I only just found this article from December 2008’s Portfolio.com. It’s by Michael Lewis (the Liar’s Poker guy). It more or less supports my vague theory that this financial crisis thing is little more than a skimming off the top of value that never really existed.
Even my wife, who’s never claimed any knowledge nor sympathy for capitalism, basically said this morning that the job of banks was to decide the best place for money to go – and that they weren’t doing a good job of it.
This seems to me a good description of the problem. But if that is the problem – then giving banks money is not the solution. Lewis too, through the story of Steve Eisman, is basically saying that Wall Street wasn’t doing its job:
“I put a sell rating on the thing because it was a piece of shit,” Eisman says. “I didn’t know that you weren’t supposed to put a sell rating on companies. I thought there were three boxes – buy, hold, sell – and you could pick the one you thought you should.”
Eisman says in his defense, “I did subprime first. I lived with the worst first. These guys lied to infinity. What I learned from that experience was that Wall Street didn’t give a shit what it sold.”
Now I have full sympathy for everyday people who have somehow been effected by this ‘crisis’ through job loss or loss of retirement funds (in the case where they weren’t making silly decisions to risk everything to the whim of a margin call). But I can’t understand government bailout of companies. Surely, the assets of the company would still be able to be redistributed to others who know how to manage them better? And if there are no assets, what exactly is the government investing in?
It appears that there’s a structural change in the economy which people who know more than I do about these things think is long overdue. I think it may be as simple as some sort of dis-intermediation of capital management. I’m not sure how these things work now, or ever worked, so I shouldn’t really speculate.
But I will speculate. I think that the specialisation of the ‘banker’, or the ‘money guy’, or the ‘financial analyst’ might be broken. It might be that just like the specialisation of ‘management’ which I’m so interested in, this type of specialisation in financial knowledge – or rather the elevation of the specialisation of financial knowledge which has effectively turned democracy into a technocracy – has collapsed.
I have a theory that whenever a single specialisation becomes the dominate or controlling specialisation it turns the coordination into a technocracy. I might be using technocracy in the wrong sense but I’m using it to mean that a single specialisation (i.e. a single branch of technical knowledge) becomes dominate.
In this case, rather than financial knowledge acting as just one input into decision making, and as just one service available to individuals, financial knowledge became the single dominate knowledge used in decision making. This in itself was a problem because it interfered with true and proper determination of ‘value’. But it would also have the effect or corrupting the body of knowledge itself (perhaps not in the textbooks, but ‘in use’).
Eventually, the knowledge of finance not only supersedes all other knowledge, but the finance knowledge actually disappears as it is replaced with what is convenient or beneficial to those in finance. This process could be a simple as people entering financial jobs even though they have no passion or knowledge of such things because that is where the money is (literally in this case, but it doesn’t have to be that way).
This is basically the theory that caused me to develop the outline of the MWT Model 9 years ago. But I think it’s also helps explain the reason for the structural changes in the economy which will come – if not, unfortunately, there ultimate shape.
The question is, will the structural change fundamentally stop any one discipline being elevated to the top (i.e. solve the root cause of the problem) or will some other discipline simply be elevated to the top?