It seems a bit ironic that on one hand we are celebrating the 200th birthday of Charles Darwin and the 150th anniversary of his book On the Origin of Species, while on the other, we are desperately trying to prevent his theory of “evolution by natural selection” from working in our current financial system.
Illustration: Jayachandran / Mint
During the boom times, the high-flying financiers would have been the first to support their percept of survival of the fittest: after all, they were the fittest. They would never have approached the regulators then to say, “Hey, we’re just making way too much money and something doesn’t seem quite right. Could you please help us?” Mind you, neither did the regulators think to look more closely at their tremendous growth and profits. But now, during this crisis, many banks have arrived, hat in hand, asking to be rescued.
And rescue them we must because so many of us are tangled up in their tentacles that if they sink, we all do. But it’s good fun—and perhaps good sense—to ask, why bother? Should bloated, over-extended financial institutions be entitled to survive, and the financiers entitled to keep giving themselves bonuses? Why not let them go bust? Call it natural selection.
We’ve had many financial crises in the past, and the pundits say we’ll have more in the future: It seems that’s simply the nature of the animal. Some theorize that it’s our own innate traits—our sense of optimism and herd mentality, for instance—that have gotten us into this mess. Historian Niall Ferguson says that it’s precisely for such reasons that we need to know financial history. But if these traits have caused the trouble, it’s these same traits, combined with a dose of selective amnesia, that are the ingredients for a thriving financial market. Did these traits evolve so we can be market-friendly animals, or have our financial markets evolved in such a manner as to suit our traits? This is no doubt a chicken-and-egg question that Darwin overlooked.
Also, one of the encouraging aspects of business in the US is that it has long been the land of easy, non-stigmatized bankruptcies. During most years in the last decade (including the boom times), at least a million bankruptcies were filed annually. We didn’t try to help them. We felt that they would brush themselves off, learn from their experience, and go on to do something better and more successful. Maybe we should give our banks the same opportunity.
US President Barack Obama has in place a banking bailout plan worth at least a trillion dollars, and last week Federal Reserve chairman Ben Bernanke was suggesting that a touch more may be needed. Several other countries are also spending billions to bail out their biggest financial institutions. Should endless quantities of public money be spent to prop up these fat and greedy dinosaurs? Or should the very natural process of extinction be allowed to take place, such that a different, smarter and fitter species can evolve to fill the space? God didn’t step in to save the dinosaurs, and we humans prospered as a result. If we don’t step in to save the over-extended banking system, perhaps something better and more human—and more humane—will be the outcome.
Evolution is progressive but not always linear. The fittest does not necessarily mean the biggest and the most complex but that’s where the financial evolution has led, especially over the past few years. Mergers and acquisitions have reduced the number of banks but increased their size and reach. Not being a banker, I readily admit I never understood how complex instruments such as mortgage-backed securities, collateralized debt obligations, or how Long Term Capital Management worked or was financially sustainable. And the frightening thing we find out now is that neither did the bankers nor the regulators. Banks have become these huge complex monsters that have gone out of control. Experts say we cannot afford to let them fail, but can we afford to save them?
Despite our enthusiasm for Darwin, our acceptance of his theory of evolution is not total. Having achieved our relatively superior position as humans (perhaps quite accidentally and arbitrarily), we now fight Darwinism in many aspects of our lives. When our children are ill, we struggle to make them well again. As our parents age, we strive to lengthen their lives. In war-torn areas, we attempt to act as peacemakers to prevent casualties. We try to feed the poor. We do not want a totally free-market situation: yes, free to innovate and grow, but not free to destroy each other. We want a level playing-field, and a just environment that supports not only survival of the fittest, but advancement of the good.
No one wants to see a species become extinct, but, instead of pouring billions into saving one that has proved unsustainable, perhaps it’s time for some rapid evolution on the part of both financial institutions and regulators so that they can evolve into a more deserving system which is better adapted to the new environment. Now that would be a good way to celebrate Darwin’s birthday.
Ranjani Iyer Mohanty is a Delhi-based writer. Comment at email@example.com