Too complex to succeed

By David James.

A common observation is that the financial system got into trouble because of the invention of securities that were too complex for ordinary investors to understand. This is true, but it should be more closely examined. Warren Buffett is no doubt right in noting the sociological implications for the finance and business tribes: “The business schools reward difficult complex behavior more than simple behavior, but simple behavior is more effective.” Such preference for complexity applies especially to the financial markets. If an investment strategy sounds complex the assumption tends to be that there is a high level of intelligence involved (true) and that this will result inevitably in better returns (probably false — witness the fate of Long Term Capital Management, not to mention the GFC).

In finance, the question should be asked — what is this complexity? It is the establishment of sophisticated new rules. Because, as I have long argued, money IS rules. The complexity is the creation of new, more sophisticated rules, and the insanity of what has happened in the financial system over the last decade is that traders, not governments, have been allowed to make up their own rules. The basic rules of money, such as those applying to bonds, shares, insurance, have been overlaid with increasingly complex meta-rules created, in many cases, by scientists formerly from NASA. Two of these new rules, collateralised debt obligations and credit default swaps, almost destroyed the world’s system of money in 2008.

I am sorry if this is getting a bit repetitive, but until this is understood, no solution will be found; the danger will persist. It is a simple case of a popular metaphor deluding everyone. For example Terri Duhon, the JP Morgan banker commented in a documentary that she thought credit default swaps were fine because they created credit and credit is the “lifeblood” of the economy.

Note the metaphor. Blood. Coursing through the veins of a body. Sounds fine, but it is false. Credit is a transaction, an agreement between people that allows them to behave in a particular way with confidence. It is not a fluid. Neither is it the case that if more of this “fluid” is created that everything will improve, the body will be flush with colour or something. What happens is that more people are able to transact, which relies entirely on how the basis of those transactions will hold good.

And what is the basis of the transactions? A set of rules. Obviously, if excesses occur, then the rules will not hold up. It becomes even more dangerous when new rules are invented, creating multiple layers of rules. Not only does this put more pressure on the basic rules. For example, the more mortgage securitisation you have (CDOs etc), the more it imperils the basic rule of a mortgage, that the bank lends you money to buy a house and you pay it back in a certain time.

You also add the extra risk that there will be too much pressure on the new rules as well. In other words, the more rules you allow people to make up, the more chance that some of them will fail at some point. And then you imperil the very system of rules that is money, which is exactly what happened. Paul Kanjorski, former chairman of the subcommittee on Capital Markets said that on a Thursday in September 2008 $550 billion was drawn out of US money market accounts in one morning:

The Treasury … pumped $105 billion into the system and quickly realised they could not stem the tide. We were having an electronic run on the banks. They decided to close the operation, close down the money accounts, and announce a guarantee of $250,000 per account so there wouldn’t be further panic …
If they had not done that their estimation was that by 2pm, $5.5 trillion would have been drawn out of the money market system of the United States, [collapsing the national economy] and within 24 hours the world economy would have collapsed. It would have been the end of our political and economic systems …

This is what a collapse in the system of rules looks like. In this case, the Treasury was able to impose a rule of guarantee that saved the system. If not, money itself would have been imperilled.

There is a further problem with allowing such a complex system of rules to be created. It is that the rule system becomes a law unto itself, a rule system that generates its own rules and logics, eventually becoming unmanageable. This is what the absurdity of high frequency trading is inclining towards. This is the application of algorithms to the basic rules of finance which sets off a chain of new algorithms, followed by algorithms that chase those algorithms and so on. All justified by calling it extra “liquidity” (another fluid metaphor).

Once again, it is just an increased frequency of transactions that relies on the basic rules of markets to exist. Eventually it will result in either the basic rules failing or the sophisticated rules failing. There is only one solution. Stopping the financial sector from making up its own rules. (Moving back to a gold standard, I might add, may limit some of the rule making debauch, but gold mainly has value because that is the rule. It is just the rule made more physical.)

