global financial crash yay!

J

josef k.

Dangerous Mystagogue
There are a couple of additional questions here, poorly and inexpertly formulated, but worth putting on the board.

Firstly, to what extent was corporate leadership with technology, and to what extent was it acting against it? If it is genuinely the case that new computing logics greatly increase the power of the top at the expense of middle-management, it seems clear that the errors of this class magnify in importance, when they make these errors. This is actually a truism - our hyperconnected world, etc, in which someone sneezes in China (or in Argentina, or Russia) and then stockbrokers in New England catch a cold.

On the other hand - is there a possibility (an old Marxist argument, this one) that existing hierarchies ("relations of production") were in effect operating against the cutting edge of a new (computerised) form of production, and thereby distorting it - so that intra-office, bureaucratic politics came to distort wider business practices.

Finally - and here is were things become strange. In theory, the new logic of power which Sennett analyses (the text is The New Culture of Capitalism) should make business more efficient, more rapid, more practical, irrespective of its human costs, such as they are, and which Sennett also draws attention to. This has not happened - the general stupidity of a company like General Motors, for instance, has become even more pronounced. How to explain this? A lag behind the technological development curve, or what?
 
T

turtles

in the sea
The way I figure it, if the global financial market can now be seen as essentially one large distributed software system, then the current financial meltdown, as triggered by the above mentioned copula function, can be seen as a software bug which entered the system due to an insufficient QA/testing process (ie, extending the model beyond the time period of the "great moderation", testing for edge-cases). High finance became an engineering discipline without anyone really noticing. I bet these companies don't even have QA departments! Instead government regulators have to do all the testing for them, and we all know how well that worked out.
 
vimothy

vimothy

yurp
Turtles -- that's an interesting analogy. But actually, I think they do have QA departments (assuming I know what QA stands for) -- risk management. Or maybe they need QA for their risk management departments. In a sense, after all, the copula is a risk management technology. Banks also use stress tests (another analogy with software development, if I'm not mistaken). From the BoE paper I linked to upthread:

A few years ago, ahead of the present crisis, the Bank of England and the FSA commenced a series of seminars with financial firms, exploring their stress-testing practices. The first meeting of that group sticks in my mind. We had asked firms to tell us the sorts of stress which they routinely used for their stress-tests.

A quick survey suggested these were very modest stresses. We asked why. Perhaps disaster myopia – disappointing, but perhaps unsurprising? Or network externalities -- we understood how difficult these were to capture?

No. There was a much simpler explanation according to one of those present. There was absolutely no incentive for individuals or teams to run severe stress tests and show these to management. First, because if there were such a severe shock, they would very likely lose their bonus and possibly their jobs. Second, because in that event the authorities would have to step-in anyway to save a bank and others suffering a similar plight.

All of the other assembled bankers began subjecting their shoes to intense scrutiny. The unspoken words had been spoken. The officials in the room were aghast. Did banks not understand that the official sector would not underwrite banks mismanaging their risks?
Click to expand...

Which suggests a related problem. Technologies allowed, maybe even ecouraged, banks to take risks. If you're confident that your correlation coefficient is low, that your models are brilliant, that your data-archives are vast -- you can divest decision making onto the technology. You can make LTCM-style mistakes, thinking that the market is wrong and you're right, because your models tell you so. (Perhaps this is also analgous to the discussion about whether humanitarian intervention exacerbates the problems it is trying to solve).
 
hucks

hucks

Your Message Here
Could you post the link to the BoE paper again Vim? I can't find it upthread.

Ta

PS your pm box is full
 
vimothy

vimothy

yurp
Damn that inbox! Should be fixed now.

"Why Banks Failed the Stress Test": http://www.bankofengland.co.uk/publications/speeches/2009/speech374.pdf

Another choice quote from Lewis:

When their three brand-new global-size banks collapsed, last October, Iceland’s 300,000 citizens found that they bore some kind of responsibility for $100 billion of banking losses—which works out to roughly $330,000 for every Icelandic man, woman, and child. On top of that they had tens of billions of dollars in personal losses from their own bizarre private foreign-currency speculations, and even more from the 85 percent collapse in the Icelandic stock market...

Iceland instantly became the only nation on earth that Americans could point to and say, “Well, at least we didn’t do that.”​
 
hucks

hucks

Your Message Here
vimothy said:
Damn that inbox! Should be fixed now.

"Why Banks Failed the Stress Test": http://www.bankofengland.co.uk/publications/speeches/2009/speech374.pdf

Another choice quote from Lewis:

When their three brand-new global-size banks collapsed, last October, Iceland’s 300,000 citizens found that they bore some kind of responsibility for $100 billion of banking losses—which works out to roughly $330,000 for every Icelandic man, woman, and child. On top of that they had tens of billions of dollars in personal losses from their own bizarre private foreign-currency speculations, and even more from the 85 percent collapse in the Icelandic stock market...

Iceland instantly became the only nation on earth that Americans could point to and say, “Well, at least we didn’t do that.”​
Click to expand...

