The Fourteenth Banker Blog

November 1, 2010

There Is No Thinking Like Systems Thinking

Filed under: Running Commentary — thefourteenthbanker @ 6:04 PM

How do we make sense of the ongoing mortgage and foreclosure fraud news flow and the attempts of the Fed and others to resuscitate the engines of job creation? About a week ago I re-posted an item from James Kwak at Baseline Scenario.

In this post, James discusses industrial food production and industrial finance. He refers to ideologies and how those are reflected in these industries. These industries are imprisoned in their ideologies.

It might be helpful at this point to think in terms of “Systems“.  Tomorrow there is an election and it appears that the ideologies of the “Right” will win out. I’m not sure how those ideologies are going to help their supporters though. The vast majority of the Tea Party seems to share the angst of people on the right and the left who feel that we are losing our economic liberty. The ideology they are caught up in is the myth that we used to have free markets and now we don’t because there is too much government spending (even though the government does not bother to tax in order to spend), or too much regulation (even though neither Dodd Frank or the Health Care bill has done diddly squat yet).

Read this for a take on the state of the free market these days and where the threat comes from.

The CEOs I have talked to in recent years over drinks, overseas, and in private, are worried too. I have heard this comment at Davos far too many times to ignore: “I am as patriotic as anyone, but when I see where my corporation is investing, where it is doing R&D and especially where it is hiring, I worry about my country. It’s all going outside America. But what can I do?”

Or read this:

Democracy’s Death Spiral is a positive feedback loop between ever-greater concentrations of wealth and the ever-higher costs of retaining political power…

…In the U.S., the ever-greater concentrations of wealth gathered by an ascendant Financial Power Elite has entered a positive feedback loop with the costs of gaining or retaining political power. The costs of winning an election have skyrocketed to the point that fundraising is the key function of any politico who is not independently extremely wealthy.

This quantum leap up in the costs of gaining or retaining power has forced politicos to curry the favors of those few Elite groups which can give them millions of dollars.

Just as in an arms race, the amounts of money which can be spent on campaigns is essentially unlimited. The explosion of media now requires multi-million dollar campaigns on multiple fronts: broadcast TV, cable TV, mailed flyers, radio spots, promotion campaigns to influence the mainstream media coverage, adverts on the Web and social media campaigns–the list grows longer every year.

Here is the positive feedback loop. Candidate A gains the backing of a Power Elite group (a political action committee or other front) and collects $5 million. As a result of a media blitz, he/she wins.

Between elections, he/she amasses a “war chest” of $5 million from the same donors, guaranteeing that the final cost of the next election will be $10 million.

Potential rivals understand that victory against this well-funded incumbent, no matter how incompetent, will require $15 million. The only sources of that amount of cash are other Financial Power Elites and State-funded fiefdoms like teachers unions, and so each candidate sells their soul to the few “special interests” with deep enough pockets to harvest and contribute millions of dollars.

Back to “Systems” thinking. This is a complex topic but here are some basic elements of a system.

System concepts

Environment and boundaries
Systems theory views the world as a complex system of interconnected parts. We scope a system by defining its boundary; this means choosing which entities are inside the system and which are outside – part of the environment. We then make simplified representations (models) of the system in order to understand it and to predict or impact its future behavior. These models may define the structure and/or the behavior of the system.
Natural and man-made systems
There are natural and man-made (designed) systems. Natural systems may not have an apparent objective but their outputs can be interpreted as purposes. Man-made systems are made with purposes that are achieved by the delivery of outputs. Their parts must be related; they must be “designed to work as a coherent entity” – else they would be two or more distinct systems
Theoretical Framework
An open system exchanges matter and energy with its surroundings. Most systems are open systems; like a car, coffeemaker, or computer. A closed system exchanges energy, but not matter, with its environment; like Earth or the project Biosphere 2 or 3. An isolated system exchanges neither matter nor energy with its environment; a theoretical example of which would be the universe.
Process and transformation process
A system can also be viewed as a bounded transformation process, that is, a process or collection of processes that transforms inputs into outputs. Inputs are consumed; outputs are produced. The concept of input and output here is very broad. E.g., an output of a passenger ship is the movement of people from departure to destination.
subsystem is a set of elements, which is a system itself, and a component of a larger system.
System Model
A system comprises multiple views such as planning, requirement, design, implementation, deployment, operational, structurebehavior, input data, and output data views. A system model is required to describe and represent all these multiple views.
System Architecture
system architecture, using one single coalescence model for the description of multiple views such as planning, requirement, design, implementation, deployment, operational, structurebehavior, input data, and output data views, is a kind of system model.

