Tuesday, 30 December 2008

2008 Re-visited

It's 1:30 am , as the last 24 hours of 2008 start ticking away. I'll be stumbling off a boat at this time tomorrow, as I am taking a boat trip on the Thames for new year. Today, though, I was doing my last 2008 wander around London, and I ended up picking up a few books to add to my already big pile of unread books.

When it comes to books, I tend to buy more books than I can read, but considering the fact that everything I own fits in two suitcases, the one thing a man can never have too little of, is books, even though if he doesnt end up reading all of them, but at least he always motivated to read more and more, but the more you crave books, the more books you buy and the more books you read and so on and so forth, so its like a positive feedback loop.

The same can't be said about 2008. Rather, its the complete opposite. A vicious circle.

Where can we start? The Bear Stearns debacle, Jerome Kerviel, the housing market crash, Northern Rock, Bradford & Bingley-Loyds, the 500bn£ bailout, the 700bn$ bad asset plan, Lehman going bust, Merril being bought out, and Citigroup on the brink.

This is a funny video.

"This crisis is not comparable to 1982 banking crisis, the savings and loans crisis of 1986, the portfolio insurance debacle of 1987 , the failure of kidder peabody in 1997 or LTCM in 1998, or the technology bubble of 2000. The crisis is not confined to a particular section of the financial system but has brought the entire system to the brink of breakdown." (Soros 2008)

The stock markets worldwide have lost anything between 10% and 45% of their value, and they are still declinining, with no sign of solid recovery anywhere in site. But to say recovery, is, in my opinion, wrong. Each of the crisis mentioned above, were what you can call bubles, and bubles grow until they burst. The credit crisis, is somewhat of a super-bubble. It's size really was far larger than any other buble. That's really because of two things: deregulation, and greed. One must give the good and the bad sides of things, though. The good thing starts with the beginning of the maturity of the banking system, that in my opinion, we are just beginning to understand what it means "money is a commodity" , and that money is just like raw material, oil etc. Banking, is just like any other industry, a producer, and their product is money. Yet, because money is a lubricant for transactions, and having it is vital, its actual value was greatly inflated that with all this credit derivatives, credit swaps, leveraging, shorting, spreads and all these nitty gritty terms that any financier will throw in your face, was all based on perception. Perceived, or, to a lesser term, estimated value of this product called money, which was, in theory, backed by "real" assets. When spreads for lending reach 40$ against 1$, there must have been some problem with the "product" : money.

When bankers can come up with a financial product within an hour, sell it, break it up, re-package it, re-sell it, at some point, something was bound to go wrong.

And its usually humans that go wrong, not the system, not the markets, and definitely not any electronic trading system.

Economics is not a science, simply because economics has an element of human intervention, which is why it is a social science, when pure science is simply the explanation of natural phenomena. (Now the LSE being a social sciences institution makes a whole lot more sense). Nick Taleb mentioned that bankers have been fooled by randomness in thinking that there actual study of the markets behavior over a certain period, can help them estimate how the market will behave in the future, and bet on that.

This is a nice pic.

I dont say markets are completely unpredictable, but i am not saying they are predictable either. It's just like people, you can have a fairly good estimate about how people will behave, but there is always this X-factor, a black swan, that can negate everything, and as long as people are the ones driving the markets there will always be that element, and the more we give the people in charge this liberty, the higher risk we run on another crash. Crashes will continue to happen, but you dont want another one of this scale, which is why I agree with Mr. Brown on more regulation. Regulation will bring a better understanding of the "money product".

The Germans and the Italians have a fairly good idea on how to build a car, but with a monolith lik GM in trouble of collapse, even well understood legacy products, and how to deal with them, will always remain as an element of risk. Why? Simply because of people. Some people just don't like driving, if you catch my drift.

Anyway, I quote George Soros when I say "History does not repeat itself [at least in finance]. The collapse of the banking system in 1929 was the cause that lead to the Great Depression, and that is why governments will not allow the banking system to collapse."

So, as gloomy as 2008 was, we'll come back, stronger, better, faster. .....I hope!

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