The global financial crisis: what’s the point of economists? It’s not imagination…
Today the FT is carrying a forum discussion on Queen Elizabeth II’s question, “Why did no one see this crisis coming?” Some of the comments are spot on and some are grossly wide of the mark and delve into all sorts of irrelevant macroeconomic theories about the roles and forecasting perspicacity of economists.
* http://blogs.ft.com/arena/2009/07/28/economists-what-is-the-point/
* http://www.ft.com/cms/s/0/21c911f6-7b66-11de-9772-00144feabdc0.html
Incidentally, the reply provided to the Queen was:
“A failure of the collective imagination of many bright people” who were all “doing their job properly on its own merit.”
LOL, a diplomatic and charming platitude albeit not one which helps us to collectively accept fault, learn from mistakes or progress towards implementable solutions.
TWAIN’S ANSWER
Firstly, banking is not about imagination. It’s about facts, numbers, analysis and decision-making (including sometimes misinformed judgment by those with sign-off power). It’s about bottom lines, value propositions, growth potentials, hedging strategies, risk management and product innovation. Unfortunately, few bankers will have the imagination à la a Steve Jobs, a Steven Spielberg or a Tim Burton to envisage the potential horrors, carnage and devastation of portfolio and value decimation, and also how to create a much more beautiful scenario of wealth creation triumphing over the financial carnage.
[Besides which, bankers are trained to deploy words like "resizing" rather than carnage so already this shows lack of verbal imagination.]
Secondly, not all bankers are bright — although the ones who are are seriously brilliant, dynamic in their intelligence and phenomenal. Meanwhile, some may be academically highly qualified (every Ivy League / Oxbridge / Tsinghua / INSEAD / Bocconi MBA under the sun), yet unfortunately they may also lack common sense and a commitment to ethical corporate social responsibility even if they’ve studied it and passed the academic exams.
My great friend GC and I recently discussed how Harvard MBAs have created their own code of ethics:
* http://www.thecrimson.com/article.aspx?ref=528381
Thirdly, not all bankers do their own jobs properly. For example, I’ve inherited investments which were poorly due diligenced, burning cash at unacceptable rates, had barely any business model and an underperforming management. As soon as the investment was under my responsibility that changed. I’ve also read internal and external management consultancy reports which were so nonsensical it made me put a freeze on buying them.
My colleague (Harvard, Cambridge) put into my evaluation review that I’m “prodigious, highly competent and have excellent collaboration skills” but this isn’t true of all bankers and even I have my odd moments where I don’t meet my own high standards — like the time a Director of Compliance almost derailed one of my negotiations through his own misinformation and ignorance, and I became a lot less charitable in my collaboration with him. Still, I managed to make a successful case for our Legal Counsel’s nomination to the newco’s executive board, so my annoyance didn’t last long. LOL.
Most importantly and relevant to how economists missed the signs of crisis is this: economists in banks get nowhere near the information which really matters — the balance sheets on whatever transactions and bond issuance are being included into the risk management systems to comply with various Basel II, international GAAP and regulatory body requirements.
That’s not the economists’ fault. It has to do with Chinese walls between business units and lines of responsibility. Chinese walls are oriented to protect confidentiality but they may also exclude information being passed to enable business units to risk manage and do their jobs. It’s the way the system is: needs improvement, work-in-progress.
Anyway, only a handful of people in CEO-Chairman’s Office may get clearance to that confidential analysis, so there’s actually little chance of any economist anywhere being able to accurately call the crisis — even if some may be being celebrated by the media as economic sages.
The media itself has some failings in its role as the Fifth Estate, to help us keep society in check and optimally functioning, wrt the global financial crisis. Some of the opinions from their business journalists have been laughable, although there have also been some excellent coverage too — such as by the New York Times and the Washington Post.
Interestingly, in one of the FT links, Galbraith is quoted:
JK Galbraith remarked that one of the greatest pieces of economic wisdom is to know what you do not know. Regulators and supervisors did not know complex financial products and processes, or the impact of low economic volatility on risk management systems.
(source: http://www.ft.com/cms/s/0/21c911f6-7b66-11de-9772-00144feabdc0.html)
I’d place an addendum to Galbraith: “An economic wisdom is to understand that to achieve perfect information for properly functioning capitalism, as proposed by Adam Smith, it’s our responsibility to find the information we don’t know and to assimilate it into our systems.”
This takes us towards building context, clarity and consensus views in a truly democratic, open and capitalistic model.
Anyway, what’s the solution to prevent future global financial crisis of this ilk? Simple: build a consortia platform involving the banks, the governments and the regulatory bodies on an international basis to share and flag bubble build-ups.
Is it do-able? Yes.
Does the technology exist? Yes.
Will it synch with the vested competitive advantage interests of different groups? Yes.
How can I be confident about this? Well, you see all the institutional trading platforms out there from Equities to Fixed Income to IR-FX? Who wrote some of their investment proposals, negotiated terms of agreement, got weekly updates from their CEO/CFO/CTOs, was involved in writedowns/reinvestments and knows how their technology works and interconnects on a cross-organizational basis?
Yes, yours truly. My sole stipulation now would be that anyone who wants me to be part of project managing the build would have to remunerate me extremely well for my knowhow.
Plus that no one’s allowed to comment on my prettiness* and just lets me get on with the project.
FINANCING VIA SOCIAL NETWORKS
The FT also carries this article on how some tech entrepreneurs are crowdfunding by leveraging social networks:
* http://www.ft.com/cms/s/0/c037ae5c-7b92-11de-9772-00144feabdc0.html
This is not a new concept, it’s how some independent film producers have been raising up to GBP1 million to make their features. What the article points to is how difficult it is in the current environment to raise new capital, especially in Series B and C rounds for development financing.
Ergo, tech start-ups would be well advised to abide by Sequoia Capital’s points about conserving cash and not burning it on poor marketing strategies.
My observation from crowdfunding via socnets which is different from the VC approach is that:
(1.) It triggers issues relating to compliance with FSA/SEC/Consob etc. rules regarding investment advice and protection of investors’ interests.
(2.) Social network investment is more likely to be a one-off transaction whilst the VC is more likely to repeat reinvest.
(3.) VCs and their network of investors tend to be able to bring expertise and contacts to the company which people on a social network merely taking a “punt” of GBP10 or less may not be able to offer.
(4.) The administration involved is different. With crowdfunding there are more investors to update and the paperwork may not be of a regulatory standard.
(5.) VCs have a more established path to institutional investors which is important if your strategy is likely to involve plans for floatation or acquisition by a media giant.
Anyway, it’s a personal choice: go with a handful of VCs and investors you meet face-to-face where you can develop deep and longer-term relationships of trust or go with many kind-hearted strangers on a socnet whom you may never meet face-to-face because of geographies and get to know each other better online.