Instead, governments are encouraging them, as the New York Times notes:

Which institutions hit this jackpot? Clearinghouses. These are large, powerful institutions that clear or settle options, bond and derivatives trades. They include the Chicago Mercantile Exchange, the Intercontinental Exchange and the Options Clearing Corporation. All were designated as systemically important financial market utilities under Title VIII of Dodd-Frank. People often refer to these institutions as utilities, but that’s not quite right. Many of these enterprises run lucrative businesses, have shareholders and reward their executives handsomely. Last year, the CME Group, the parent company of the Chicago Mercantile Exchange, generated almost $3.3 billion in revenue. Its chief executive, Craig S. Donohue, received $3.9 million in compensation and held an additional $10 million worth of equity awards outstanding, according to the company’s proxy statement.

Make no mistake: these institutions are stretching the federal safety net. The Chicago Merc clears derivatives contracts with a notional value in the trillions of dollars. I.C.E. clears most of the credit default swaps in the United States — billions of dollars a day, on paper. No wonder they are considered major players in our financial system.

Nothing, in short, has been learned.

 

 

Comments

  1. “Any intelligent fool can make things bigger and more complex. It takes a touch of genius .. and a lot of courage .. to move in the opposite direction.”

    – Albert Einstein

    • The whole problem with the world is that fools and fanatics are always so certain of themselves, and wiser people so full of doubts.
      (Bertrand Russell)

      • “When one admits that nothing is certain one must, I think, also add that some things are more nearly certain than others.”

        – Bertrand Russell

        “If you would be a real seeker after truth, it is necessary that at least once in your life you doubt, as far as possible, all things.”

        – Rene Descartes

      • No, the problem arises when society and its reigning mythology become so decadent and corrupt that fools and fanatics make just as much or even more sense than the authorities do. Or to put this another way, crisis occurs when the authorities have so little legitimacy and credibility that the reigning mythology is no longer believed in.

        In Western Civilization, this has happened three times: once in the 14th to 17th centuries when Christianity was in acute, and fatal, crisis, from which Modernism arose; once in the period 1870-1945 when Modernism was in acute crisis, and once again now as Modernism enters another phase of acute crisis.

    • +10. Brilliant! Would be nice if the management acts in a simple and more efficient way. Maybe then Australia will have brighter future after mining.

  2. “There is only one solution. Stopping the financial sector from making up its own rules.”

    Indeed. And the only way to do that, IMHO, is render the “financial sector” redundant.

    And the only way to do that, IMHO, is to seek maximal decentralisation of the power to create “money”, by introducing an alternate “money” creation system, whereby every individual is empowered to create their own “money” ex nihilo — just as the banksters do now — subject to a uniform set of unbreakable, pre-programmed rules, and conduct transactions via P2P networking.

    “To radically shift regime behavior we must think clearly and boldly for if we have learned anything, it is that regimes do not want to be changed. We must think beyond those who have gone before us and discover technological changes that embolden us with ways to act in which our forebears could not.”

    – Julian Assange, Conspiracy As Governance (2006)

    • In The Evolution of Civilization, the historian Carroll Quigley spoke of how the “instruments” of society degenerate into the “institutions” of society. Quigley was not a fan of the linear theory of history, so integral to Modernist thought, which holds that mankind is on a steadily upward pathway to progress. Instead mankind exists in civilizations that are cyclical: they are born, they grow old and decadent and corrupt, and they die.

      For Quigley, then, an instrument “is a social organization that is fulfilling effectively the purpose for which it arose.” An institution is “an instrument that has taken on activities and purposes of its own, separate and different from the purposes for which it was intended.” Finance, it is becoming quite obvious, has become institutionalized and no longer serves the purpose for which it arose.

      “Military history,” Quigley points out, “offers numerous examples of the institutionalization of instruments.” The advent of gunpowder, for instance, made cavalry obsolete before the end of the 19th century. And yet, Douglas Haig announced firmly, “Cavalry will have a larger spehere of action in future wars.” That was in 1904. During WWI, John Pershing’s obsession with the importance of cavalry made it necessary for him to carry on two wars, one against the Germans and another, almost equally virulent, against Peyton C. March, Chief of Staff in Washington.

