We Ignore Unintended Consequences At Our Peril

Early in my business career, I was faced with a challenge that gave me an appreciation for a critical lesson about life and business. It's that oftentimes, even with the best of intentions, our actions create consequences completely different from what we intend.

It's that insight that makes me so concerned about the grand central banking experiment being conducted around the globe right now. With little more than a lever to ham-fistedly move interest rates, the central planners are trying to keep the world's debt-addiction well-fed while simultaneously kick-starting economic growth and managing the price levels of everything from stocks to housing to fine art.

As with an earlier article I wrote focusing on the Bullwhip Effect phenomenon: the complexity of the system, the questionable credentials of the decision-makers, and the universe's proclivity towards unintended consequences all combine to give great confidence that things will NOT play out in the way the Fed and its brethren are counting on.

A Puzzle To Solve

Two years after graduating business school, I joined the team at Yahoo! Finance as its Marketing lead. It was a crazy time there; the tech bubble was in mid-burst and advertiser dollars -- the main source of revenue for the business unit -- were fast drying up. We went through several general managers within my first year there as the leadership scrambled for a sound course to chart.

Amidst the turmoil, a lot of misfit projects were tossed in my lap. Partly because I was the "new guy" and least likely to refuse, but mostly because the engineering-driven culture there didn't quite know what to do with a marketer, so any square peg looked like fair game.

One of those projects was the Yahoo! VISA card. A few years before my arrival, VISA approached Yahoo! with an idea everybody thought a winner: Our credit card + your massive audience = lots of money to be made. So a snazzy purple card was minted, which Yahoo! committed to promote with a certain chunk of its prodigious banner ad inventory.

By the time the project fell to me, I was told that things weren't working out to either party's hopes. VISA was disappointed with the number of new cardmembers, and Yahoo! felt it wasn't getting enough money in return to merit the value of the advertising inventory it was blocking off. But no one seemed to have any details to share. Apparently things had been running mostly on autopilot, with no one held accountable for oversight. So, I started doing a little digging.

On the Yahoo! side, I made sure the ads were running in the channels of our network where we knew "people who spend money" were most likely to be: Finance, Real Estate, Shopping, Autos, etc. We were also using targeting profiles that looked for users in favorable demographics (peak earning ages, high-earning professions, affluent zip codes, etc). So, it seemed our marketing plan was sound, and indeed, the click-through rates on the ads were well above normal. We were sending a lot of leads over to VISA.

Things got murkier when talking with the VISA folks. "The quality of your leads is terrible", they told me. Which puzzled me at first. I double-checked the data and confirmed the demographics of the people targeted by the ads were solid -- substantially better, in fact, than the median Yahoo! user. And Yahoo!'s user base was so vast, there was no reason to suspect it should be materially different than other mass market audiences VISA marketed to.

So if our audience was good, and our ads were generating plenty of leads, why was our relative performance so much worse?

Attracting The Undesirable

The 'aha!' moment came once I learned why our leads were getting rejected. Their credit scores were terrible.

This was something I was blind to when running my ads on Yahoo!. I could see what a user was interested in (for example, stocks), I knew he was a 45-54 year-old male living in a zip code that had an average household income of $100,000 (say, Newport Beach, CA), but I had no ability to know if he managed his finances wisely or not. He could be up to his eyeballs in debt, and he'd look no different to me than his debt-free neighbor.

So for some reason, all the reckless spendthrifts were responding to my ads much more than the prudent savers. Why? I wondered.

And then it hit me: this was a classic example of adverse selection.

Think about it for a moment. What do you often see when you open up your mailbox? A bunch of offers for credit cards.

But there are folks who don't get those same offers. Who are they? People with bad credit.

And if you have bad credit, chances are your finances aren't in great shape. Meaning: you'd sure like some credit if you could get your hands on it.

So, those were the people who were thrilled to see the banner ads I was serving, and who rushed to click on them and apply for the card.

The entire 'win-win' strategy originally struck between VISA and Yahoo! was failing due to a massive unintended consequence. The people we least wanted to respond to the offer were in fact the ones most motivated to do so.

Acknowledging The Reality Of Unintended Consequences

I see a lot of similar unintended consequences in the strategies that the Federal Reserve and its central banking brethren have been pursuing over much of the past decade.

The global financial system wants to correct via natural market forces, due to slower economic growth and excessive debt levels around the world. But the central banks have decided to thwart nature by intervening to prop up insolvent institutions and reduce the cost of debt, all in hopes of buying enough time for the system to grow out of its woes.

But nearly 7 years after the 2008 crisis and $Trillions upon $Trillions in stimulus, where are we? With moribund economic growth and an ever bigger wealth gap than ever before, as this recent video explains:


Quite simply, the strategy is not working out according to plan. 

And very likely compounding these unintended consequences is the basic principle of uncertainty. In his article Why Our Central Planners Are Breeding Failure Charles Hugh Smith recently opined on how unknowable much of the results of current monetary policy will be, despite the Fed et al's assurances that they have everything well under control:

As noted above, any policy identified as the difference between success and failure must pass a basic test: When the policy is applied, is the outcome predictable?  For example, if central banks inject liquidity and buy assets (quantitative easing) in the next financial crisis, will those policies duplicate the results seen in 2008-14?