I like this one

“We were always told that the Icelandic businessmen were so clever. They were very quick. And when they bought something they did it very quickly. Why was that? That is usually because the seller is very satisfied with the price.”​
 
vimothy

vimothy

yurp
After three days in Reykjavík, I receive, more or less out of the blue, two phone calls. The first is from a producer of a leading current-events TV show. All of Iceland watches her show, she says, then asks if I’d come on and be interviewed. “About what?” I ask. “We’d like you to explain our financial crisis,” she says. “I’ve only been here three days!” I say. It doesn’t matter, she says, as no one in Iceland understands what’s happened. They’d enjoy hearing someone try to explain it, even if that person didn’t have any idea what he was talking about—which goes to show, I suppose, that not everything in Iceland is different from other places.​
 
vimothy

vimothy

yurp
I also like,

Fishermen, in other words, are a lot like American investment bankers. ​

And,

The fish had not only been privatized, they had been securitized.​

But best of all is,

Since its fishing policy transformed Iceland, the place has become, in effect, a machine for turning cod into Ph.D.’s.
​

I'll stop now...
 
T

turtles

in the sea
Thinking about this some more, there certainly are similarities between a bank's Risk Management group and an engineering QA department (QA = quality assurance = testing) as they both have the same general purpose: "make sure we don't fuck up!" The one thing that makes a QA process better than a risk management process is that QA essentially assumes that extreme conditions, the outside-chance edge cases, will occur at some point and tries to make sure the system can handle them successfully. Whereas Risk Management seems more about determining the likelihood of the extreme cases, which, if deemed unlikely enough, do not need to be dealt with at all.

QA is based on the understanding that over a long enough time scale the probability of extremely unlikely events occurring approaches 1, and furthermore, that these events are the ones that can most seriously bring down your system, so you damn well better plan ahead.

Of course anyone who's used a buggy piece of software before (that is to say *everyone*) knows that the QA process can break down pretty easily as well. To make another software analogy: what this crash resembles is a piece of software that was rushed out to market too soon in order to meet a perceived demand, and consequently having a lot of bugs due to the lack of time for QA. The same "good enough!" mentality from management even applies. The product is good enough to generate revenues in the short term and longer-term systemic problems can be dealt with in "a later release" which never really materializes until much too late.

It's like the whole worldwide financial system was running v1.0 of Windows Vista.

(lol, yes I am in the midst of a QA process myself so this stuff is heavily on my mind)
 
vimothy

vimothy

yurp
That distinction makes a lot of sense. I guess that while software engineers are trying to eliminate risk, financial intermediaries are trying to accurately price it and pass it on to those who are willing to bare it. At least, that's what they should be doing. The banks' risk managers either failed to point out their over-exposure, or were ignored.
 
vimothy

vimothy

yurp
If anyone wants to hear a really good, really straightforward, radio show on the financial crisis, they could do a lot worse than check out these episodes of This American Life, written by NPR Planet Money producers and featuring loads of different perspectives and view points, from academics and market participants, to people losing their homes and dealing with personal debt. Pretty much jargon free and even quite good fun (though I may be a geek -- caveat emptor). IIRC, the three shows correspond to roughly the credit expansion, contraction, and the aftermath phases, but with special focus given to explaining and illustrating exactly what the fuck is going on, in a language anyone can understand:

 
J

josef k.

Dangerous Mystagogue
The VF piece is hilarious. My favourite exchange is:

“You spent seven years learning every little nuance of the fishing trade before you were granted the gift of learning from this great captain?” I ask.

“Yes.”

“And even then you had to sit at the feet of this great master for many months before you felt as if you knew what you were doing?”

“Yes.”

“Then why did you think you could become a banker and speculate in financial markets, without a day of training?”

“That’s a very good question,” he says. He thinks for a minute. “For the first time this evening I lack a word.”
 
vimothy

vimothy

yurp
The people who work for AIG have got some big cojones, eh? Got to admire it.

Anyway, when is everyone going to take their own advice, nationalise the banks, sack the fecking idiots, and cut the banks up into pieces that aren't "too big to fail"?
 
vimothy

vimothy

yurp
Well, I'm not sure that I think the banks should be nationalised permanently, rather than just as per the standard IMF response of nationalising failing banks, replacing their management, restructuring them and selling them off to the private sector. If we were talking about Indonesia and not the US, this would likely already have happened.
 
J

josef k.

Dangerous Mystagogue
So, here's the current news, as I understand it:

1) Brown is printing money in the UK, in an effort to inflate the British economy out of its debts.

2) Surge of populist anger rising in the USA.

3) Growing schism between USA (and UK) and Europe (led by Germany) over question of stimulus package. USA needs stimulation, having dismantled their social programs. The stimulus is a social program. Germany less interested, as its welfare system is mostly intact, but has problems with exports.

Recommendation: USA should sell Alaska to the Chinese.
 
vimothy

vimothy

yurp
Although a cynic might say that many European states are hoping to get their stimulus straight out of the US budget deficit.
 
vimothy

vimothy

yurp
Let's go further: there are many European countries with dire problems (Ireland, Greece, Hungary, Italy, etc). However, getting the EU to do anything about it is unlikely. To be precise, Germany is unwilling to have anyone else's recession for them. Thus Europe's problems are, in a sense, more severe than America's. At least America is able to act.
 
You must log in or register to reply here.
Top