      In another book titled The American Heritage Picture History of WWII is a photograph of the Polish cavalry during maneuvers in 1939. “The Poles were brave,” the text reads, “but their valor was largely futile, as on one occasion when a brigade of horse calvary armed with lances attacked a Nazi tank column.” The polish cavalry “tried to stop Nazi panzers and were slaughtered.” Within a week the German ground forces and the Luftwaffe had wrecked the Polish Army.

      Our finance industry is not a whole lot different from those cavalry brigades of 1939.

  3. I keep making a contrary argument to this.

    There was never anything wrong with the principle of derivatives, what went wrong to cause the GFC, was the serious under-pricing of the risk of house prices falling. If it was not for this, there would have been no GFC.

    If the insurance underwriting industry somehow believed natural disasters had stopped happening, and underpriced the risk accordingly, the next big one that came along would result in “systemic risk” too; and it would be worse because disaster insurance would have been too cheap, and a lot of over-insurance could have taken place.

    Howard Bloom in “The Genius of the Beast” argues that every new innovation in finance and banking has caused a crisis initially – including cheques – but then the industry learns how better to deploy the innovations and a new phase of stable growth occurs. Derivatives could be like this.

    • I do agree that there is too much complexity and opaqueness in a lot of the way that these instruments are marketed; this is a problem that at least partly relates to an under-educated, logic-lacking generation that somehow still has money to invest. This goes for a lot of the people doing the marketing too.

      But some of them are just plain “too complex” and investors should not touch them if they don’t understand them. It has been a matter of controversy that finance dealers tend to push stuff that is good for them and their firm, not for the client. This is another problem, relating to a decline in morality.

      • The key difference between insurance of a natural disaster has two elements: finance (insurance) and disaster (natural event). They are different, which creates a level of clarity, if not necessarily simplicity. But what has happened with derivatives and HFT is that you get money underwriting money, underwriting money underwriting money … There is no clarity, because it is just a blizzard of rules, some old, some newly made up. Derivatives seem somehow less “real” but they are still money … sort of. When they are on the margin and there is a clear demarcation, such as an insurance contract on wheat, then they are fine. But that is now what has been happening. I would argue not for eliminating them, but to say make sure they are tied to something other than money, such as a commodity, which was the case before. That way you do not get rules on rules on rules, ad infinitum.

      • I think it reasonable to argue that the unfettered power for banksters to create “derivatives” on anything has clearly gone way too far — and as you say, points very clearly to a decline in morality — when few if any bat an eyelid at Death Derivatives.

        Allowing banksters to create and trade bets on when you and I will die, strikes me as a very dangerous new set of “rules” for speculative profit-seeking.

        Especially with so many Malthusian and eugenics-minded types, often in high places, screeching on about “overpopulation”.

    • “There was never anything wrong with the principle of derivatives, what went wrong to cause the GFC, was the serious under-pricing of the risk of house prices falling”

      There are those who have argued that a central cause of the GFC was less the “under-pricing of risk”, and more the widespread adoption of the Li Gaussian Copula formula –

      <a href="http://www.wired.com/techbiz/it/magazine/17-03/wp_quant?currentPage=all"Recipe For Disaster: The Formula That Killed Wall Street

      • But that is essentially the same as saying that risk wasn’t being correctly priced. Which it wasn’t. Because the underlying assumption in that model (as with others) was that correlations between specific assets would behave in a certain way. Which maybe they do a lot of the time, right up until they don’t. What does tend correlate to 1 in a trading environment, though, is the propensity for each individual trader’s fear impulse to dominate their capacity for rational behaviour. There is no diversifying away the underlying risk inherent in an economic system – which is ultimately that of the human behavioural impulses that drive economic activity. One of the primary objectives of government (and by extension the monetary system that enables it), is that on a very basic, simple level – people feel that “everything’s fine, carry on”. It’s not for nothing that governments of every colour roll out the tanks (some more literally than others) to promptly quell the prospect of subversion.

