How many times have you heard someone say, “Don’t put all your eggs in one basket”? When it comes to personal investing, I think most of us already know that this is very good advice in risk management, but we haven’t used this advise when it comes to managing risk in our economy. Some companies have been judged to be ‘too big to let fail’, so they’ve been rescued with public money. Many people these days recognize that there’s something really wrong when this is our least damaging option. I’m feeling more and more that we need to discuss how the concept of diversification can be applied to our public investment in a healthy and sustainable economy.
Successful investors know that diversifying their investments can help reduce the impact that a single, poorly performing investment can make on their overall portfolio, or mix of investments. Diversification means having different kinds of investments, such as stocks, bonds, and mutual funds. It also means having a mix of investments in different sectors or industries. A well-diversified portfolio might include bonds, money market funds, and stocks of small, medium, and large companies in a variety of industries and countries. In good times and in mildly bad times, this strategy works well. Of course, in drastically bad times like these, all investments decline. That’s exactly the reason that more attention must be given to how the economy as a whole manages risk and opportunity.
David Brooks in his NY Times Op-Ed today made some good points about how we got into our current mess and what must be done to make sure it doesn’t happen again. He writes, “Both (scenarios) believe that banks are too big. Both narratives suggest we should return to the day when banks were focused institutions — when savings banks, insurance companies, brokerages and investment banks lived separate lives.” The key here appears to be the diversity of thinkers when any business makes decisions. If the same thinker is responsible for wide-spread, inter-connected decisions, a mistake in analysis or judgment goes unchecked. If, on the other hand, many thinkers are responsible for those same decisions, the likelihood that some will catch the mistake before it causes great systemic damage is greater. This, of course, assumes that critical thinking is being practiced rather than a group of people joining the herd that runs toward a cliff.
What changes would be necessary to create a ‘diversified economy’? Some corporate giants would have to be broken into smaller pieces, like was done with AT&T in the past and may be done with GM in the near future. Conglomerates would be required to disconnect their internally diverse entities in order to create greater external diversity. Mergers would come under very close scrutiny as the benchmark of a ‘diversified economy’ is applied as a protected value. What would the role of government be? How would the global economy be affected and what role would international partners play in merger decisions? Many questions arise, and we’d probably find a good mix of approaches to the goal of creating a ‘diversified economy’…if we decide to apply the strategy of diversification to the our public investment in a healthy and sustainable economy.