Re: [Fis] informational economics?, msg from Igor M.
Dear Igor, Pedro, list. If there is any sense in which these networks are "anticipatory" I agree that it is not in the sense that they are predictive. If the term can be applied to these networks at all it is in the sense that the individuals involved "anticipate" reward. The behavior associated with that disposition is simply modified (mitigated) according to the conventions the individuals embody. This is inevitable behavior and is entirely seperate from any information model embodied or prediction individuals may make as a result of that model. With respect, Steven -- Dr. Steven Ericsson-Zenith Institute for Advanced Science & Engineering http://iase.info http://senses.info On Nov 3, 2008, at 1:26 AM, "Pedro C. Marijuan" <[EMAIL PROTECTED] > wrote: > message from > Igor Matutinovic > Managing Director > GfK-Center for Market Research > > > Pedro raised an interesting question that deserves discussion - if > anything because the last crisis cost tax-payers few trillions of > dollars in the US and Europe. > > First, we should define what do we mean by calling financial flows > "anticipatory" information flows? Are all financial flows > "anticipatory" > and what they, if any, "anticipate". > > Let equate "anticipatory" with foresight, forethought, forecast - a > kind > of "objective", "rational", forecast of future events. > > Traditional activity of banking is lending to business and > households by > using a security collateral (assets, income ..). It would be difficult > to demonstrate that this activity is anticipating or enabling any > major > change in economic structure or consumer behavior. Innovation in > business (new technologies and marketing ideas) is usually financed by > venture capital, which is outside the banking system. Lending in its > traditional aspect just helps the extant structure getting bigger. > It is > "following" in the established footsteps, not "predicting", and the > risk > involved is minimal for the bank as well as the interest rate > charged to > clients. > > Investment banking, on the other hand, involves sale of securities, > facilitating mergers and other corporate reorganizations, acting as > brokers etc.. This activity is better called speculative than > anticipatory - speculative in terms of bets on future events like a > direction of a stock index, or commodity. The essence of these bets is > closer to casino gambling than to anything else. It would be > meaningless > to consider that taking a position on the "red" is "anticipatory" in > any > sense. > > The origins of the current financial crisis are multiple, as is the > norm > in any complex system. In the real sector - the housing market - the > construction of new houses must have exceeded sound demand - those > clients that can repay mortgage (with low probability of default, > which > the bank can insure against with the insurance companies). So we start > with an overproduction of houses which have difficulty finding quality > buyers. To move the houses "off the shelf" the mortgage brokers turned > to "Ninja" clients (no income, no job, no assets) and irresponsibly > (!) > concluded housing sales (cashing in their commission at NO risk) and > let > the banks finance the client. Banks in cooperation with investment > banks > afterwards securitized these (bad) mortgage loans into three > tranches of > different degree of risk (AAA; BBB; CCC) and sold them thereafter to > other banks and investors around the world. The rating of the > securities > by independent institutions was at least irresponsible if not > fraudulent. The whole process of selling new homes to Ninja buyers was > based on the expectation that the housing prices will continue to > rise, > forever ... Every financial institution involved with creation and > sales > of securities (e.g. Collateral Default Obligation, or Credit Default > Swap) based on mortgage loans ) had real or fictitious earnings or > booked an - to be found later, fictitious - increase in the value of > assets in the Balance Sheet. Brokers and managers wer paid their > bonuses > on the base of it. > To cut it short, the whole structure crumbled when Ninja's started to > default on their loans, and there were too many of them to fit into > insurance default statistics... > > The learning's: financial flows were not "anticipatory" - 99% of the > financial industry, FED, etc.. were caught by surprise. Lack of > regulation, greed, and irrational expectations (that housing prices > will > keep increasing, that Ninja's will be repaying debt, etc..) were at > the > basis of the crash. The "informational layers" - the so called > "structured products" or derivatives that increased the complexity of > international financial system on one side, and blurred its > transparency > with respect with fundamentals on the other, were basically fraudulent > and had no
Re: [Fis] informational economics?, msg from Igor M.
