Transformation design opportunity: US financial system

Peter Jones Wu Wei

In our fields of practice (consulting, design, innovation) the “elephant in the room” that people ignore is that of the impact of the current market transformation of financial systems, large banks, and global investment banks. And mortgage packagers and guarantors. With AIG, we are seeing the implosion and bailout of the world’s largest insurer. And before that, Fanny Mae. The systemic impact and necessary transformation of Wall Street and US and international financial regulation, will be undergoing seismic, whole systems changes this year.

Because financial services and banks don’t want a total run on their assets, they withhold transparency until it’s too late. These players waited till the inevitable disasters occurred, and apparently they had no real Plan B’s. So we are currently witnessing perhaps the most historical “transformation” of industries and firms we may ever see in our careers.

Innovation, we should realize, is value free. Not every innovation is good for its market.

Joseph Stiglitz just said:

“One thing that is now being understood as a result of this crisis is the information asymmetries of globalization. In Europe, for example, it was little understood that U.S. mortgages are non-recourse mortgages — if the value of the house becomes less than the value of the mortgage, you can turn the key over to the bank and walk away. In Europe, the house is collateral, but the borrower remains on the hook for the amount he borrowed no matter what.

This is a danger of globalization: Knowledge is local because you know far more about your own society than others.”

When the financial industry “innovates” to their profit  advantage (SIVs, sub-prime lending in a low-rate bubble, credit derivatives), there is often a hidden downside – which is foreseeable but not disclosed. Economists and writers such as Stephen Roach (Morgan Stanley), Nouriel Roubini, and Bill Fleckenstein were warning about the credit markets and the “housing ATM” 2-3 3-4 years ago. Were they ignored simply because people in the market were increasing their net worth in electronic representations of assets?

These events were actually foreseen. What is our foresight in the context of transformation design? What role, if any, could any of us play in facilitating future scenarios, design alternatives, whole-problem systems thinking about the hazards of current financial industry “innovation” and the future of finance and investment? As design thinkers, do we ignore these systems at the peril of players with direct access to markets that irresponsibly and materially destroy wealth and assets on personal, national, and global scales?

Perhaps innovation is also required on the regulatory side of an industry that has the power to systemically destroy wealth.

What has your experience been?