I mentioned a while ago to Jeg with regard to a sudden interest FV has taken on the “financial crisis”:
[...] this is gonna be yet another case of an “expert” pontificating about what are essentially simple concepts using a mind imprisoned by textbook thinking [...]
I refer of course to a guest blog entry dedicated to irresistible moi contributed by The Ca_t who indicates that her primary mission in contributing this fine specimen of Pinoy writing is to complicate an otherwise SIMPLE phenomenon: The Financial “Crisis”.
Interestingly enough, she also proclaims ignoring moi as one of her missions in life.
So I thought that before Madame causes any further expert damage — in this case murdering the field of economics (which, given the way it is practiced, isn’t really much of a field of “science” if you ask me) — I thought I’d jump in and save the day and clarify things from a non-expert angle.
Before everything, can we first call on the eminent Dean Jorge Bocobo to contribute to this worthy effort by policing our grammar and spelling?
You can start with Ca_t’s title, Dean:
Another Financial Tsunamis – It is not really that simple
:D
Now then:
We need to see financial “crises” from the simple perspective of these being mere occasional corrections that happen in an imperfect system, folks. Paraphrasing what I said earlier, our monetary system (and the financial system built around it) is an imperfect mechanism for quantifying wealth and keeping score of who has it. More importantly, it also in principle keeps track of who doesn’t have it. Yet, in all ironies, it has been used to make people and entities appear to have it.
Corrections happen when bogus value in the system reaches some form of critical mass, and at some point the market forces the score tallied by said financial system to re-align with reality — just as the Dot Com boom imploded as soon as people realised that the stocks people like Mary Meeker talked wannabe’s into lapping up were worth jack shit. The concept is no different from how a leap year is needed every four years to correct an imperfect system we use (the Calendar) for tracking the Earth’s position relative to the sun. The reality is the Earth’s actual position relative to the sun (in Einsteinian space, there are no absolute positions) and the score is our imperfect calendar. The only difference is that we’ve reduced the latter to a science whereas the mechanisms that govern when the corrections happen for the earlier remain a mystery even to self-styled “experts” on the matter.
[For that matter the monetary/financial system has been found to be fundamentally flawed at taking into account the real costs of our economic activities to the environment; e.g., the system does not penalise us for waste generated by our increasing skill at producing, in ever larger volumes at ever lower "costs", products with ever shorter useful lifespans (thus encrouaging an increasingly wasteful throwaway society). But this is all a separate topic in itself concerning the looming correction that Mother Nature will be overseeing sometime in the future.]
And that’s all there is to it, folks. Two paragraphs (plus a bonus third in brackets) that I highlight in bold to highlight it as the core of the simple matter.
True to my word and contrary to what the self-described “experts” say:
It’s simple, really™
Arguments against this assertion of simplicity abound. But because of the lameness of such arguments, we can easily group them into a handful of categories:
:D It’s all the fault of the so-called “Masters of the Universe” of Wall street
True. We can quite easily blame the creativity and cleverness of financial “engineers” who made careers out of turning investment instruments into convoluted abstractions far removed from their tangible asset underpinnings. They also possessed the hubris to presume to reduce risk into a mathematical model in an Excel spreadsheet (an application even a six-year-old can learn to master).
But lest we become too comfy with the currently popular hobby of demonising the “greedy” hedge fund managers and Harvard-educated hotshots who supposedly led us over the abyss, we should consider this: at the end of the day people who could not afford to take on risk or understood it the least jumped in like droves of lemmings.
:D “Evil” greed brought this upon us.
Of course it did.
Indeed, as jcc observed here:
[...] the most guilty of all these dubious characters is the greed in every man’s heart, that means you and me.
What I beg to differ on is the “Evil” label that voodoo practitioners tend to slap on avarice. As observed quite accurately, this natural property of the living resides “in every man’s heart”. So then how could something inherent to being human be “evil”?
Our approach to “greed” needs a refreshing dose of perspective. Greed is something that should be taken into account as a design consideration in the building of social and governance systems. If we are so inclined to argue — no, lament — that greed is in “every man’s heart”, well, Yours Truly can argue that SHIT resides in every man’s gut. But guess what, that SHIT is also part of the human condition and a standard design consideration when we build human dwellings and communities. We deal with the reality of shit in every man’s gut by including sewerage systems in our designs.
Greed is no more evil than shit is. We have to live with both and build around them rather than against them.
:D We are all inadvertent victims.