message from Igor Matutinovic Managing Director GfK-Center for Market Research Pedro raised an interesting question that deserves discussion - if anything because the last crisis cost tax-payers few trillions of dollars in the US and Europe. First, we should define what do we mean by calling financial flows "anticipatory" information flows? Are all financial flows "anticipatory" and what they, if any, "anticipate". Let equate "anticipatory" with foresight, forethought, forecast - a kind of "objective", "rational", forecast of future events. Traditional activity of banking is lending to business and households by using a security collateral (assets, income ..). It would be difficult to demonstrate that this activity is anticipating or enabling any major change in economic structure or consumer behavior. Innovation in business (new technologies and marketing ideas) is usually financed by venture capital, which is outside the banking system. Lending in its traditional aspect just helps the extant structure getting bigger. It is "following" in the established footsteps, not "predicting", and the risk involved is minimal for the bank as well as the interest rate charged to clients. Investment banking, on the other hand, involves sale of securities, facilitating mergers and other corporate reorganizations, acting as brokers etc.. This activity is better called speculative than anticipatory - speculative in terms of bets on future events like a direction of a stock index, or commodity. The essence of these bets is closer to casino gambling than to anything else. It would be meaningless to consider that taking a position on the "red" is "anticipatory" in any sense. The origins of the current financial crisis are multiple, as is the norm in any complex system. In the real sector - the housing market - the construction of new houses must have exceeded sound demand - those clients that can repay mortgage (with low probability of default, which the bank can insure against with the insurance companies). So we start with an overproduction of houses which have difficulty finding quality buyers. To move the houses "off the shelf" the mortgage brokers turned to "Ninja" clients (no income, no job, no assets) and irresponsibly (!) concluded housing sales (cashing in their commission at NO risk) and let the banks finance the client. Banks in cooperation with investment banks afterwards securitized these (bad) mortgage loans into three tranches of different degree of risk (AAA; BBB; CCC) and sold them thereafter to other banks and investors around the world. The rating of the securities by independent institutions was at least irresponsible if not fraudulent. The whole process of selling new homes to Ninja buyers was based on the expectation that the housing prices will continue to rise, forever ... Every financial institution involved with creation and sales of securities (e.g. Collateral Default Obligation, or Credit Default Swap) based on mortgage loans ) had real or fictitious earnings or booked an - to be found later, fictitious - increase in the value of assets in the Balance Sheet. Brokers and managers wer paid their bonuses on the base of it. To cut it short, the whole structure crumbled when Ninja's started to default on their loans, and there were too many of them to fit into insurance default statistics... The learning's: financial flows were not "anticipatory" - 99% of the financial industry, FED, etc.. were caught by surprise. Lack of regulation, greed, and irrational expectations (that housing prices will keep increasing, that Ninja's will be repaying debt, etc..) were at the basis of the crash. The "informational layers" - the so called "structured products" or derivatives that increased the complexity of international financial system on one side, and blurred its transparency with respect with fundamentals on the other, were basically fraudulent and had no functional linkage to the real sector, except to help clear the stocks of unsold houses. But this surely was not the most "efficient" way to do it ... The point is that (all) markets must be increasingly regulated as the global economic system becomes spontaneously more complex. Self-organized, informational networks (financial or whatewer) do not suffice to serve the need for economic and social stability of modern societies. Therefore, the tax-payers money must occasionally be used to cover damages that arise from inherent malfunctions of the market informational networks ... The best Igor Dr. Igor Matutinovic Managing Director GfK-Center for Market Research Draskoviceva 54 100 00 Zagreb, Croatia Tel: 385 1 48 96 222, 4921 222 Fax: 385 1 49 21 223 www.gfk.hr Before printing this e-mail, please consider environment protection. -Original Message- From: [EMAIL PROTECTED] [mailto:[EMAIL PROTECTED] On Behalf Of Pedro C. Marijuan Sent: W
