Call me ‘BP Lotterman.’ Servicing my pickup last week proved to me how right U.S. Senate candidate Rand Paul of Kentucky was in asserting that oil spills are just accidents that happen. Once in a while a series of things unintentionally can go wrong that put oil into the environment.
This does not mean, however, that such spills — or other kinds of accidents or crises — are “acts of God” with no human fault.
In my personal oil spill, I screwed up in several ways: by changing oil outside the garage, where rain eventually would pick up any residual spilled oil and move it into the storm sewer; by not exercising care in placing the pan relative to the drain plug; by not checking to verify that the jug to which I started to transfer the oil had no holes; and by not ensuring that I had oil absorbent on hand to soak up any spills.
Those were all stupid, preventable errors. I should have known better; I’ve changed crankcase oil hundreds of times. But I was in a hurry and ignored critical details. And despite my frantic efforts with rags, at least a couple of ounces of oil are now in the ecosystem. Sum such ineptitude over millions of do-it-yourselfers and you see why such small spills combined with leaking oil-pan gaskets pose a knotty water pollution problem.
Human nature is such that people become careless, make mistakes and take risks. That can result in a quart spilled or millions of gallons. Societies need to take measures to provide incentives to minimize how frequently such errors occur and how much damage they cause. And societies need mechanisms to ensure that those responsible for any harm compensate those damaged. Moreover, the sorts of minimalist governments Paul and other Libertarians idolize are not particularly good at this.
One similarly hears Wall Street operators make the “it was just an accident” explanation for why financial crises occur. These ultimately cause far more harm to people than do oil spills.
Financial panics and crises have recurred episodically for centuries, the argument goes. Therefore they are random acts of God or nature that cannot be avoided. Government regulation of financial institutions and markets has not eliminated such crises. Therefore no investment banks or trading firms are to blame. Crises just happen.
And since they happen despite existing regulation, governments apparently can’t do anything to stop them. They are inevitable. Therefore revising regulations is futile.
This is dangerous, self-serving nonsense. Prudent regulation can reduce the harm to society from financial crises just as it can reduce the harm from oil spills and has reduced the harm from aircraft accidents.
Years of aircraft accident investigation demonstrate that most crashes are due to a chain of events, not just a single circumstance. Take the 1977 crash of two 747s on the island of Tenerife that killed 583, the deadliest ever. If Los Rodeos airport had not been jammed with planes because the main airport on another of the Canary Islands had been closed by a bomb scare; if congestion had not forced planes to back-taxi partway down the runway before turning to take off in the opposite direction; if the exits from the runway to the taxiways had been marked better; if the Pan Am crew had not missed the indicated exit; if the air-traffic controller had spoken better English; if the KLM pilot had not been impatient because the crew was near the legal limit on their flying hours; if the KLM junior officer who feared the runway was not yet clear had not been intimidated by the fact that the pilot at the controls was the airline’s most senior pilot with more than 15,000 hours; if it had not been foggy; and so on, the crash would not have occurred.
Similar chains of events lead to major financial crises. If the Fed had not increased the money supply much faster than the real growth of the economy for a decade; if the SEC had not repealed the “net capital rule” that limited investment banks leverage; if the Glass-Steagall act separating commercial and investment banking had not been repealed; if Congress and the Clinton administration had not acceded to Senator Phil Gramm’s demand that financial derivatives remain completely unregulated; if Fannie Mae and Freddie Mac had not been encouraged to underwrite riskier loans; if a largely unregulated shadow banking system had not been allowed to grow to a size where it dominated mortgage lending; if ratings agencies had not faced perverse incentives to give high ratings to poorly understood mortgage-backed securities; if standard economic theory had not dismissed any need for central banks to consider asset price inflation; if we had not let federal budget deficits balloon again after reaching near-balance in the late 1990s; if investment banks had not engaged in an competitive arms race of designing ever more complicated securities; if Europe had not been blind to the dangers of a common currency, we would not be in the mess we are in.
Aviation safety regulation has not eliminated crashes, just as regulation of oil production has not eliminated spills and financial regulation has not done away with bubbles and crashes.
But the U.S. and Europe have many fewer crashes than African airlines. Norway has many fewer oil spills than Nigeria. And fewer financial crises occurred during periods of prudent regulation of the financial sector than we have had under reduced regulation. There is a lesson here.
© 2010 Edward Lotterman
Chanarambie Consulting, Inc.