Forest Fires, Monkeys and Pricing: What Policy Makers Need To Know

Tuesday, March 24, 2015

The Federal Reserve and United States government have taken unprecedented actions to support business operations, financial institutions and housing prices. The Fed has kept the federal funds rate at a near-zero rate for almost half a decade (the monthly average since 1954 is north of 5%). The government, meanwhile, has made unimaginable sums of money available for bailouts of private companies. It is going to extraordinary measures in a futile effort to contain damage to the broader economy.

These extreme efforts remind me quite a bit of the early approach to how the government dealt with forest fires - something that Professor Tom Swetnam of the University of Arizona referred to as the the Smokey Bear Effect. The more forcefully people tried to prevent fires, the more deadly those fires became. Dead trees, leaves and other tinder amassed, dried out until they reached a critical mass. The result was always the same - gargantuan fires that were more dangerous and more destructive than would have resulted, had the forests been left alone in the first place. Not only would the resulting damage have been less severe, but government resources (both time and money) could have been used for more productive purposes.

Meanwhile, Netflix gets it. Just as the Federal Reserve lowering rates to unheard of levels, Netflix unveiled its famous Chaos Monkey - a bit of software that intentionally breaks its servers. Many observers were shocked by its announcement, but the product has proven to be quite valuable to Netflix's bottom line. By not only allowing, but increasing the problems that its infrastructure faced, they "forced their services to be built in a way that is more resilient." The result? The company that serves up to a third of wired internet traffic continues to thrive as competitors have fallen by the wayside.

A healthy capitalist system (much like a healthy forest) needs to allow for destruction to occur. Manipulating the financial environment to benefit those whose time has come puts the whole financial system at greater risk.

Hey, Federal Reserve and US Legislature! I'm available for private economic consultations. Not only do I have degrees in business and economics, but I also wrote a great book that looks at the pricing of software applications.