Facing facts: Definancialisation, deglobalisation and relocalisation
Sunday, 4 September, 2011 Leave a comment
Getting the complexity message across to people who don’t want to know or understand is really tough.
But it may comes as a surprise to some (outwith the industry) that it is incredibly difficult to introduce new, better, more reliable and comprehensive means of managing risk to Financial Services companies…even though it would, significantly, improve their bottom-line – enabling them to improve their customer proposition!
SO, in the circumstances, you may understand why I rarely trouble anyone for their thoughts on “peak oil”, how we can best prepare for a post critical society, how we survive and re-build society.
I have, however, been so bold as to introduce talk of Panarchy (the “Panarchic Cycle”) so that thinkers can…well, think. The author of this article kinda cuts to the chase. Great. Although I wish that I felt more confident about the possibility of meaningful change.
One person I would like to have a close encounter with the brick wall is Myron Scholes, the Nobel Prize–winning co-author of the Black-Scholes method of pricing derivatives, the man behind the crash of Long Term Capital Management. He is the inspiration behind much of the current financial debacle. Recently, he has been quoted as saying the following: “Most of the time, your risk management works. With a systemic event such as the recent shocks following the collapse of Lehman Brothers, obviously the risk-management system of any one bank appears, after the fact, to be incomplete.” Now, imagine a structural engineer saying something along those lines: “Most of the time our structural analysis works, but if there is a strong gust of wind, then, for any given structure, it is incomplete.” Or a nuclear engineer: “Our calculations of the strength of nuclear reactor containment vessels work quite well much of the time. Of course, if there is an earthquake, then any given containment vessel might fail.” In these other disciplines, if you just don’t know the answer, then you just don’t bother showing up for work, because what would be the point?
The point certainly wouldn’t be to reassure people, to promote public confidence in bridges, buildings, and nuclear reactors. But economics and finance are different. Economics is not directly lethal, and economists never get sent to jail for criminal negligence or gross incompetence even when their theories do fail. Finance is about the promises we make to each other, and to ourselves. And if the promises turn out to be unrealistic, then economics and finance turn out to be about the lies we tell each other. We want to continue believing these lies, because there is a certain loss of face if we don’t, and the economists are there to help us. We continue to listen to economists because we love their lies. Yes, of course, the economy will recover later this year, maybe the next. Yes, as soon as the economy recovers, all these toxic assets will be valuable again. Yes, this is just a financial problem; we just need to shore up the financial system by injecting taxpayer funds. These are all lies, but they make us feel all right. They are lying, and we are buying every word of it.