All entries for Friday 14 November 2008

November 14, 2008

More learning from the PMA, Credit crunch, Financial Services and Globalization

Continuing from the previous post. Some thoughts that came to me while writing the PMA. I wrote about financial services. The connection between globalisation (and I`m not crazy about that word, because the world has always been globalised, I think we should use something like Hyper-Globalisation to make explicit that we are talking about the increase, the strengthening of something that has always been there) and financial services is clear. And by understanding it it gives us a different vision of the current crisis.

The moment now is very similar to the burst of the bubble that happened on 1929 (even though its being treated in a very different way and hopefully it will also end in a very different way, but only time will tell). After a moment of irrational exuberance (fantastic expression created by the former president of the American Central Bank, the FED, Alan Greenspan to describe the dot ".com"  bubble of the 1990's/early 2000's) the markets went burst and so it was decided that they should be much more regulated. Exactly the same as know. Well, we all know economical growth does not follows a clear pattern. It is made (pretty much as life itself) of moments of quick growth, that generates bubbles, that burst, theres some learning, some pain, that will be followed by growth in new ways, resulting in new bubbles, new burst, pain, and so forth. That`s the way it goes, and that`s the way it will go again know. When we are under pain, it looks eternal, but usually the growing years, the pleasure ones are longer and more significative over time. But we just realise it from an outside look.

That brings me to another point. We are now complaining, throwing stones, shouting, crying and screaming over credit decisions, greed, high salaries, etc etc. Of course no one likes the idea of going through the stress, the worries of a crisis like that because a few VERY WELL paid guys committed mistakes. But looking back, this crisis was built along many, many years of very cheap credit, of innovative financial products that allowed lot`s of people buying houses, cars, trips, ipods, laptops, etc etc. By doing so they also generated lot`s of jobs. What I`m trying to say is that for many many years, all the world gained from the schemes, the ideas of that same people. I don`t think anyone complained when we had the lowest  long term interest rates for for many years, or when we found very easy credit to buy a car that we always wanted, or when a company got a nice loan, built a factory and got us a job. It`s a bit about complaining that the car broke in the middle of the road after we`ve been using it for 100.000 Km! Well, happiness is not forever, every system, every process, every cycle needs to be constantly changed and improved and in such a complex system as the global economy it`s very hard not to have some problems once ina while.

What I`m trying to say is not that we should do nothing and accept it the way it came, but that we should try to look at it from the outside and understand that this is how things work. That same system that brought as the problem was the one who gave us plenty of solutions, that we were also benefited in the good years (and we had quite a lot of good years , the global economy has been through one of its best moments in the last decades). And the guys who created, as bad or greedy as hey can be, were also responsible to it. Is a certain sense, is a bit like creating a revolutionary car. If one creates a car that runs on water, and that by taking one litre of water will go for 100 Km and it looks wonderful on theory everyone will want one. If after a few years we find this car just stops working in the middle of nowhere after a while we are going to be pissed, but we should remember how good this car was. every new product is a bit avant-garde and has inherent problems in it that will be fixed along the way. And when you are talking about financial products is even worse, because there are no labs, traditional scientific methods that would allow experimentations, you can not experiment on social sciences...

Of course a better regulatory system, perhaps and more concious managenemtn, a system that payd more attention to variations and the long term (Ok, thaks Deming!) would have been usefull, but it is important to look all that came with that experience, and not only a few people and a especific moment of it.

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