A few weeks ago I told you about my client who “acquires houses out of foreclosure, rehabs and rents the properties, then sells the properties to investors” and the consequences of the unintended craziness involved in the auctions in Texas.

Unintended consequences sometimes seem to be the primary result of human actions. It is safe to assume that no one planned to cause global warming or the current economic meltdown.

These are just unintended consequences, but each one is much, much larger than the sequence of intentional human actions which led up to it. Given that we do not have perfect foresight, unintended consequences appear to be truly unavoidable. But they don’t have to be tragic.

Goals, Judgment, Flexibility, and Transparency

We can reduce the negative effects of unavoidable consequences.

Consider a sailor navigating a sailboat into a harbor marked by a lighthouse. Unfortunately, this sailor does not have GPS or an electronic autopilot, so he has to steer the boat manually, using the tiller. He sets the boat on a course to the harbor, using the lighthouse as the marker. Almost immediately the wind, waves, and tide push the boat off course. The sailor constantly corrects the boat’s heading to keep it on course for the harbor. Sometimes the boat has to change course to avoid larger ships heading into port. Most of the time the boat is off course, but due to the sailor’s constant corrections it makes progress toward the goal.

Passengers on the boat may not know how to sail, but they can see the lighthouse and can use the radar screen to track the progress of the boat amidst other ships. They can tell, for themselves, that the boat is on track and making progress.

The sailor has a clear goal and uses his judgment and flexibility to keep the boat heading to port. The analogy to our economic situation is obvious—while the sailor is guiding the boat to a safe harbor; our economy feels like it is careening out of control, heading toward the rocks.

Things to Think About

Given that most of us cannot significantly influence the government or the national economy we need to look closer to home.

• How do you guide your business?
• How does your team set goals?
• How do you encourage transparency?
• How much freedom do you allow your employees to use their own judgment?
• Do your policies look like the US Constitution (only 4,440 words) or like the US Tax Code (over 400 volumes)?

One More Consequence

Recently I have found a new opportunity, much too interesting to pass up. To pursue this new opportunity with the attention it deserves, one unintended consequence is that I must let go of this blog. With great appreciation for you readers and with many thanks to Miki Saxon, who gave me this opportunity to speak directly with you.

I close with the heartfelt wish that you follow your dreams all your life; that you may fulfill your dreams and that they may fulfill you.

Sincerely,

Actions have consequences, mostly unintended.

Ready, fire, aim.

In response—mostly—to the financial crisis, the US government has taken so many actions that the list is almost too long to chronicle here. To pick a few…

• The government has picked survivors in the banking industry.
• The government has picked survivors in the auto industry.
• The government has picked executives in many companies.
• The government has set compensation levels in many industries.

And the government’s intrusion into previously private enterprise sectors has only just begun.

Of course private enterprise has never been a model of virtue and discretion. But, just because private enterprise has executed a series of excesses, is it reasonable to assume that federal regulation will produce unalloyed goodness?

If executives in private enterprise cannot foretell catastrophes ahead, is it reasonable to assume that those same executives, when working on behalf of the federal government, will have better foresight?

Massive Actions, Unintended Consequences

The economy is in uncharted territory. This is the first major crisis of the integrated, global economy. It simply has too many moving parts for any individual or organization to identify all the inter-relationships, much less to forecast the results of all those interconnections. The chart below makes the point exquisitely.

Historically the money supply has grown by 2-7% annually, with spikes prior to Y2K and following 9/11. In the past nine months, the Fed has increased the money supply by over 100%, almost ten times greater than the largest previous increase, during Y2K. The Fed might argue that this increase was needed to offset the loss of a comparable amount of bank lending, when credit dried up in the past year.

But how and when does the Fed unwind this massive increase? What are the long-range consequences of this action?

At the moment, no one can guess. However, we can be certain that many of the consequences will be significant, unforeseen, and unintended.

Transparency – The Only Cure for Unintended Consequences.

The Federal government now controls almost 25% of all domestic economic activity, not to mention 100% of the money supply. We need much more transparency, particularly with government sponsored enterprises such as Fannie Mae and Freddie Mac.

Recently our culture has cheapened transparency to the cliché “full disclosure…” after which the author lists some relationship, often trivial.

The US government pumped over $170 billion into AIG late last year, to prevent its collapse. This expense received very little exposure, either from the press or by the Treasury Dept. execs who made the “investment.” Where did this $170 billion go? Why was this expense necessary?

Neither elected congress people nor Presidential staff exhibited any curiosity or outrage over this “investment.” However, when AIG paid out $165 million in bonuses—only 1/1000 of the amount the Treasury Dept. had spent a few months earlier—elected officials went into hysterics. Selective transparency is no transparency at all.

“Sunshine is the Best Disinfectant.” –Supreme Court Justice Louis Brandeis

Meaningful transparency can have considerable impact. Witness the recent publishing of the expense accounts of British Members of Parliament.

In the US, the Federal Election Commission (FEC) regulates campaign contributions. Of course every politician running for office has thoroughly computerized records of donors and amounts and the FEC requires that every candidate report all donations to the FEC. That information might be interesting to voters making voting decisions. But candidates provide those reports to the FEC in thick, printed volumes, specifically to delay the FEC in compiling the results. As a result the FEC finally publishes the donation reports months after the elections are done.

Follow the Money—Post Everything on the Internet

With the expansion of the government into finance, autos, energy, and insurance, as well as health care, public disclosure is critical if our economy is to respond positively. Encourage your elected representatives to post budgets, and expenses on the internet.

Over time, we can recapture our democracy.