Indeed. We are all victims of clever marketing.
But then while a marketer’s responsibility is to sell, a consumer’s responsibility is to evaluate and discern. In other words it comes down to personal accountability. Pinoys have a very weak grasp of this simple concept — which goes far in explaining why Pinoy society is poor in all aspects of the word — for personal accountability is the corner stone of a society destined for prosperity.
Interestingly enough, it all comes back to the fundamental principle that underpins poverty:
We locked ourselves into commitments beyond any inherent ability in us to honour them.
All roads lead to GetRealism, as always.
Ultimately we are all investors and risk managers — from the ordinary home mortgagee to the biggest of institutional investors. And the Mandelbrotian scalability of this SIMPLE REALITY is brilliantly illustrated in the third episode of my equally scalable The Ultimate Poverty Framework™ (T.U.P.F.) franchise. Everyone and every entity that participates in the economy has a revenue base, an asset base, and a cost base. Decisions to take on risk depend on how well we understand our individual positions and circumstances across these.
And this is the beauty of Capitalism. Like democracy, it works well given a reasonable amount of brain and imagination amongst those who participate. We who live in capitalist and democratic societies have the power to chart our destinies. We just need to use this power wisely.
The only real way to appreciate the true nature of capitalism is to look outside the small square drawn around it by “expert” economists and finance types. The aggregate capital of humanity is the sum total of our intellectual, cultural, scientific, and technological achievements. The financial system is merely a quantification mechanism – a method for calculating a number to describe the value of these achievements and the returns they produce for us.
Sometimes this mechanism deceives us.
Or we use it to deceive ourselves.
["I" before "E" except after "C", right DJB? :D ]
The nature of a correction — this Financial “crisis” is one such — made out to be more complicated than it really is is the product of the same thinking that creates such “crises” in the first place.
And guess what:
Problems cannot be solved using the same thinking that created them. – Albert Einstein
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All that writing and you said nothing! What gives?
and still i wonder why you are not yet ceo of your own company yet…
you should have been the messiah by now…
@Benign0
NO ONE is saying the fundamental issues involved are not easily described. YOU are the only one saying it.
The complexity that you are missing is on how to SOLVE these problems.
I understand that you are selling your framework. But don’t oversell what your framework can do: draft solutions. Solutions are hard.
in a past post i mentioned this statement is important in dealing with poverty:
“We locked ourselves into commitments beyond any inherent ability in us to honour them.”
To operationalize it, you need to define terms carefully. Also, there is a danger some of the things you say are tautological. For just this example, we can conceivably imagine that even the non-poor (<$1 a day) also fall under the statement. In fact, any person taking on (any) debt can be described (naively) as locking into commitments beyond one’s inherent (loaded word!) ability to honour them.
note that we aren’t in the SOLUTIONS stage yet. we’re just defining terms…
GabbyD,
I never said the framework can “draft” solutions. Frameworks are for organising one’s understanding of a system so that a structured approach towards formulating or designing a solution can be taken.
I beg to differ slightly on your statement…
You should separate the two so that the poverty conclusion is conditional, thus:
One risks poverty by acquiring debt beyond one’s inherent ability to honour it.
Debt is not necessarily bad. Debt presents a high risk to you or does not serve you well if your assets (particularly the portion of it readily convertible to cash) does not fully cover it or, say, if it is used to fund something that loses its value over time (such as a car).
Then what on earth does this mean????
http://www.getrealphilippines.com/solution/framework.html
KG, stidi ka lang dyan. I think GabbyD was referring to my The Ultimate Poverty Framework™. Unless of course I assumed wrong.
The Solution Framework on the other hand provides the framework for the solution I propose.
Simple. ;)
I am the last person to have a K in grammar,syntax,spelling,definitions,and whathaveyou, but pardon me:
When you say Ultimate, it usually means the last.
How come you said your TUPF is in its third episode?
I know you hate nitpicking,but COME ON; anong gusto mo,Ikaw lang?
I know you hate ad hominems,again anong gusto mo,Ikaw lang?
I was mistaken in thinking that you can take punches because you can give them too.
You are complaining about giving too much bandwidth to shawarma topics and yet you spend too much bandwith on trying to prove your self.
Pinoy ka nga,ayaw mong malamangan.
nailabas ko na, stidi lang ako.