        Sorry, I think I have lost the thread of my original thought there. The lawn needs mowing anyway. Off to it.

      • Apologies if it may at first glance appear to be hair-splitting, but I don’t see it as such. To clarify: Phil pointed to “under-pricing” of risk. You are suggesting that my reference points to incorrect pricing, and argues this is the same thing. What I think is the key take from the article is that the formula employed in the creation of myriad new derivatives did not price risk at all … it simply assumed the existing market pricing of risk to be correct –

        “Li wrote a model that used price rather than real-world default data as a shortcut (making an implicit assumption that financial markets in general, and CDS markets in particular, can price default risk correctly).”

        Per SoN’s observation, this is a classic example of piling rules on rules on rules.

      • Your article is essentially about underpricing of risk. But not too worry. It’s been underpriced. We’re paying the true cost now. And so it goes.

      • Interesting points, all.

        “Death Derivatives”?

        Come ON. There has to already be laws against this sort of thing on grounds that are nothing to do with finance sector regulation/deregulation.

        As an aside, I often wondered whether the law of copyright that dated the duration of copyright from the author’s death (rather than date of publication), was a potential source of problems – someone should use this as the plot for a thriller movie. It seems to me slightly odd that a commercial publisher who has bought a copyright from an author, stands to gain from the author living longer. The publishers that hold George Gershwin’s copyrights would have made a lot more money had he lived to a greater age.

      • Hedge funds – and by extension some Australian super funds – have already been playing in the mortality risk space for some time. It’s hidden there somewhere in their ‘alternatives’ risk bucket. Not illegal. Not immoral. An uncorrelated asset. A financial innovation. German pension funds are already probably trading in them against specific pools of the Greek population.

  4. My problem with the argument is where do you stop when retreating into “non-complexitiy”?

    At evry point in time in modern financial history the current period and how the system was operating would appear more complex than the previous period. So by definition moving to greater levels of complxity has had systemic benfits over the long term

    The answer lies not in complexity but in information and education which create an understanding of the complexity making it no longer seen to be complex. The rules of finance and money should be aimed at creating this understanding.

    The real banksters revel in misunderstood complexity or creating unnecessary complexity again out of general market ignorance. Understanding crushes complexity and the banksters. I do agree however that its a never ending battle

    • That assumes that we have advanced because of financial innovation. On balance, I think that it is reasonable, because some of the sophistication allowed new types of transactions to occur. But this latest spate of “innovation” is on a new level entirely, as evidenced by the GFC. It has undermined the distinction between the rules of money and the wealth creation that those rules are designed to reflect. There was an interesting point made in the doco on Wall Street. A fellow said there are two schools of thought: one that complex risk risk always ends up in the hands of the smartest people in the market, the other that it ends up in the hands of the dumbest. The person concluded, based on his observation, that the latter applied.

    • The answer lies not in complexity but in information and education which create an understanding of the complexity making it no longer seen to be complex. The rules of finance and money should be aimed at creating this understanding.

      The real banksters revel in misunderstood complexity or creating unnecessary complexity again out of general market ignorance.

      Good point, it’s a reality I confront every day at work.

      I remember looking the Investment manager in the eye, when discussing the GFC, and saying “But we’re part of that” when disclosing what can, and does go wrong.

      I remember hearing someone saying ‘there’s no such thing as bankers anymore, they’re all salesmen’. It was pointing to how these senior people approach what they do.

      I would therefore point to the incentives in place, particularly from a game theory point of view.

      I would argue a lot of bankers knew this was going to blow up by 2005. But say from an Australian perspective, if Norris said ‘nup, too much risk so we’re pulling out of the game’.

      technically, the right decision.

      But their share price would plummet and WBC, NAB and ANZ would just take up the market share.

      The right decision gets punished, unless you pick bottoms at the right time of course.

      It’s easier for them to herd together, and each leap off the cliff, to then all say ‘we didn’t see it coming’

      They will do this because they are remunerated by volumes, not risk.

