Vision to Reality: The Reut Blog

The New York Times (7/9) has an interesting piece about the current bailouts of Fannie Mae and Freddie Mac that links to one of the books in the Reut Canon. Can Israel prevent its own Predictable Surprises?

The article states that “Today’s necessary but likely very expensive action for taxpayers is the consequence of regulatory neglect and of a broader political system’s reluctance to take on what should have been clearly seen as festering problems,” said Lawrence H. Summers, who as former Treasury secretary had warned of mounting problems at the companies.

The process leading to the companies’ downfall is similar discussed in Max Bazerman and Michael Watkins’ book Predictable Surprises which describes a series of cognitive, emotional and political reasons for why such events happen listing three main factors;

(1) at least some people are aware of the problem;
(2) it is getting worse over time; and
(3) eventually it is are likely to explode into a crisis, but is not prioritized by key decision makers.

The NYT piece continues by explaining that “The companies expanded rapidly in recent years, initially playing down the risks posed by a housing bubble” (what Bazerman and Watkins call Optimism / Cognitive Failure).

“Then, as the housing slump expanded nationwide, they resisted raising enough new capital that might have provided a financial cushion to weather the storm.” (Denying Distress)

Finally “Lawmakers, paralyzed by partisan infighting, delayed strengthening regulatory oversight of the politically powerful companies.” (The political losers mobilize to prevent change)

What predictable suprises are awaiting Israeli decision makers and how can they be prevented?