All you have to do is read this description of “systems” and think of the news you read these days and you can see that we have dysfunctional systems. For example, there are concepts of exchange of matter and energy with surroundings. Implicit is that exchange is two way and beneficial. Exchange and extraction are not the same thing. There is a concept of transformation. Implicit is that stasis is not a measure of health of a system. The system must adapt. We do not see healthy adaptions in our system. A system must have a workable architecture. Does the inter-relationship between the Congress, the Fed, Wall Street, and Main Street feel like it has a workable architecture? Will leaving Congress, the Fed, and Wall Street unconstrained by any intentionality lead to a good outcome for Main Street?

Another word that you hear a lot these days is “Ecosystem.


The entire array of organisms inhabiting a particular ecosystem is called a community.[1] In a typical ecosystem, plants and other photosyntheticorganisms are the producers that provide the food.[1]Ecosystems can be permanent or temporary. Ecosystems usually form a number of food webs.[2]

Ecosystems are functional units consisting of living things in a given area, non-living chemical and physical factors of their environment, linked together through nutrient cycle and energy flow.[citation needed]

  1. Natural
    1. Terrestrial ecosystem
    2. Aquatic ecosystem
      1. Lentic, the ecosystem of a lake, pond or swamp.
      2. Lotic, the ecosystem of a river, stream or spring.
  2. Artificial, environments created by humans.

Central to the ecosystem concept is the idea that living organisms interact with every other element in their local environmentEugene Odum, a founder of ecology, stated: “Any unit that includes all of the organisms (ie: the “community”) in a given area interacting with the physical environment so that a flow of energy leads to clearly defined trophic structure, biotic diversity, and material cycles (i.e.: exchange of materials between living and nonliving parts) within the system is an ecosystem.”[3]

I am convinced that what is broken is the system. The system today is like a shattered mirror. The best that could be done with that mirror is all the hundreds of pieces could be put back together like a jigsaw puzzle, with great effort and cost, and then the mirror would only be partially functional.

The system is like the land. For 40 years we have used the land in a way that has depleted its productive capacity so that now all we can do to maintain industrial food production is engineer more synthetic fertilizers and engineer seeds that can withstand the ecological desert in which we plant them. We can’t get off this merry-go-round because if we did there would be nothing to eat. Then we would kill each other with our guns.

But we can recognize that the system we have is not optimal and begin to change it. Converting farmland back to organic takes a minimum of three years. During those three years the land can produce a little fodder for livestock or can product low yields of food crops. But it cannot produce much. During this time though, it can become healthy if the land, the soil, is nurtured properly. Organic content is increased. PH balance is restored. Microorganisms begin to return. The soil returns to life and living soil, properly managed with biodiversity, is productive soil and produces healthy food. Healthy food can improve quality of life and reduce health care costs and yes, even government expenditures. But we must invest in healthy food.

I recommend a book, Inquiries into the Nature of Slow Money, by Woody Tasch.

Quoting from the Forward:

We have to find a new form of economy, an economy that knows how to govern its limits, an economy that respects nature and acts at the service of man, a situation where political and humanistic choices govern the economy and not the other way around. We have to discover new economic relationships that respect the pace of nature. Lacking this respect, we have an economy that is speeding out of control, promoting unlimited consumption and always chasing after distant markets, with destructive consequences for local economies, communities, and all living things.

Quoting from Chapter One:

The problems we face with respect to soil fertility, biodiversity, food quality, and local economies are not primarily problems of technology. They are problems of finance. In a financial system organized to optimize the efficient use of capital, we should not be surprised to end up with cheapened food, millions of acres of Genetically Modified corn, billions of food miles, dying Main Streets, kids who think food comes from supermarkets, and obesity epidemics side by side with persistent hunger.

