This talk of feedback is interesting to me. My degrees are in control systems and Engineering Economics. Using engineering principles to describe economic systems is what I’m supposed to know.
Describing this downward spiral as a negative feedback loop is not quite right, but not entirely wrong. (As you can tell, I prefer the term “downward spiral.”) It may very well be negative feedback that is adjusting the market down, stabilizing an overly bubbly economy. If it doesn’t overshoot to the downside, then negative feedback is doing its job.
If it overshoots to the downside, then we may have an underdamped and possibly unstable system (positive feedback or open loop), as I suspect.
I see three major feedback mechanisms that have failed. First, the models used by the banks to determine loan quality failed miserably. The fear of failure, or risk, is a critical feedback mechanism that helps stabilize economic behavior. With broken models, this feedback was destroyed.
Second, Greenspan set rates too low. Because the rate is set by a person, and it does not adjust to the market in real-time, this is an open loop control. Bad. Very bad. This reminds me of a digital control system where the feedback is sampled at too low of a rate.
Third, if we don’t let the banks fail and we bail out the homeowners, we eliminate yet another natural feedback. Moral hazard is just another term for “positive feedback” and those who understand what that means know it forces the system to go unstable.
Undoubtedly, the government will try to replace natural negative feedback with regulations because they think they know how to manage the market better than natural feedback loops. Regulators move so slowly and often with poor information, it always ends up being open-loop.
Eliminating these negative feedback mechanisms from the system makes it unstable, as the current global economic system demonstrates.
Getting the economy out of the hands of the government is the most important issue America faces.