@Karl
no idea what he means either! what i meant was a framework should lend itself naturally to solutions. isn’t that the point of this exercise? — when u have a framework on how something works [the first step], then u have a handle on what to change and how [stage 2].
isn’t that the point of this/his exercise? a framework upon which to address problems in a way that is effective or novel (or both)?
a great example of a framework is porter’s competitiveness framework. Its useful, coz it lends itself easily to the analysis of different industries/situations, and it has solutions you can sell. Boston Consulting Group, McKinsey, et al, they all have these things, which they sell under the rubric of ‘mgt/strategy consultancy’ (whether or not they are right solutions is another story)
@benign0
yup i agree debt can be good! which is why defining what ‘inherent ability’, ‘commitments’, ‘lock-in’ is a key first step.
the way i’d put it (and most other people) is that debt is a way to move consumption around independently of income. u give an example of a car. You have the income to own a car, but if you wait for your salary to come in, you’ll have to wait a year. sayang naman! just get an auto loan, get that car now, and pay incrementally over time. diba thats the logic of all loans?
in your comment, you argue something different. you want people to defer current consumption and ‘invest’ in an ‘asset’ (for lack of a better term) so as to have higher value in the future (thus, higher consumption in the future). OKS din yun.
i’m trying to help u dude!, to come up with a better framework… :)
the fact that a whole nation, and nations upon nations are scrambling to get themselves on solid ground, frankly has me scratching my head as to how you could say this whole fiasco is simple.
Theory is simple.. reality is complicated.
the fact that human beings are involved in the matter adds to the complexity of economic theory and application. The markets are irrational, regulation is hard to implement…
It’s Complicated, if it weren’t so, this whole post would have been a one liner.
Gabby,
I agree and I commend you for always having a smooth exchange with benign0.
If there is one thing that Friendster is good at; is to make people say:
It’s complicated!
You guys should not listen to benigno. you will learn better in youtube and in your own research. In this blog, I will grade him FAIL.
He is running out of ideas to write.
Let’s boycott benigno for a while. :)
Leytenian has a point.
If you’re willing to park your retirement money for say 5 to 10 years to buy shares of companies with good business models and future-looking e.g. biotechs. They might be a good buy this time.
The share prices of these growth companies were depressed by the effects of contagion from the financial stocks.
“In every crisis, is an opportunity.” It’s simply real!
“We need to see financial “crises” from the simple perspective of these being mere occasional corrections that happen in an imperfect system, folks. Paraphrasing what I said earlier, our monetary system (and the financial system built around it) is an imperfect mechanism for quantifying wealth and keeping score of who has it.”
hahahahahahaha you are so funny.. monetary system ? and “built around it”? what’s built around it? let me complicate it further…. moving averages, technical analysis, fundamental analysis, fibonacci, ,candlestick… Break it down benigs or else… no one will believe you anymore.
In Philippines: remittances, mother nature, population, GDP, GNP, CPI, government policy, bangko sentral, IMF, world bank, interest rates and corrupt politicians and many more. Can you make this simple? If you can , blog it , let’s see if you will not embarrassed yourself. HINT: focus on an industry… a good example: Jon limcap’s new blog.
But your sense of humor is very flipino, a strong in heart , willing to coach and willing to help the country by CONFUSING PEOPLE.. hahahahah :) , oh my god. I cannot help myself.
you are one hell of a writer. please base your sentence ( like the one you said: BUILT AROUND IT ) on facts ok. A simple news like the one The cat has will probably be more entertaining for everyone. Keep it simple benig… LOL :)
“built around it”…. what is it ? hahahaha :)
@Karl Garcia on December 17th, 2008 7:51 pm
ty. i think benign0′s not wrong (not entirely at least). i think his description is right on many levels. but think he oversells the ‘simple’ too much, especially as it relates to solutions.
My goodness if you want to preach morality and ethics as the ultimate consideration for solving humanity’s problems then come out and say so directly.
Why go all around the bush and pretend to be an expert on the more complicated process of human material existence.
The professora was talking about how businesses should not keep large amount of savings.
But the problem of excess savings has led to a monster in finance called complex derivatives which have a notional value of hundred of trillions of dollars all based on highly leveraged debt positions. All based on the future projections that asset valuations would have no limits as to their price appreciation.
That bubble has burst and the unwinding process is leading to a massive cutback in credit allocations that has now reached the physical economy. Even the semi communist state of China is reeling from this contagion. They are more state capitalists than anything else.