You see, the financial system is part of the food system and it is like the food system. There is no biodiversity in the financial system. It is largely monocultural. Monoculture breeds disease. Monoculture depletes the environment. Monoculture is standardized. Loan servicing is standardized. Monoculture is efficient. Outsourcing jobs is efficient. Monoculture is fragile. Too Big to Fail banks are fragile. Monoculture is about maximizing production. Biodiversity is about sustaining productive capacity without chemical infusions. Just as our monocultural agricultural processes require maximum synthetic inputs to produce crops, our monocultural financial system requires increasing infusions of monetary stimulus, fiscal stimulus, legislative protectionism, and public subsidy. We have a sick system. We need to quit protecting the sick system and build a healthy system.

Then we can have healthy communities.






  1. Lovely post 14th. Want to try and set this one on fire? Here is a little accelerant. Everyone blames the very high cost of getting elected. A democracy that survives must obviously be possessed of voters who can discern facts from bullshit and would after sixty years of visual electronics be virtually immune to electronic stimulation. In short, vast campaign costs should be a waste of money because the voters know enough to find things out for themselves. A democracy of really smartened up citizens could not be fooled as the citizen is today. H. L. Mencken, before TV and mass media understood Boobus Americanus to be a fool’s fool and called them just that for an entire career. If Boobus Americanus knew enough of real life to run his country , just how far down has the citizen political dementia decline been. Tyler Durden in the link says Democracy has imploded. He is correct. There are those that are not addled in big corporate arrangements if one believes the corporate handouts and rah rah pieces. Yet, experience has aptly demonstrated that big finance has set it’s own collective self on the road to utter loss of their wealth. Capitalist finance can run political choice up or down the scales any way they desire but they too have not even begun to recognize their own personally deadly conduct and poor separating out of facts. The “What Is” that determines their outcomes.

    A reasonably smart peasant the world over understands the realities they exist in. They do not live all that long if they do not. The American peasant understands very little of the realities they exist in and on top of it all they live in every possible fantasy truthworld they can latch on to.

    Are Americans tending more and more to be as dumb as door posts? They hate organization and hate the organized. The business elite is organized …. networked used to be the term. Is it possible for the innately stupid to rule themselves? I often thought this was the question Ben Franklin had in mind when he said you have a republic if you can keep it. Note republic not a democracy. The difference between the two must have been on his mind. I wonder too if he thought to himself that he would bepiss himself with laughter if he dared use the word democracy in lieu of republic.

    The European peasants off loaded in the US from the Civil War to the Great War were smart enough to stay together and organize their benevolent and protective associations. They knew the value of their fists too… perhaps too much. They paid off to get what they wanted from the get go. Their grandchildren and great grandchildren seem to have lost the edge needed to survive. Did ideas about democracy do them in? These questions are going to get asked again if the current citizen gets politically turned away another time. That is their fantasies get turned away by those they elect. The time will soon come when getting knocked on their asses will bring up the thought that democracy , my ass, it’s about survival together.

    So, is tomorrow’s election the equivalent of 1858? The next one is the social blow up?

    Pity the poor next Congress that must deliver truthfantasies or else.

    Comment by Jerry J — November 1, 2010 @ 9:02 PM | Reply

  2. We need a new sheriff in town.

    A fantastical tale: There once was a little town called Bedford Falls. The sheriff there realized that laws were being broken, so he started arresting people. When they were convicted, the judge invoked asset forfeiture to reclaim the felons’ ill-gotten gains. They started with home appraisers, worked their way up through mortgage brokers, got through the securitizers, got to the rating agencies, then the boards and management of all the big banks. Somehow he figures out a way to arrest all the heads of the Federal Reserve, almost all the members of Congress, and the Supreme Court. He doesn’t forget the SEC, FDIC, and all the regulators either. But he doesn’t stop there. It turns out he can arrest most of the economics professors and MBA professors for fraud as well. Amazingly, he finds fraud in the History Departments as well. Unfortunately, this leads to the indictment of most of the elementary school teachers for fraud as well. But wait, there’s more. The heads of the unions are brought to the bench as well. Then the pension fund managers, the directors of mutual funds, equity analysts, the NYSE and Nasdaq.

