Geoffrey Morton-Haworth_

Too Big to Fail Banks: A Simple Solution

I like the image of the dinosaurs. Their size belies their vulnerability.

Of course the banks are not too big to fail - they are failing. There isn't enough money to bailout Buffet's economic weapons of mass destruction! And there is no reason that the society won't implode around them.

Want to see where this ends up? Look at the kleptocracies in Africa.

This is the Social Hazard, see seekingalpha.com/insta....

Mapping the Market Genome

XBRL and "crowdsourcing' (Wired's suggestion) are both part of the solution.

The key step is to realize that the stock market is a complex adaptive system - one that has the capability to learn in its parts and as a whole - and can never be managed top down and from the center. All the TARP and Stimulus interventions are likely to do is provoke unintended and mostly unwelcome consequences.

One way or another, it's the people at the grassroots who will be left to pick up the pieces. Everything we do to improve dialogue, like XBRL and radical transparency, will help them to self-organize and thus encourage the emergence of the local solutions which will eventually crystallize into the global behaviors that will be the only things that can accelerate the recovery.

Thomas Friedman Doesn't Get the Economic Reality of Silicon Valley

Yes, Thomas Friedman gets lots wrong. The central assertion of his "The World is Flat" is that information technology is turning the world into a global village, whereas it is creating small-world networks of local tribes (Facebook, MySpace, etc).

See "Who Controls the Internet?: Illusions of a Borderless World" by Jack Goldsmith and Tim Wu.

Massive Job Layoffs Announced at Various Fortune 500 Companies

Half a league, half a league,
Half a league onward,
All in the valley of Death
Rode the Fortune five hundred.

Trust - Not Confidence - Is the Issue for Geithner

While I can’t compete with ROLEX18K’s assessment of the situation, Simon I think you are right and that the trust issue is global.

The simple rule with trust is “the deeper you see the more you trust”.
So I come back to Joseph Stiglitz's remarks on Fareed Zakaria’s CNN GPS show on 28 December 2008:

“Much of the innovation that we've had in the financial sector in the last two decades has been of negative value. It has been creating complexity.

“It's not a question of disclosure. You could disclose these documents, but nobody -- the buyer, the seller, the regulators can understand them.

“And it was done deliberately. It was done deliberately, so people couldn't understand what was going on.”

Hernando de Soto added:

“You're starting to find out that the real economy has a lot to do with trust, more than with the so-called fundamentals. That when people are not able to identify each other, when they don't know what rights they have over what property or liabilities, then you don't get cooperation.

“The reason you are in paralysis, the reason you are collapsing, is because you no longer know who's got whose hand in whose pockets. Remember that financing is there at the service of production, in combination, and is not center stage.”

The Scariest Chart Ever

Armaments, what else?

On Jan 20 05:27 PM JohnAl wrote:

> Yeah? We made stuff to sell to the rest of the world in 1946. What
> do we sell them now?

Lesson Learned from Madoff's Ponzi Scheme

The short answer on trust is “the deeper you see the more you trust”.

As the UK TV series “Hustle” points out, “you cannot con an honest man”. Gamblers need to believe in a system that can beat the odds, and people wanted to believe Madoff was doing something slightly extraordinary to explain his exceptional returns. As long as they were beneficiaries, his investors preferred not to ask hard questions.

Madoff is surely only very small fry, just a cheap crook “caught swimming naked as the tide goes out”, as Warren Buffett puts it so delightfully. I can’t see why so many commentators treat him with a sort of grudging respect. The scale of deliberate deception is much greater than this and our culpability, or lack of “collective mindfulness”, is far more profound.

For instance, Fareed Zakaria’s GPS programme on CNN (December 28, 2008 - English slightly edited) hosted this frank discussion between pundits:

Hernando De Soto, President, Institute for Liberty and Democracy:
From a Third World point of view, the interesting thing is that, as trust breaks down in Western societies, like the United States, banks have stopped lending to each other because nobody really knows who owns what assets and what liabilities. You are starting to find out that the real economy has a lot more to do with trust than with the so-called fundamentals.

We have lost track. And we’ve lost track, because instead of having universal documentation as to who owns what — which is what international cooperation would give us — today, most of the paper in the world is untraceable.

Jagdish Bhagwati, Professor of Economics, Columbia University:
In each of these financial crises, the new instruments and changes have usually gone way beyond comprehension, and that is really at the heart of financial innovation.

Hernando De Soto:
It is about transparency.

Jagdish Bhagwati:
The downside is really important. When we say we must regulate, the regulators must first understand what has to be regulated.

Joseph Stiglitz, Nobel Prize-Winning Economist, Columbia University:
I think the point that Jagdish made is exactly right, that much of the innovation that we have had in the financial sector in the last two decades has been of negative value. It has been creating complexity. It is not a question of disclosure. You could disclose these documents, but nobody — the buyer, the seller, the regulators — can understand them. And it was done deliberately. It was done deliberately so people could not understand what was going on.

Hernando De Soto:
The reason you are in paralysis, the reason you are collapsing, is because you no longer know who’s got whose hand in whose pockets. You have to make a distinction. And remember that financing is there at the service of production, in combination, and is not center stage.

***

Sadly, because we did not challenge things we did not understand, we have become collectively liable for the consequences of the deception. We have failed in our responsibility to be truthful to ourselves and to demand the same standards of honesty in others.

