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: Wednesday, October 29, 2008 12:58 PM To: fis Subject: [Fis] informational economics? Dear FIS colleagues, Some aspects of the current financial crisis might be related to discussions we had in this list on information and the nature of economic flows years ago ("economic networks", and also, central aspects of ecological "ascendancy"). The amazing growth of financial assets of many kinds during last decade may have conduced finally to a brutal crisis like the current one, not just for "greed" or political lack of control, but also for dearth of scientific understanding. I would argue that: 1. Financial flows are "anticipatory" information flows that preclude the structural changes and the evolution to follow by real economic structures. 2. Without financial anticipation, economic changes could not keep pace with technology & science progress due to the "viscosity" of social and legal webs of relationships. 3. The creation of successive informational (financial) layers becomes an exercise in complexity accumulation, that almost inexorably leads to cross instability thresholds and a general loss resilience. 4. Though the financial info is a sort of virtual builder, a potential energy of sorts, it has to suffer "closure" upon the real economy; then its excessive flows in out from some sector (eg, housing in some strategic countries), amplified in the global complexity, have now potential to destabilize the whole financial layers and bring the real economy to havoc. 5. Economy is an informational systems, in crucial aspects, not well explained yet... advancing an "info economics" would be quite timely. Would it be interesting to argue on some of these very roughly penned aspects (while our pockets get emptier and emptier)? best Pedro PS. The recent track on foundations of art is still worth of some further comment... ------------------------------------------------ Pedro C. Marijuán Grupo de Bioinformación Instituto Aragonés de Ciencias de la Salud Avda. Gómez Laguna, 25, Pl. 11ª 50.009 Zaragoza. España Telf.: 34 976 71 3526 Fax: 34 976 71 5554 [EMAIL PROTECTED] ------------------------------------------------ _______________________________________________ fis mailing list fis@listas.unizar.es https://webmail.unizar.es/cgi-bin/mailman/listinfo/fis _______________________________________________ fis mailing list fis@listas.unizar.es https://webmail.unizar.es/cgi-bin/mailman/listinfo/fis