      Game theory explains this precisely.

      When discussing the post WWII arms race, it was theorised, according to game theory, that it would have to lead to a nuclear war.

      If the threat to use a weapon never eventuated, then the weapon is seen as a hollow threat and ignored. Thus its force would have to be demonstrated to enforce its threat perception.

      The failure of game theory would also apply to ‘chicken’ as a game of two oncoming cars.

      I would argue that the prospect of death overcomes the bad decisions being made under game theory.

      ‘Death’ to banking participants (whether than means figuratively as in total financial destitution, or real; the death penalty) should correct their decision matrix.

      Getting back to your statement, particularly the lead of the second paragraph, there is no incentive for ‘salesmen’ to not be ignorant of their product.

      As I alluded to, they are incentivised to push volume. Being ignorant, and make information about the product opaque probably aids them in maximising volume.

      • RP
        How do you break free of the circularity in all of this, from a practical, strategic political point of view ? I mean, in the sense that shareholders in banks (increasingly owned by superannuation funds in this country at least), are increasingly dependent on the dividend stream/capital growth of those bank shares for the value of their retirement funds, who have no incentive to hold to account the Trustees of those funds who place them with institutional fund managers who have clear incentives to manage close to the index (meaning they’re always going to hold banks near benchmark weight), and as such bring their influence to bear on the management of said banks to be competitive in the game, which the banks do by focussing on means of ‘innovating’ away the risk of issuing ever increasing amounts of debt to the same investor participants (via super) in their bank capital.

        How do you take away those incentives in the system, at a political level, without destroying the base that effectively gets you elected ?

      • How do you break free of the circularity in all of this, from a practical, strategic political point of view ?

        The only way I can think of it is if a party has the express mandate to say “If a bank goes under, we will let it fail, no guarantees”, ultimately a bank failing is a result of agents making poor decisions.

        I have proposed before that only for ADI’s, as they are a unique type of business, that federal government legislation be that upon a bank failing, the government assume 100% ownership for $1, and only domestic deposits up to 10 times AWOTE be protected.

        So letting it be known that the bank will ‘die’, then the banks owners will correct the behaviour and instruct their agents where to go. After all, boards are meant to hold executives accountable.

        I mean, in the sense that shareholders in banks (increasingly owned by superannuation funds in this country at least), are increasingly dependent on the dividend stream/capital growth of those bank shares for the value of their retirement funds, who have no incentive to hold to account the Trustees of those funds who place them with institutional fund managers who have clear incentives to manage close to the index (meaning they’re always going to hold banks near benchmark weight), and as such bring their influence to bear on the management of said banks to be competitive in the game, which the banks do by focussing on means of ‘innovating’ away the risk of issuing ever increasing amounts of debt to the same investor participants (via super) in their bank capital.

        How do you take away those incentives in the system, at a political level, without destroying the base that effectively gets you elected ?

        That’s a hard one.

        A lot of those structures you describe I would assert are related to the profit share/wage share (labour/capital) equation. A whole lot of garble will be involved will try to rationalise it away or express it as something else from the class war it actually is.

        Increasingly we have seen wage share fall with the beneficiary being capital.

        We have a unique situation with a demographic bulge via the baby boomers seeing a lot of capital (accrued savings) pursuing the same amount of wealth creation (productivity). More demand for the same supply to me says return on capital should be more expense, i.e. reduced yield.

        I could assume a model that was to express wage share fixed at 62% and profit share at 20%. More savings chasing this 20%.

        What we have seen of course is the 20% blow out to 28%, and wage share drop from 62% to 54%.

        The letter is what pension recipients want to hear, and I doubt many would understand the justification for the former if it happened that way, especially baby boomers and their anchoring of expectation to ‘high growth’ environment, and being that demographic bulge during their working lives.

        And this labour/capital equation all sits with counter party behaviour. Other agents of finance are only all too keen to leverage up via ‘equity mate’. There are masses of financial agents who believe they are doing the best by their clients with such advice.

