Sunday, January 04, 2009

Efficiency vs. Resiliency

Last year, the financial sector took a pretty universal beating. In fact, unless you were in bear mutual funds or short-selling stocks, it was pretty dismal year. Over the past decade or so, communication barriers have fallen and that's helped improve the efficiency in the financial systems world wide. Cheap oil in the 80s and 90s helped foster global specialization as high-end products could be produced with cheap labor in developing economies. As a whole, the world became more efficient.

The downside was that all markets became more brittle. The improved efficiency helped to ensure there would be fewer shocks, but that their impact would travel further, faster, with fewer inefficiencies to dampen them or contain their spread.

There is a bright spot though, one that I think is well worth looking at as we head into 2009. Credit Unions. Because credit unions didn't go nearly so crazy during the housing and commodities bubbles, they are on much more solid financial footing than the rest of the financial sector -- and without massive taxpayer bailouts.

I think there is an analogy to the Credit Unions in our larger economy, and that is small towns. Big cities are places of specialization. In fact, that's no small part of why and how they exist. When everything is going well, these big cities will prosper, but their very efficiency has made them brittle. 2009 will see entire states getting hammered as their major cities crumble through over-specialization and lack of resiliency. New York, Michigan, California, New Jersey.

On the other hand, you have small towns (and different fingers). Small towns don't tend to be efficient -- that isn't the point. They're not filled with just a few kinds of specialists. Instead, they're home to generalists, people who can and do a wide variety of things. While very few small towns are actually completely self-sufficient, they are substantially closer than urban areas are.

Those that called the 2008 housing and commodities bubbles are expecting 2009 to be even worse wit 2010 being bad as well. I think that's going to make resiliency even more important going forward.

After several months of reading and writing about the collapse, I think I'm going to switch gears and try to learn about how small towns can improve their self-sufficiency. If nothing else, it should be a more positive experience for me than reading about yet another asinine plan of the US government to reward incompetence and use the taxpayers to absorb losses caused by irresponsible investors, regulators, bankers, and ratings agencies.

Small towns don't ride the crest of the wave in bubbles, but they don't crash upon the shore when the bubble bursts either.

1 comment:

Bob said...

I have been a credit union client since 1995. Since they are not laser focused on maximizing profit, they do not fall prey to the bubbles as you note. They are accountable to their members, and all their members want is good service and competitive price. Mine delivers (and plops a dividend in my account annually, to boot).

- bk

PS - Nice to see you posting again.