Mainstream economics is not the cause of the current financial crisis – rather, the cause of the current financial crisis and the cause of mainstream economics being mainstream are the same.
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Category: Current Events Page 2 of 3
I’ve written a few short descriptions of the MWT Model over the years. I just submitted the following to ValueBasedManagement.net:
ManageWithoutThem is firstly a theory of how organisations actually behave, rather than how managers should behave. Secondly, it’s a redefinition of the management process so that it benefits the organisation as well as managers themselves. It re-intermediates management processes and refactors those processes without the implicit role of a separate management class.
Managers still exist in the organisation, of course. But the the principles of market analysis are applied to the inside of the organisation to allow greater transparency of operational activities without filtering all measurements through management hierarchies. Rather than flat organisations, the model allows for the accountability of hierarchy without the politics of hierarchy.
The ManageWithoutThem model redefines management as a technology that collaborating individuals share – allowing for the possibility of improving that technology in terms of efficiency, usability, and integration with other technologies.
Check out ValueBasedManagement.net – it’s filled with managemeent techniques, theories, and models. This isn’t a critisism of the site at all – but it makes you realise how fragmented and specialised management has become as a profession.
Just like there is always an excuse for more government spending, with such a wide range of management techniques available there is always an excuse to do some more ‘management’.
The term technical is often misused, and used only to apply to engineers, but the management profession itself has become technical in the true sense. Nobody would argue against the fact that much of that management knowledge, even when it’s correct and useful, is technical in nature.
This means that modern organisations are basically technocratic.
I’m reminded time and time again that the problem is not what you are managing it is how you are managing. It doesn’t matter if you add projects, communications, services, risks, etc, etc, etc to the list of things you are managing. All you are doing is increasing the amount of activity that requires a manager – or, in the worst case, increasing the amount of management activity proportional to other activities. You need to change how you manage!
If you want to understand economics, the current state of the finance industry, and some of the corruption caused by bizarre inflationary money systems, it’s worth reading How an Economy Grows and Why It Doesn’t.
It’s a comic – which is kinda cool – and it was published in 1985 – which makes the parallels with the current financial [industry] meltdown kinda eerie. (Even the web site is old! It proudly declares ‘best viewed in Netscape’!)
The comic was written by Irwin Schiff, who is the father of Peter Schiff. Peter Schiff has been getting a lot of airtime at the moment as the (a) ‘Dr. Doom’ who predicted the crisis. He actually thinks things are going to get worse (for America) as the situation turns into a currency crisis (for America).
(On a side note – I like how America seems to be calling for a ‘unified approach’ to dealing with the global financial crisis. Well of course they are! If you are going to inflate your money supply you need every other country to do the same thing so that your country isn’t disadvantaged relative to other countries! Sheesh!)
I’m only up to page 70 of the comic (so may words, man!) – but it appears that’s also where the world is up too, or a least the public reporting of it. So I’m excited about reading what happens next!
Interestingly, while Peter Schiff is doing well his father Irwin, who developed the comic, appears to be currently in jail. He is some sort of tax denier who doesn’t only dislike tax but thinks it’s ‘voluntary’ – and has argued as such in court.
From what I’ve read his argument is wishful thinking – he seems to be finding the word ‘voluntary’ in various documents relating to the American federal tax system and reading into it that people don’t have to pay if they don’t want to. But I think what these documents are actually saying is that the tax system relies on voluntary compliance with the law as opposed to knocking on millions of doors and asking for tax (i.e. mandatory compliance).
Sure, if everybody stopped paying tax then the IRS wouldn’t have the resources to move to ‘mandatory’ compliance – but that doesn’t mean everybody wouldn’t be breaking the law. However, that wouldn’t mean everybody would be prosecuted either – it would mean a revolution, maybe blood would be spilt. I don’t want blood – let’s just continue to pay our taxes and complain.
Sorry Irwin – I could have saved you 12 years. That said – I like your style and agree there is something a little fishy (ah, get it? Fishy! – read the comic) about paying people so they can buy votes. But, as I said, always pay your taxes. If a mugger with a knife wants your wallet you give it to them right?
After my last few vague ramblings on the economy I wanted to hear what somebody who actually knew what they were talking about thought.