It all boils down to the fears of the collective consciousness of the major parts of society. They do not want to loose their savings. Is that not a major part of the human psyche. The whole infrastructure of trust is almost gone in the capital markets.
Countries with weak governments will feel the punch more than others.
The technocrats see things in a mechanical way and they forget that humans are not machines but frail fallible creatures. Do you baby them or do you have a system that allows them to grow and make mistakes and get up and start all over. The Philippines is a bad example of Nanny state. GMA likes the idea of breast feeding grown people to remain popular. That idea of an all giving Queen Mother is sick… She is an overly ambitious greedy person. She made it her main mission in life to restore the so called grandeur of her so called clan. How sick can one get.
Putting her in place of Erap (the manner it was done) was one of the most serious setbacks this country has ever had.
This wonderful human creation we are utilizing is a perfect example.
Humans are social animals… Keep it simple stupid…
The root cause of the present financial/economic crisis can be described as the audacity of intellectual arrogance. These genius technocrats believed that they had all about abolished risk… These guys with IQ’s of over 200 placed absolute faith in their computerized models on risk mitigation. Oh another word for risk is uncertainty about the future. Risk abatement is called insurance.
Add to that the theological belief in free markets of the regulators. Now they all say we were wrong. They were so certain about future valuations they bet most other peoples money in the game. They could like all Ponzi schemes depend on more suckers entering the game.
All this was happening in an age where there was undoubtedly technology based wage deflation.
The digital revolution made outsourcing not only of manufacturing but of parts of the services sector of national economies. Then add to that the entry of India and China into the global economy further allowing manufacturers arbitrage in determining where to produce their goods.
Then this idea of peak oil combined with the the war on terror.
All a heady witches brew. There is no global regulatory frame for financial markets. it is still for the most part “let the buyer or investor beware.”
Maaaring simple lang ang issue ng financial crisis para sa isang nagtratrabaho sa isang bangko kagaya mo Benigno, at gayon din sa mga taong nasa upper B classes pataas, pero para sa Broad C pababa ang simpleng tinatawag ninyong financial crisis ay hindi simpleng paghahagilap ng paghanap ng makakain para sa kanilang pamilya. Oo nakahanap si Madam Arroyo ng 1 Billion investment noong isang araw sa Qatar, gayon din ang 500 pesos na ipinamumudmod niya sa mga mahihirap. Pero nasagot na ba ng pamahalaan hindi lang sa bansang ito kundi sa ibang bansa na kung paano sasagutin ang issue ng kahirapan partikular na ang problema ng financial crisis na sinasabi ninyo?
Marahil hindi ninyo ito nakikita, lalo na sa mga taong nagsasabing simple lang ang nangyayari ngayon dahil sa tatlong bagay:
1. Hindi ninyo nararanasan ang hirap na dinadanas ng mga kababayan natin.
2. Alam ninyong may problemang ganito ngunit nagbabalat kayong ayaw ninyong harapin ang issue na ito bugkos sinasabi ninyong easy lang ang problemang ito.
3. O sadyang bulag lang ang iilan sa atin dahil kuntento na ang iba sa atin sa posisyon nila kaya sinasabi nilang OK LANG at WALANG PROBLEMA.
GET REAL ika nga maging totoo tayo sa kung anong nangyayari kaya walang nangyayari sa lipunan puro takbo tayo at puro substitution ang pinapanukala natin hindi natin puntuhin ang sitwasyon at haraping may PROBLEMA nga at anong MAGAGAWA KO
I dunno Flow. I’ve met taxi drivers who lived in squatter shanties who put three kids through to college. I’ve met housemaids who, because of their diligence and the goodwill and trust they earned from their employers, were given the chance to pursue college course and go on to become successful engineers.
Henry Sy was once a 3rd Class citizen.
All of these people did it, and ACHIEVED under the same bulok government that all of us were subject to (note that it is not only Arroyo’s government that is bulok, people).
Anong magagawa ko?
I do my job properly.
Those who presume to tell people that one is obliged to do any more than that are bonkers.
You know why?
Because even something as basic as doing stuff properly is already beyond the skills of many Pinoys.
It’s simple, really™
J_AG: Add to that the theological belief in free markets of the regulators.
Ah, the free market of the regulators. Supreme irony.