    Sorry about that, I must be stuck in a never-ending Halloween nightmare.

    Yep, I think the system is broken. I once thought that a leader should set the moral tone for the organization, but it turns out they set the amoral tone.

    Comment by Eric W — November 1, 2010 @ 9:58 PM | Reply

  3. Natural systems do not have objectives. Purpose does have objectives. If you “interpret [a natural systems]’s outputs as purposes” you risk expecting that natural system to produce outcomes that are, in fact, not functions of it’s elements and organization. Since time and experiment are required to comprehend any natural system, expecting it to have outcomes which its organization will only
    result in by coincidence, will skew your observation of that natural system while you are attempting to comprehend it. Yet it is essential to comprehend the natural system(s) that man’s “designed” systems are expected to interact with so as to actually “design” them. Imputing purpose to them will not forward that endeavor.

    Energy and matter are different forms of the same thing–energy is conserved; all Earth’s biomass is built with energy from the sun and chemicals from the atmosphere and earth. Thinking of just Earth as a closed system will also lead us down the garden path. We need to include at least the sun and the moon in the system within
    which we try to design our human systems.

    You write: “For example, there are concepts of exchange of matter and energy with surroundings. Implicit is that exchange is two way and beneficial. Exchange and extraction are not the same thing.” Natural systems, having no purpose, need no benefits. It is to our advantage to try to mitigate effects of our extractions from the natural system in such a way that it continues to provide what we require to
    maintain our designed systems, but the constitution of that mediation arises from
    our purposes, not the natural system’s benefit.

    You write: “You see, the financial system is part of the food system and it is like the food system. There is no biodiversity in the financial system.” One cannot expect biodiversity from the financial system. Not even metaphorically. It’s not biological. It is conceptual only. It has no inputs or outputs. It is a way we organize human behaviour in order to “design” our systems. Human behaviour cannot be guided or understood by identification with concepts from physics and
    thermodynamics. It needs concepts like finance. But a financial system must be purposely designed to bring about certain human behaviour, given all the systems those humans are engaged with. We cannot assume that some unpredicted advantage
    will materialise out of some natural system at just the moment we need it; we don’t know what it would be or when we would need it. France, for instance, in the seventeenth century could not start shifting her economy from silver to gold, because she had no idea that Portugal was going to bring all that gold back from Brazil in the eighteenth. She had to use what she had, which meant regulating, deflating, inflating, coining, recoining silver and paper as she designed her financial system and adapted it to her changing conditions.

    You write:”A system must have a workable architecture. Does the inter-relationship
    between the Congress, the Fed, Wall Street, and Main Street feel like it has a
    workable architecture?” No. It doesn’t feel like it’s a complete system, either. We’re about out of phosphorus and will be fighting over water before too long. What we need to do is figure out what systems are now holding us, natural and man-made, and design man-made systems that will let us survive.

    Comment by carping demon — November 2, 2010 @ 4:14 AM | Reply

  4. news readers on radio economic news often make the statement that “two-thirds of the economy is consumer-driven”

    if you accept that statement, you wonder at the future of a consumer-driven system in which the consumer has:

    1) increasing economic burden(health insurance, education, television, transportation, housing)
    2) declining income(wage stagnation, deceased share of income and unemployment)
    3) increasing debt (average person’s debt has grown substantially last two decades and dependence on credit has increased)

    Comment by jamzo — November 2, 2010 @ 9:46 AM | Reply

  5. Twas the night before QE2, when all through the house
    Not a creature was stirring, not even a Wall St banker louse

    The stockings were hung by the chimney with care
    In hopes that Ben Shalom soon would be there

    Blankfein and Dimon were nestled all snug in their beds
    While visions of free money danced in their heads

    Comment by Fatboy — November 2, 2010 @ 4:28 PM | Reply

  6. Let’s face it. It is all over but the crying at this point. As soon as the banks have to start marking to market like any real business the wheels come off for good this time. Game over and lights out.

    Comment by Tray Cable — March 23, 2011 @ 4:20 PM | Reply

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