The current set of fiscal and monetary policies pursued by central banks and states are all based on lessons drawn from the Great Depression of the 1930s. The successful (if slow and uneven) “recovery” since the 2008-09 global financial meltdown is being touted as evidence that the key determinants of success drawn from the Great Depression are still valid: the Keynesian (or neo-Keynesian) policies of massive deficit spending by central states and extreme monetary easing policies by central banks.

Are the present-day conditions identical to those of the Great Depression? If not, then how can anyone conclude that the lessons drawn from that era will be valid in an entirely different set of conditions?

We need only consider Japan’s remarkably unsuccessful 25-year pursuit of these policies to wonder if the outcomes of these sacrosanct monetary and fiscal policies are truly predictable, or whether the key determinants of macro-economic success and failure have yet to be identified.

It's this concern about the failure of the current strategy our central planners are pursuing, paired with the tremendous magnitude of the impending cost of that failure, that motivated Chris to issue our recent report The Consequences Playbook, which begins:

What’s really happened since 2008 is that central banks decided that a little more printing with the possibility of future pain was preferable to immediate pain.  Behavioral economics tells us that this is exactly the decision we should always expect from humans. History says as much, too.

It’s just how people are wired. We’ll almost always take immediate gratification over delayed gratification, and similarly choose to defer consequences into the future, especially if there’s even a ridiculously slight chance those consequences won’t materialize.

So instead of noting back in 2008 that it was unwise to have been borrowing at twice the rate of our income growth for the past several decades -- which would have required a lot of very painful belt-tightening -- the decision was made to ‘repair the credit markets’ which is code speak for: ‘keep doing the same thing that got us in trouble in the first place.’

Also known as the ‘kick the can down the road’ strategy, the hoped-for saving grace was always a rapid resumption of organic economic growth. That’s how the central bankers rationalized their actions. They said that saving the banks and markets today was imperative, and that eventually growth would return, thereby justifying all of the new debt layered on to paper-over the current problems.

Of course, they never explained what would happen if that growth did not return. And that’s because the whole plan falls apart without really robust growth to pay for it all.

And by ‘fall apart’ I mean utter wreckage of the bond and equity markets, along with massive institutional and sovereign defaults. That was always the risk, and now we’re at the point where the very last thing holding the entire fictional edifice together is beginning to give way. Finally.

When credibility in central bank omnipotence snaps, buckle up. Risk will get re-priced, markets will fall apart, losses will mount, and politicians will seek someone (anyone, dear God, but them) to blame.

In The Consequences Playbook (free executive summary; enrollment required for full access) we spell out what will happen next and how you should be preparing today for what might happen tomorrow. If you haven't yet read it, you really should. Suffice it to say, a tremendous amount of wealth will be lost if (really, when) the central banks lose control. And standards of living for many will be impacted. A little preparation today can make a huge difference in your future.

This is a companion discussion topic for the original entry at https://peakprosperity.com/we-ignore-unintended-consequences-at-our-peril/

I'm hopeful for the future but it ain't looking too good. 
Having family in Toronto area, I've been concerned and voicing my caution to loved ones there.  But up until recently it's been all, pardon my French, all "$h*ts & giggles". Everything was going up, up, up.

This week the Canadian headlines could be considered a pre-confirmation as to what's happening.  Oh no, oil is dropping, housing is dropping, banks are raiding the accounts by incredulous bank fees.  And It's all electronic transactions, so what's with that? I opened a bank account in 1976 got interest and little way of charges, last year I closed my account after quarterly compounding of 0.02 was being eradicated by charges like $1.00 to use the debit card.  With some sentimentality cut my ties with the CND. 

Now, I have no regrets.

The unintended consequences usually out-weigh any benefits when something is used for something other then it's original purpose. Try googling "cane toad introduction Australia" for a prime example from the natural world.

The US isn't better.  My HSA (Health Spending Account) was switched in 2015 from Chase to PayFlex.  This was a decision by Aetna over which I have no choice.  We were locked out of our HSA funds for a month.  I just found out yesterday that I will be paying PayFlex $4 per month to maintain my HSA account.  There is a schedule of additional charges I will incur for various transactions and events.

To my knowledge, decisions regarding HSA accounts are made solely by the provider.  If I want to get the tax benefits of the HSA account, I am forced to pay fees I never agreed to.

I pay over $7,000 per year in health care premiums for a health care plan with $7,000 of deductibles (two people).  Once I have paid out the $14,000, I get the benefit of basically 80% coverage.

This is not the health care environment that was built into my retirement plan. I ran a new retirement projection a couple of years ago.  Over half of my spending in retirement will go to health care and taxes.  Add in zero interest rates and my retirement plan will not survive this.  Unfortunately, it's too late for me to modify the plan.  I am already there.

The bank fees are just insult added to mortal injury.

I'm in the same boat with healthcare as I'm relatively healthy at 63 and NEVER use $14,000 for healthcare, so cannot justify that fee each year. I'm self insuring and paying the penalty, since my income now is VERY low due to negligible interest rates. I'm lucky because I'm close to Medicare, although my guess is that will become increasingly expensive for decent coverage, since many doctors won't accept stripped down Medicare patients as the slow motion train wreck of Obamacare unfolds.
I believe the medical community will eventually come up with solutions that by-pass insurance, but I'm a hopeless optimist. The unhappiness of doctors with the status quo is underestimated, I hope.