Federal Reserve, What Do You Have to Hide?

Good question.

In most restaurants where proud chefs prepare great food, patrons are welcome to enter the kitchen and thank the chef. Where such openness is practiced, customers get the chance to learn a lot about the nature of the restaurant, especially its cleanliness.

But in a few so-called excellent restaurants, however, patrons are kept out of the kitchen with explanations like: “You will be in the way “, “It is too busy in there”, or “Our insurance does not allow it”. This makes it easy for the customer to imagine that the restaurant is hiding something: a dirty kitchen, frozen food reheated in the microwave or underage staff, perhaps.

Openness and secrecy are opposites. Openness exposes fraud and deceit: the less open, the more room for dishonesty. An excellent restaurant can survive without letting customers see its kitchen. But a similar restaurant that is open will do much better.

Thus a closed, secretive business is not automatically dishonest, but keeping your honesty secret is self-defeating.

The Federal Reserve may be about to learn that the hard way, for the new technology of the Internet–blogs like this–is revolutionizing the way organizations are going to have to communicate with their stakeholders.

The U.K. government's banking industry bailout needs some work, key players warn. "They are making them do the wrong things – making them store up cash and then repay the government – when what you want them to be doing is lending out to businesses."

At the root of all such interventions is the terrible simplification that what we have here is something like a simple mechanical system: pull some levers, add some feedback, create the right incentives and everything will come right.

A more helpful view is that we are dealing here with a complex adaptive system; that the stock market has the ability to learn in its parts and as a whole. Thus attempts to manage it top-down and from the centre are likely to fail and more likely than not to generate unintended and unwelcome consequences. Because governments and regulators are at the top and in the centre they can’t think of anything else to do. Look at the failed ideas and U-turns of the TARP. When will the obvious sink in?

If for a second we suspend disbelief in the familiar assertion that we are moving from a capital economy to a knowledge economy then we might realize that the one massive asset that appears on nobody’s balance sheet is the knowledge and experience of people in their businesses. The obvious is not observable, and the observable is not obvious! The only people who can possibly dig a Ford or GM out of its hole are its workers; its managers demonstrably can’t. If you make this assumption then the question becomes how you mobilize the talent and unquestionable motivation of people at the grassroots of organizations like these. There are answers. But they are nowhere to be found in the remote and abstract notions of accounting, economics and finance.

General Electric: Genuine Risk of Collapse?

“The Earnings Game: Everyone Plays, Nobody Wins” an article in the Harvard Business Review (June 2001) notes: “The fetishistic attention to an almost meaningless indicator [quarterly earnings] might be cause for nothing more than amusement, except for one thing: the earnings game does actual harm. It distorts corporate decision making. It reduces securities analysis and investing to a guessing contest. It compromises the integrity of corporate audits. Ultimately, it undermines the capital markets.”

“SEC chairman Arthur Levitt, has called earnings management a ‘widespread but too little challenged custom.’ Empirical data appear to support Levitt’s position. A 1999 study of thousands of corporate earnings… found that quarterly earnings reports that meet analysts’ expectations exactly or exceed them by just a penny per share occur far more frequently than would be likely in a random statistical distribution… ‘It’s hard to find corporations that don’t pump up their earnings’.”

I wonder if they then had any idea of the extent to which such systematic deception by companies like GE, who claimed to be models of good management, would "undermine the capital markets"?

WSJ: A Frightening Indictment of Our Society

On Nov 19 04:26 PM henarl wrote:

> Lets see, our economy can be run by greedy and corrupt CEOs and
> hedge fund managers - or - it can be run by stupid and corrupt politicians
> and bureaucrats - or - by a combination of the two. Don't worry
> about how the country is run - that's hopeless. Instead, worry about
> how your own personal economy is run - it's your only hope!

Interestingly, Susan Hockfield, the President of MIT, sent a letter to all its alumni about the current financial environment and the effect on the Institute. There are many interesting things about this email.

First, how seriously the Institute takes the present recession:

"The global economic contraction will likely compromise all of the Institute's major revenue streams."

Next, the recognition of the impossibility of forecasting:

"The continuing uncertainty about the length and depth of the economic downturn makes accurate predictions impossible."

Then, while not mandating budget cuts, the importance placed on immediate reductions:

"Achieving significant savings this year can help prevent more painful future choices; early savings will compound, so that a dollar saved today gives greater long-term budget relief than one saved a year from now."

Above all, the emphasis on working together to develop a long-term approach:

"We will set in place a broad, deliberate, inclusive process, in which all branches of the Institute will work together in the coming year to reassess our priorities and the use of our resources."

But why send this to all the alumni, unless of course it carries the broader message... and these thoughts could be appropriate to "your own personal economy", too

WSJ: A Frightening Indictment of Our Society

The root of the problem lies in a "terrible simplification". We are not dealing with a simple system with just a few levers to pull and everything will come right.

I am a believer that the stock market behaves far more like a complex adaptive system than a simple mechanical system. It has the ability to leran in its parts and as a whole. It cannot be coerced. Market sentiment is an emergent property. And action top-down and from the centre is likely to have unintended and generally unwelcome consequences.

But how do you manage beasts like this?

Obama’s management style is the only way – listening, eliciting, working to know people better and to help them develop their own solutions, pulling not pushing, seducing not coercing.