I found the ideal candidate: John Allison, former CEO of BT&T Bank (which hasn’t gone broke), speaking for the Ayn Rand Institute. Now don’t get me wrong, the folks at the Ayn Rand Institute can be a bunch of crazy mofos! But this guy was facinating and makes a lot of sense.
It’s a dense presentation (as in, there is a lot of content squeased into it) so follow the related slides and pause it often – as I did.
The talk and accomanying slides can be found here.
Exactly:
… what struck me most was Geithner’s repeated conflation of our “financial system” and our “institutions”. Mr. Geither’s unspoken assumption is the fixing our financial system implies ensuring that incumbent troubled financial institutions are “strong”. But that’s not right. Our financial system is composed, in part, of financial institutions, but it is supposed to be larger and more robust than any specific firm. Three years ago, Mr. Geithner would have readily conceded that financial institutions are supposed to come and go, rise and fall, succeed and fail as a matter of market discipline, and that our system is made stronger by that flow of creation and destruction than it would be if some state-manged cadre of crucial banks were at its core. Of course, we all knew three years ago that some institutions had become “too big/complex/interlinked to fail”, but we viewed that as unfortunate, and would have foreseen that if any of those banks got badly into trouble, the goverment would be forced to intervene and resolve the bank at some taxpayer cost, as it had in the case of earlier TBTF banks. Three years ago, no one would have suggested that the strength of our financial system and the strength of Citibank are inseparable.
– from Interfluidity
Everybody is citing the article in Wired on the Gaussian copula function. Apparently, everybody had been applying some clever maths to finance decisions so they thought they had a mathematically valid way of making accurate predictions while eliminating most variables. It probably was mathematically valid. But was it ever economically valid?
The Austrian economics folks at the Mises Institute are basically saying that it’s difficult to imagine an Austrian economist, a reader of Human Action: A Treatise on Economics
My take is that the Misians are right (again) and this is a failure in the understanding of economics, not a failure in maths or the creator of the formula. But I don’t have to make any comments on this because ‘Andrew’ has already said all I want to say in his comment on Boingboing:
#7 posted by Andrew, February 24, 2009 1:19 AM
Economics is not formulas. Economics is not higher math. Economics is not experimental science. Economics is not even quantitative. Economics is logic applied to the choices that people, and business, make constantly. The logic of marginal value, opportunity cost, uncertainty, and all the rest is as good as it’s ever been — it’s universal as long as time and resources are finite. It’s when you start to say that the demand elasticity of natural gas times the velocity of money, minus the consumer price index, is correlated to the relative humidity in china with r^2=.83, that you’ve fucked up irrevocably.
What’s this got to do with management? In management terms, applying a formula is never the basis of a capability. Like another great ‘Andrew’ said in a comment to my last post, the banks appear to have been saying ‘yes’ to anybody who asked for money – and now they are saying ‘no’. This itself is the simplest of all formulas – and it doesn’t in itself give you that all important capability of being able to differentiate between good and bad risk. And if you use a formula long enough you’ll loose the capability itself (if you ever had it).
I’m becoming convinced that the financial system is completely broken. One of the reasons that managers didn’t put the breaks on use of the formula is sighted in the Wired article:
In hindsight, ignoring those warnings looks foolhardy. But at the time, it was easy. Banks dismissed them, partly because the managers empowered to apply the brakes didn’t understand the arguments between various arms of the quant universe. Besides, they were making too much money to stop.
(See also comment here)
Note that they were ‘making too much money to stop’ and yet you might ask the intelligent questions raised here:
And one question:
I’d like for the knowledgeable people here to tell me what would have the banks done with all the money they had to lend if they wouldn’t have gone for the bad risk? Isn’t everybody so loaded with debt right now that there is very little good risk left? Was this crisis even avoidable?
These raise an interesting point – what do you do with ‘too much’ money? How, or why can there even be ‘too much’ money? If you are expected to make a certain return, to create a certain level of growth in any market conditions, then you need to spend or lend your spare money.
