Internet Worsened the Economic Crisis, Says New Book

 
on September 17 2011 9:24 AM

Do you think the 2008 economic crisis would not have been so severe if the Internet had not been there? Do you think the impact of the 1929 depression would have been deeper and wider had there been the Internet way back in the 1920s?

Will you agree if somebody says the Internet has created a world where speed erases the ability to reflect, where investors act in haste, where ill-considered investments are fueled by easy money?

You may not accept all these, but will patiently listen to the argument because of your interest in the subject. One may encounter the same dilemma while going through William H. Davidow’s book ‘Overconnected,’ published recently by Hachette.

Davidow tries to theorize that increasing and strengthening interconnections would create large amounts of positive feedback in a system. There will be rapid changes, driving situations to extremes, making the system accident-prone.

He argues that many of the recent crises have their roots in ‘overconnection’ – from the dotcom bubble and the financial meltdown to the collapse of the Icelandic economy.

The bursting of the Internet bubble in 2000 was the first evidence of this phenomenon. The Internet created the stocks inflating the bubble; it transmitted the rumors that drove up the prices of the stocks; it supported the thought contagion that accompanies all economic bubbles; it made day trading possible by enabling individuals to make low-cost trades from their desks at work and in their living rooms at home, says the author.

He says things that took weeks and months to happen, started happening in a matter of seconds or minutes post the advent of the Internet. For example, there was a time when it took weeks to get a home loan approved. But the Internet accelerated the pace of the process and banks started approving loans instantly, without properly checking if the borrowers would be able to repay the amount.

The book says the Internet supercharged the positive feedback processes that were already in place, making them far more combustible. By sending us messages that wore away our resistance, the Internet heightened our infatuation beyond all reason.

Citing the financial crisis in Iceland, Davidow says the Internet tricked the banks in the small island country. The Internet had allowed the Icelandic banks to suck up deposits from around Europe, but without safeguards in place to prevent a calamity. It enabled the banks to issue loans based on the values of currencies of various countries. The banks even failed to maintain the liquidity ratio too. But when the value of the krona (Iceland’s currency) started falling, people found it difficult to repay the loans. This ultimately led the nation to the economic crisis.

He says the crisis in Greece is yet another example of how the Internet can break you. It makes global trading easier, putting nations in precarious situations.

The author goes on to describe how the Internet supercharged the subprime crisis in the U.S. “The Internet helped people buy their homes and shop for loans, and it helped create a frenzy among home buyers. It made the stock market more accessible to investors, so many people tied their financial futures to the price of stocks. As a result, it exposed more people to its decline.“

After ‘overconnecting’ the Internet with most of the economic crises in the world, the author dwells upon how it has left many Americans jobless by taking the jobs to offshore destinations like India and how the news on the Web forced many newspapers to close their editions.

Davidow has put forward some pragmatic solutions to the problems. He says progress is wonderful, but only as long as society can keep up with it. …in overconnected environments, the chances of a big problem happening are much higher, so every individual and institution needs more reserves. The challenge then for government is to encourage more responsible behavior and lead by example. We have done just the opposite, of course.

Well, nothing, even the wise words of his teacher Professor John Adams - I have found that the more facts people know, the less they theorize (page 135), could stop Davidow from theorizing about the Internet. But his lack of conviction in his own theories, which he has mostly cooked up by citing the examples of the steam engine, Ford company and even Intel, where he had worked as a senior vice president, is apparent everywhere.

On every other page, one can come across the statement that ‘the Internet has changed the world’. The author seems to have forgotten the fact that too much of anything is as dangerous as being ‘overconnected.’ A book that could have been written in 100 pages has been stretched over 200 pages to say the same thing again and again. (Sorry, I am not supposed to say ‘overwritten.’)

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