The Law of Unintended Consequences

Option model creator Robert Merton's dad was a sociologist of some renown, and articulated the Law of Unintended Consequences, which is a warning against the hubristic belief that humans can fully control the world around them. In light of the current push to create sweeping new financial legislation, they should keep this in mind. For example

Solar Panels: Just yesterday I read about a finding that nitrogen trifluoride one of several gases used during the manufacture thin-film photovoltaic cells and flat screen TVs. Many industries have used the gas in recent years as an alternative to fluorocarbons, and of course building photovoltaic cells is part of solar energy. Unfortunately, the gas is 17,000 times more potent as a global warming agent than a similar mass of carbon dioxide. It survives in the atmosphere about five times longer than carbon dioxide. The net result, in other words, is more greenhouse gas than using standard fluorocarbons.

Pesticides: plants have many natural toxins designed to protect themselves against herbivores. Celery defends itself by producing psoralen, a toxin that can damage DNA and tissue and also causes extreme sensitivity to sunlight in humans. People who handle celery professionally often develop skin issues: if it were man-made, it would be banned. Celery psoralen production is highest when it feels under attack, as bruised stalks of celery can have 100 times the amount of psoralen of untouched stocks. Farmers who use synthetic pesticides, while creating other problems, are protecting plants from attack. Organic farmers don't use pesticides, but this leads to stalks becoming vulnerable to attack by insect and fungi, and when those stalk are munched on by the little critters they respond by producing massive amounts of psoralen. Pick your poison.

Saving the S&Ls in 1982: When interest rates were 18% in the early 1980's, most S&L's were insolvent, so a simple off balance sheet solution was to give these highly regulated institutions more powers (Garn-St.Germain), and increase the amount of deposit insurance from the Federal Government. only 6 years later, there was a Savings and Loan crisis, the failure of 2412 S&Ls in the United States. The ultimate cost of the crisis is estimated to have totaled around $560 billion, about $320 billion of which was directly paid for by the U.S. government. This is the archetype of 'moral hazard', because those depositors who might have monitored these risky actions had no incentive, and the managers basically had a free option to swing for the fences, which they did.

I fully expect the latest legislation to create a disaster in 5-10 years.