        They are carrying out their fiduciary duties, to the best of their understanding.

        So back to how banks behave, they are essentially utilities. In reality, those seeking the dividends are creating another push on the business to take on more risk as to have it behave, thus return, as something that returns more than a utility.

        Add in the allure to sociopathic managers that money creation provides, and the best PR that can capture government response, and all of a sudden we are beholden.

        So to fix it… it is why I added in the death penalty.. I wasn’t being glib.

        Banks have extraordinary privilege, the biggest carrot. Time to introduce the biggest stick.

        When a message is introduced to say ‘you may defraud for the biggest amount of money, but you won’t be alive to enjoy it’, you will adjust behaviour.

        Political solution, the idealist in me says sit firm, the pragmatist in me says it won’t happen until it all comes crashing down. When it does, then you can capture their attention, educate them to how it works, and build up from the ashes.

        And until then, enjoy then decline.

      • Rusty Penny said:

        A lot of those structures you describe I would assert are related to the profit share/wage share (labour/capital) equation.

        That equation, however, is rapidly becoming obsolete, as Steve Keen explains here:

        • “Anyone who believes that exponential growth can go on forever in a finite world is either a madman or an economist” (Kenneth Boulding)

        • All schools of economic thought treat production as function of Labor & Capital inputs
        –Only inherent limits seen are supply of those inputs

        • Reality: production involves transformation of inputs into outputs

        • Transformatin takes energy

        Must obey the Second Law of Thermodynamics
        http://www.debtdeflation.com/blogs/2012/11/16/energy-production-and-entropy/?cp=1

        As the evolutionary biologist David Slaon Wilson points out in Darwin’s Cathedral, “Even massively ficticious beliefs [like classical and neoclassical economics] can be adaptive, as long as they motivate behaviors that are adaptive in the real world.”

        Classical and neoclassical economics, however, clearly no longer fulfill this function.

      • I should have included Marxist and Austrian economics to the list along with classical and neoclassical economics. As Keen points out, they’re all massively fictious belief systems.

      • The other thing your analysis is missing, RP, is that the increased share of the pie going to capital is not going to “traditional” (ie productive) capital at all, but to what Keen calls “the roving cavaliers of credit”, ie the financiers. I suppose there must be some reason we are paying them such a huge cut, but I haven’t yet worked out what it is.

    • Deep T said:

      The answer lies not in complexity but in information and education which create an understanding of the complexity making it no longer seen to be complex. The rules of finance and money should be aimed at creating this understanding.

      Well that certainly is an iteration of the Modernist manifesto. As the theologian Reinhold Niebuhr put it,

      Rationalists inclined to believe that injustice could be overcome by increasing the intelligence of men…. This faith of the Enlightenment is still the creed of the educators of our day and is shared more or less by philosophers, psychologists and social scientists. The sorry plight of our civilization has qualified it only in the slightest degree.
      REINHOLD NIEBUHR, Moral Man & Immoral Society

      It’s also known as “the deficit model,” as Naomi Oreskes points out here in a presentation to the Science Network:

      …it carries the implication that most ordinary people are stumbling around in the dark and it is up to us to enlighten them, a variation on a theme that is familiar to scholars in science studies, a theme that we call the deficit model. That is to say that the problem with the public is a deficit of knowledge, education and cognitive skills.
      http://thesciencenetwork.org/programs/beyond-belief-candles-in-the-dark/naomi-oreskes

      As Oreskes goes on to explain, belief in the deficit model triggers a supply-side solution: public education, K-12 science education, statements on web pages and various other ways to supply the public with the necessary information.

      The problem with this solution is that, as she points out, it doesn’t work.

      Students of history, however, already knew this. As Eric Hoffer noted of 1930s Germany: “It colors my thinking and shapes my attitude toward events. I can never forget that one of the most gifted, best educated nations in the world, of its own free will, surrendered its fate into the hands of a maniac.”

