An interesting modern analogy is the invention of the CDO in finance.
Its development lead to a complete change of the rules of the game.
If you had asked a bank manager 100 years ago to envisage ultimate consequences assuming the availability of a formula/spreadsheet for splitting up losses over a group of financial assets, so there was a ‘risky’ tier and a ‘safe’ tier, etc., I doubt they would have said ‘The end of the American Financial Empire’.
Nonetheless it happened. The ability to sell tranches of debt at arbitary risk levels lead to the banks lending more. That led to mortgages becoming more easily available. That lead to dedicated agents making commission from the sheer volume of lending that became possible. That lead to reduction of lending standards, more agents, more lending. That lead to higher profits which had to be maintained to keep shareholders happy. That lead to increased use of CDOs, more agents, more lending, lower standards… a housing boom… which lead to more lending… which lead to excessive spending… which has left the US over-borrowed and talking about the second great depression.
etc.
It’s not quite the FOOM Eliezer talks about, but it’s a useful example of the laws of unintended consequences.
An interesting modern analogy is the invention of the CDO in finance.
Its development lead to a complete change of the rules of the game.
If you had asked a bank manager 100 years ago to envisage ultimate consequences assuming the availability of a formula/spreadsheet for splitting up losses over a group of financial assets, so there was a ‘risky’ tier and a ‘safe’ tier, etc., I doubt they would have said ‘The end of the American Financial Empire’.
Nonetheless it happened. The ability to sell tranches of debt at arbitary risk levels lead to the banks lending more. That led to mortgages becoming more easily available. That lead to dedicated agents making commission from the sheer volume of lending that became possible. That lead to reduction of lending standards, more agents, more lending. That lead to higher profits which had to be maintained to keep shareholders happy. That lead to increased use of CDOs, more agents, more lending, lower standards… a housing boom… which lead to more lending… which lead to excessive spending… which has left the US over-borrowed and talking about the second great depression.
etc.
It’s not quite the FOOM Eliezer talks about, but it’s a useful example of the laws of unintended consequences.
Anonymous.