This is the obsession with growth that I think must end. We even define a recession in terms of a lack in growth – why does there always need to be growth? Also, if the government is fiddling with interest rates and indirectly providing cheap loans how do you as a business deal with sort of price eroding competition? Your forced to make dumb / risky decisions I guess – but perhaps you also start getting the wrong signals making it hard to make the right decisions.
The other point it raise is the different between earning money and creating value. The money that was risked on risky loans is now gone. Never mind the details but that value has been whipped from the economy. But the destruction of value coincided with the making of money. Again, something is wrong here. In this sense people were being paid for taking risks. This shouldn’t ever be the case – people should be paid for either creating value or because the risks they take paid off.
But there is more than one agent here. There are the employees of the banks and the banks themselves. Of course, you have to pay employees for turning up – even if they are risking money and eventually driving your business into the ground. So it’s not the financial folks themselves that are taking the risks. It’s the organisation. It’s the bank itself. It’s the process, structure, culture – in short, all the capabilities that make the organisation what it is – that by its very design choose the wrong people, had the wrong controls, gave incentives for the wrong behavior.
And yet – it’s the Banks that are getting bailout money! I can’t understand this. People don’t appear to realise that the institutional structure is temporary. The exact nature of who owns banks, who runs banks, the boundaries between banks, and the intermediation of different agents (existing or potential) is all we have when it comes to a financial industry. The only way a solution can possibly exist for any financial crisis is for the institutional structure that is overlaid over value to change. The only process that will cause universal (or at least, on average) improvement is to change this institutional and agent structure so that it works more effectively and so that more capable ownership and control exists.
Bailouts to banks will effectively allow the current owners of banks to continue to own the assets -despite- the fact that they have proved they can’t managed them effectively. This doesn’t stop at direct ownership – it also include the investors. If people have invested in banks that are not managing value correctly they have failed to invest wisely. A bailout helps them retain ownership -despite- making bad investment decisions.
If investors are investing in the wrong things, and if owners or corporations are managing assets ineffectively, or if risk is not being managed by a corporations capabilities the investment needs to not provide a return, the assets need to be moved (naturally, through sales) to somebody who can manage them, and different capabilities need to be engineered or given resources.
But – what is the magic formula for deciding all of this restrucing? Well there isn’t one – it just has to be allowed to happen doesn’t it?
PS. I’m not an economists so I don’t really know what I’m talking about.
Some time ago I was trying to form my view on Michael Costa. I never quite finished that train of thought – but I was definitely leaning towards liking him a lot.
With that in mind I’m attend the following talk next Wednesday:
Michael Costa – What makes good or bad government?
Date: Wednesday 4 March 2009
Time: 6:30 for 7:00pm
Venue: Pazzo, 583 Crown Street, Surry Hills
Details are from Catallaxy.
Let me know if you are attending and I’ll see you there!
I only just found this article from December 2008’s Portfolio.com. It’s by Michael Lewis (the Liar’s Poker
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.”
And again:
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.”
via The End of Wall Street’s Boom – Portfolio.com
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?
There is something particularly exciting about Barack Obama’s plan to appoint a government chief technology officer. Not only is this good for government, but it’s also good for the IT industry. Like Ron Tolio of Cap Gemini has said:
No half measures. And quite a strong message to many corporations that struggle with the role of IT in business. This is far from the marginalised position of an IT manager who apathetically reports to the CFO about cost cutting and risk management. This is a boardroom position, one that is supposed to create strong impulses for change and growth.
There is a real difference between a CIO that is charged with ‘serving the business’ and one that is charged with ‘getting value from IT’. You can serve the business by saying ‘it’s the business’s money therefore they get to decide how to spend it’. But to commit to delivering value out of IT you have to commit to business benifits and a business return of technology spend. You need to actually contribute to the strategy and deliver growth through technology spend.
It doesn’t matter what type of CIO you are. As long as you know what is expected you can be successful. But if you are successful purely because you have moved investement decisions to business units, who is ensuring that you are getting the most value out of IT? Is IT actually contributing to the organisations strategy and growth?
Anyway, it’s also good to see a few of these sites popping up too. ObamaCTO.org allows anybody to suggest ideas for the CTO role, which are then voted on and ranked. Now this sort of system is still susceptible to manipulation by special interests. But it’s transparent – and that’s all you can do.