    • I don’t believe it was the complexity of the Gaussian Copula’s or the concepts of Martingale risks that was poorly understood, rather the GFC was the result of financial institution’s accepting risks that they could never hope to pay-out against. This is really a form of insurance fraud, so it is interesting that derivatives lobbied successfully for legislation that prevented them being treated as Insurance product.

      The Gaussian Copula failed completely as a suitable formula for pricing CDS risk because the US entered a period of correlated Real Estate price declines. The correlation of the decline in RE prices is at the heart of the risk miss-pricing.

      Looking forward, what concerns me most of all is the protection that has been afforded financial institutions (too big to fail) vs the real (main st) economy. Clearly WS is back to business as usual while Main st tries to pay of the debt.

      The real problem is that the world can’t afford to play a second round of this game!

  5. “(Moving back to a gold standard, I might add, may limit some of the rule making debauch, but gold mainly has value because that is the rule. It is just the rule made more physical.)”

    Finally, some common sense. A gold standard would have severely limited Greenspan’s ability to lower interest rates and unleash credit through the entire system.

    I’m willing to be most on here would hate a gold standard because it removes control of the money supply away from a centrally planned bureau (central bank).

    • Going back to a gold standard would only take us one step backwards into the centralised “money” system trap of the usurers. Whoever controls the stock, and/or the supply, and/or the reporting of the stock/supply, would still control the “money” system.

    • Financial complexity is simply the way for massive and permanent redistribution of middle class real income and wealth:

      1. Today financial system/capital rulers need everyone as a fictitious investor, e.g. as a consumption debtor. They don’t need people to save in the banks and with their savings to adequately invest and fund the growth of their wealth and real economy? They don’t need savers and real investors, but consumption debtors, because if people save for investing, the financial capital won’t be able to grow much faster than anything else in the real economy: the real wealth, the real income and the real consumption. But the real income and wealth is distributed through the financial markets accordingly to the quantity of existing base money plus all units of created credit money in the economy by the rulers.

      2. As the money is the RULE and the financial rulers (the banks and the traders) can create money (e.g. can create financial capital), a greater portion of the real income and wealth can always be appropriated to the money rulers accordingly to the newly created quantity of money, which finances fictitious (unproductive) capital growth, e.g. complex financial instruments, totally detached from the real value in the economy and its productive basis.

      3. The world will never move back to the gold standard, because today’s economic system what ever you would call it will be dead. Only fiat/credit money allows the “infinite” money creation in our financial system to work for the banks and Wall Street rulers. The money system is a ponzi with the only difference that the ruler (FED) of the rulers can permanently create a massive quantity of new money (financial capital) even when people are reluctant to take part in the scheme by taking more consumption debt. It is a brilliant, ingenious scheme for real income and wealth appropriation.

      Don’t dream of the gold standard, will never come back.

      Happy weekend!

  6. My experience in Banking was that the credit worthiness of a deal was often inversely related to the thickness of the proposal divided by the number of tens of milions of dollars of loan sort.

    The thicker per $10M the less credit worthy the proposal.

    • Increasing complexity is the hallmark of systems that have become so obsolete that it is no longer possible to believe in them. That’s what happened to the medieval order and its underlying belief system. Here’s how the historian Jacques Barzun explains it:

      The larger picture was this: in the heavens, with Earth at the center, were several huge spheres, one within the next, each made of finer and finer stuff, and all revolving and emitting the “music of the spheres.“ The planets, then the stars, studded the two nearest spheres, the rest being the dwelling place of angels and other spirits in the service of God the Creator, the Unmoved Mover at the farthest boundary. Sphere and circle, the two perfect figures, were essential to this perfect movement; it was unconsciouable on the part of Mars that it should retrogress. Other irregularities were taken care of by old Ptolemy’s epicycles, circular paths around the point where the errant body should be.

      It made a very complex structure, and at last the mind rebelled at more and more contortions. William of Occam’s principle of economy, that the best explanation is the one that calls for the least number of assumptions, was an argument against Ptolemy, in addition to the awkward facts.
      –JACQUES BARZUN, From Dawn to Decadence

  7. Nothing will change , at all, without deconstructing the ediface that enabled the GFC. Lot’s of things need to be done.