That’s my point benign0 when i say:
Marahil hindi ninyo ito nakikita, lalo na sa mga taong nagsasabing simple lang ang nangyayari ngayon dahil sa tatlong bagay:
1. Hindi ninyo nararanasan ang hirap na dinadanas ng mga kababayan natin.
2. Alam ninyong may problemang ganito ngunit nagbabalat kayong ayaw ninyong harapin ang issue na ito bugkos sinasabi ninyong easy lang ang problemang ito.
3. O sadyang bulag lang ang iilan sa atin dahil kuntento na ang iba sa atin sa posisyon nila kaya sinasabi nilang OK LANG at WALANG PROBLEMA.
GET REAL ika nga maging totoo tayo sa kung anong nangyayari kaya walang nangyayari sa lipunan puro takbo tayo at puro substitution ang pinapanukala natin hindi natin puntuhin ang sitwasyon at haraping may PROBLEMA nga at anong MAGAGAWA KO
We should face the problem rather than running away from it mahilig tayo magsubstitute ng mga bagay bagay at ang ending walang nangyayaring matino, bkit hindi natin harapin ang problema at magsimulang kumilos. May role ang government sa bagay na ito sila ang kapitan ng barko na dapat lumalayag ng tama
“Because even something as basic as doing stuff properly is already beyond the skills of many Pinoys.”
I can relate to that. i have changed my mind to boycott you. :)
Jeg,
I think the root cause will be debated and analyzed and that history will be the ultimate judge. that isn’t to say, i disagree that greed is the biggest factor. i do.
Nick,
I disagree, to a degree. governments should act as referee and a protection against catastrophe, fraud and force.
Sparks is correct that it (capitalism) is just a tool. How it is used is ultimately dependent on who wields it. I think that, imho is the best “regulation” of all.
“Quis custodiet ipsos custodes?”
Yes, iAgree. if this financial mess was simpler we wouldn’t be in imagining things like “great depression”. The market is irrational. And no one has a clear idea or picture of how to resolve it. This mess… it isn’t simple and this… is far far from over.
Jeg,
I think the root cause will be debated and analyzed and that history will be the ultimate judge. that isn’t to say, i disagree that greed is the biggest factor. i do.
Nick,
I disagree, to a degree. governments should act as referee and a protection against catastrophe, fraud and force.
Sparks is correct that it (capitalism) is just a tool. How it is used is ultimately dependent on who wields it. I think that, imho is the best “regulation” of all.
“Quis custodiet ipsos custodes?”
Yes, iAgree. if this financial mess was simpler we wouldn’t be in imagining things like “great depression”.
The market is irrational.
And no one has a clear idea or picture of how to resolve it. This mess… it isn’t simple and this… is far far from over.
jeg, sorry. just to clarify (re my most recent comment): i meant to say, i do agree that the biggest cause would be greed but is not entirely the culprit.
When will we get it thru to our thick heads that looking to Government for our salvation is a DEAD END proposition.
Step back and check out the landscape:
:D We are democratic (we vote, they ascend)
:D We are a free market economy (we can work in whatever job in whatever numbers of those we like and however hard we feel, and we can park and move our money wherever we like however we see fit).
:D We are secular — in principle for now (there aren’t any morality police patrolling with machineguns ready to drag away “fornicators” into dungeons).
In other words, dude, it’s all laid out for us. We just need to exercise our liberties WISELY and recognise OPPORTUNITIES even as they lie right under our noses.
We Pinoys have to GET THAT.
Obviously we CAN’T.
Boo hoo.
I agree Cocoy. It isn’t that simple — but only if we try to see it from the perspective of narrative.
If you try to explain in narrative how a piece of software works, you’ll confuse the hell out of a listener (you’ll end up having to narrate every single case that the code has to deal with) and lead him to believe that it is too complicated.
But if you try to explain it by describing its logic, you’ll soon start singing off the same page (assuming, of course, that you have the right type of listener — the ones who ask the right questions).
I attempt to explain this in my recent post.
Gabby: note that we aren’t in the SOLUTIONS stage yet. we’re just defining terms
Let me throw this out there for discussion by all you financial hotshots by way of solutions:
Get rid of fiat currency and fractional reserve banking — this will put it in line with the laws of physics, that is, the first law of thermodynamics — and get government out of economics. This I believe will get rid of the business cycle and allow natural selection to take place. Good companies thrive, poor companies fail, and not at the same time. This is better than the system we have now wherein good companies and bad companies all suffer at the same time.
As for the second law of thermodynamics, benny addressed it in his bracketed paragraph.
The laws of nature, ladies and germs. It’s simple, really. :D