was to maintain those practices. 

Wall Street

According to Samuelson:
... theories abound [to explain the crisis]. Liberals blame Wall Street greed and lax government oversight. The conservatives’ villain is the government’s aggressive promotion of homeownership, which flooded the economy with bad mortgages.

Although these ideological explanations have some merit, the real story is more complicated and perverse. What ultimately caused the financial crisis was the economy’s very success. We had, it seemed, entered a new era of less risk. Believing this, Americans embraced more-risky behaviors which, once shunned, suddenly seemed justified by widespread optimism.

The paradox is plain: The faith that economic risk had declined inspired more risk-taking, because it seemed safe.  ...

Here’s one passage, “The story of how the crisis happened is ... about risky leverage, runnable funding, shadow banking, rampant securitization and outdated regulation.” A rough translation: Lenders lent too much; borrowers borrowed too much; and arcane financial instruments stymied regulators from stopping the process.

This is the conventional wisdom. It’s also wrong, because it mistakes the crisis’ consequences for its underlying cause. The cause lay in the delusional beliefs that the economy had changed so much that practices that in the past would have been considered risky were no longer so.
Again, the wrong lesson was learned from relative financial system stability.  Instead of maintaining risk management practices and processes that fostered stability, the choice was to stress the system by introducing much more risk into the system.

This is comparable to the situation faced by many retailers today.  Under the ownership of private equity the companies have been loaded up with debt, use cash flow for dividends to the owners, have sold off real estate, and have little money to invest in improving store facilities and systems.

As a result, many companies are bankrupt and are shutting down, because financialization made them vastly more vulnerable to the least bit of change in economic conditions.

Risk overreach

What we might call "risk overreach" happens when things have been going well and this leads to the belief that underlying conditions, systems, and structures have changed so much that a new set of system conditions has been achieved.


The same process is underway with deregulation of industry.  This has been going on a long time, since the onset of the neoliberal paradigm, which venerates markets and private industry, and denigrates government.

Granted, there was regulatory overreach in some sectors, and deregulation of certain industries, such as in the US, freight railroads, trucking, and airlines, has resulted in significant improvements.

But there have been major setbacks too.

The way that the Trump Administration is systematically cutting back on regulation of polluters, banks and other financial institutions, food processing, automobile efficiency, energy standards, etc., is more likely to result in less protection of consumers, not more.

And death ("US plan for coal power deregulation could cause more deaths," Associated Press).

And like with the financial crisis and the failure of the Boeing 737 Max, it's likely to push many businesses past a line where the consequences could end up being catastrophic, forcing government intervention to assuage crises and business failures.

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