    As the worlds biggest economy, it must start in the US. The big enabler – Glass/Steagal-needs to be put back in place. Accounting rules that actually mandate price discovery of all assets (rather than mandate hiding them)must be changed back. Laws that promote off balance sheet banking and gambling activity must be rescinded. That is just a start. Only from there can the really big issues of fractional reserve lending and CB’s themselves be tackled.

    The chances of that? Very low, but increasing. It would take a crisis that shatters all common resolve to put up with the financial system status quo. A very serious social worldwide crisis where we see retribution metered out to those who have benefitted so much from the misery they have imposed through their system construct. Some societies seem to be heading along that path.

    In the Anglo countries we tend to leave politicians to “get on with it”. Politics , which provide the enablers, is something we all moan about but essentially treat as an arms length issue. Our populations get distracted with “life”. All well and good. This is the perfect scenario for the Banksters and their lobbyists to silently skew the system in their favour- to amazingly solid positions of impenetrable influence. That condition has been cemented into place. We, the (Anglo heritaged)people, will not change that. Yet. The Latins are starting to have a go but it is directed towards getting more milk at the teat. Wrong direction methinks.

    We too have to be royally rooted first before real meaningful change takes place. The Banksters are not going to offer up their priveliges on a platter.

    • I would also add the point of “confidence”.

      One of the biggest issues arising from the crisis days of 2008 was the then shattering of confidence in the world’s financial system. If we recall those days, Political leaders were apoplectic with strident daily shreiking about re-building “confidence”. We must have it to be saved (from what?)…. or something like that.

      A large part of all Political/Financial policies since those days has been built around shoreing up that “confidence”. That is why we have seen so many bailouts and stupendous Govt spending leading actors to where they are today.

      Confidence in what, though? I would say Democracy and our way of life. The gross perversions and shortcomings inflicted on Democracy shone through with the GFC. The curtain was pulled back to show us all what it really looked like- grotesque in many cases. Leaders panicked , scurrying to sooth us using our money to calm our fears and doubts. Like all subterfuges though, that too has its shelf life.

  8. One way you can under price risk, is to create a product that looks low risk, yet isnt. I remember the omip products created by Mann I think. You gave them a $1, they put 70c in a 10 yr index bond that guaranteed your money back, then they geared the other 30c up and traded futures/ currencies/ options for yrs on your behalf via a black box. They made a fortune as planners were paid I think 4% upfront to sell plus a 0.4%pa trail to keep an eye on even though you were basically locked in. Planners basically had little idea what was going on, clients less, yet to be honest I think most of them made some money I think?
    The other classic was the plantation investments that accountants were paid I think up to 10% to sell.
    Basically they all worked via the “trust me strategy”, this product is complexed, yet I’ve reviewed in detail and it looks really good really, even though off the record, I have no formal experience regarding such products or forecasting.
    Greed is a big driver in financial products, yet l think after “once bitten, twice shy”, many investors will never touch this crap for a long time.

    • Oh, the opim products, Did Guaranteed your money back, less inflation that is?, but who reads the detail when capital guaranteed sounds so low risk.

  9. Reminds me in Central Europe where one of Buffet’s counterparts, Soros, has a business school with professors who have never worked in the real world. However, thet are more than happy to tell you all sorts of empirical knowledge related to finance, economics, “leadership”, yet have never run nor would be able to successfully run a corner shop……
    One, a lecturer in “leadership”, became cricket captain, antogonised another team (made up Indian back office co.) so much when fielding, that when came time to bat (where their tasty fast bowlers were exacting their revenge), he came down with a feigned back injury…… think there is a metaphor in there somewhere?

    • One can be excellent in teaching others, but not a good businessman and vice versa. Business needs very different mind set from teaching. It is the same to say for example that a doctor can’t be a smoker, but there are many excellent doctors who are heavy smokers. Not every student from the musical academy becomes a great composer, but could be a great teacher.