PendulumWhen a system is over-constrained (i.e. there are too many rules or too much bureaucracy) it often folds back into chaos i.e. order collapses.  For example, too much bureaucracy forces employees to find all kinds of work-arounds to get their work done, leading to a collapse of discipline.  Once a system is in chaos, order is often imposed by a despotic leader.  All goes well for a while, but slowly the bureaucracy creeps in again, and in an attempt to avoid the chaos (“that will not happen again on OUR watch syndrome”) stricter policies are implemented, more oversight etc etc until the system becomes overconstrained again, and back we go to chaos.  It becomes a never-ending pendulum, unless a visionary leader manages to break out of this pattern. …

With the chaos caused by the recent economic crisis foremost in everyone’s mind, the concern is that leaders will have knee-jerk reactions, and just fall into the pendulum trap.

In a recent blog post by American Express Open, they quote Liz Ann Sonders, chief investment analyst for Charles Schwab from an article in the Washington postwhere she made this very point about regulatory overreach:

“History is littered with post-crisis regulations,” she said. “If there are undue restrictions on the operations of businesses, they may view it to be their job to get around them, and you sow the seeds of the next crisis.”

They also write: “That knee-jerk reaction will come in the form of overzealous regulators. Unless calmer heads prevail, regulators and government officials will go overboard with regulations. And then the public and small businesses will pay another price: the stifling of businesses that are well run and didn’t need interference in the first place, leading to worse scenarios down the road. …

… Just because we had some bad situations that need fixing, let’s not throw the baby out with the bath water. Because … to use another cliche … we’ll snare dolphins in the tuna net. Some of those dolphins will likely be small businesses that will get burdened with unnecessary regulation. They will also be consumers who get burdened with higher costs. And speculators will find the loopholes anyway, leading to who-knows-what crisis a few years from now.”

Lets hope leaders think before they act and surround themselves with a variety of views to encourage dissent.  Hopefully they can find novel ways out of the crisis without succumbing to their first inclination to clamp down and over-regulate.