A plan for 'Imperfect Competition'

For the last few days I have waited before wading into the conversation regarding the Volcker Rule.

The Volcker Rule was the plan President Barack Obama announced on 21 January 2010 in which he proposed to reform the banking and financial services sector in the United States.

As usual the Press have been trying to pull this press release into the wrong direction and flawed analysis is once again being applied to the debate on financial services regulation.

In my mind, having watched the 8 minute YouTube clip, see (Volcker Plan), what the President was referring to in his statement was to the economic theory of Imperfect Competition.

Imperfect competition refers to the fact that there are:

1)             Many participants in the market both buyers and sellers

2)             All sellers have diversified products and services they sell

3)             Monopolistic competition can be a resultant format of engagement in the market by sellers

4)             All participants participate equally and fairly on a level playing field, therefore the barriers to entry are low

Therefore the supply side concentration of power in the financial markets which currently rests with too few oligopolistic institutions (Oligopoly ), will be broken by a new framework being created, under which market participants will have to engage in the free market mechanism.

So there we have it in a nutshell, a democrat proposing a free market framework in which risk is shared over a wider continuum of participants and no one participant able to be a 'pure' price maker and thereby skewing the 'rules of the game' in their favour.

What better testimony to the theory of Imperfect Competition than to just ask the players to merely move away from the current uneven playing field on to a new more equitable playing field for us all to share.

As long as these players take one of the libertarian principals of personal responsibility to heart, we might actually end up with the “Socialist President” creating the (im)perfect free market mechanism for financial services competition for many a generation.

theMarketSoul ©2010, is open to one or two more pleasant surprises from beyond the pond.

Values and morals! Who's values and who's morals?

This post was inspired by another fellow “LinkeInner’s” question which read as follows:

Do you think that the core of the current economic crisis is a crisis of ethics and values?

Two-thirds of people believe the current economic crisis is also a crisis of ethics and values. But only 50% think universal values exist. These are among the findings of the World Economic Forum’s Faith and the Global Agenda: Values for the Post-Crisis Economy, an annual report on issues related to the role of faith in global affairs.

Global religious leaders identify the key values for a more just and sustainable post-crisis economy.

http://www.imf.org/external/np/pp/eng/2009/021909.pdf
http://www.universityworldnews.com/article.php?story=20091011105058536
http://www.weforum.org/en/media/Latest%20Press%20Releases/PR_Faithvalues

My answer is:

What do the other third think who DO NOT believe the economic crisis is a crisis of ethics and values? 

If we were to ‘layer’ the global economic landscape, we would discover that the playing field is never and never will be level.  As an example, in your part of the world, one man’s commission is potentially viewed as another man’s bribe...?  (See the Serious Fraud Office’s investigation into the BAE System’s contractual relations in Saudi Arabia).  I am not pointing any fingers or inferring wrongdoing on anyone’s part, but I am trying to highlight the problem of ‘relativity’.  Points of view on morality, ethics and values different depending on your position, relative to the other people involved in that exact same ‘transaction’.

But, to answer your question directly I would say NO, it isn’t a crisis of ethics and values.

My justification is this:

1.       There is a general misunderstanding of the Laws and forces of economics that are at play here:

The fundamental Laws and forces at play in economics have nothing to do with morality or values.  These are emotional characteristics and only ‘enter the field play’ and manage to distort the rules of the game.  Yes, don’t get me wrong there is hopefully a morally correct framework set up in the first place, in order to allow everyone access to an opportunity to participate in the market, however, as we know in practice, this is not necessarily the case.

Markets, on the whole, tend towards and actively seek states of ‘equilibrium’.  However, on the odd occasion there are factors at play (political, regulatory, information, access to resources, etc.) that distort and cause markets to deviate from this natural tendency to seek the ‘clearing price and volume’ in the market.  Equilibrium is defined as that point at which the demand and supply curve interacts in such a way that all parties are satisfied (achieved utility) and all products in the market is ‘cleared’ at a given price.  There is therefore no shortage or surplus available. 

Scarcity of resources leads to a continuous search and flow of innovation, capital, land, labour and resources into the economic landscape (the market) thereby combining to meet some economic need or want by the production, distribution and consumption process.

If we are lucky, we participate with like-minded ethical and value-based actors in this market-place, however, if we are not so fortunate, we have a choice as to whether we participate or not.  Regulation is supposed to assist us in defining the rules of engagement, however, sometimes these rules become so onerous that participants actively seek ways and means to avoid or circumvent them.  That is way libertarians in general favour principle based, rather that rule based systems of compliance and participation in free markets. 

Because of Information Asymmetry we do not necessarily know the intentions, wealth, capabilities, etc. of our fellow market participants.  This is why one of the fundamental principles of market participation is ‘Caveat Emptor’ or ‘buyer beware’.

2.       Compliance and regulation are well intentioned in order to help define the rules of engagement, but as I stated above, they can become onerous, leading to dysfunctional behaviours in the market place and can contribute to the Law of Unintended Consequences.

Competition and the way in which ‘free markets’ operate invariably lead to ‘cutting of corners’ and finding ways and means of gaining some form of an advantage, be it lower costs, more features, better built quality, etc.  The problem is when sub-standard materials, labour and skills get involved and is then presented and ‘superior’ products and the purchaser does not derive the ‘intended utility’ he expected from that product.

The question really is whether this is a moral, ethical and values based issue?  No-one wants to be cheated o feel cheated and taken advantage of and therefore be disappointed in the market place; but as realists we all know that utopia is a very distant aspiration...

This is but the beginning of the debate and I would like to continue this theme in future posting

All the best.

theMarketSoul © 2010

I lost my glove tonight...

Well, it was borne out of anger, causing stupid behaviour and the next minute my glove was gone, fallen between the platform edge and the almost departing train. Next followed frustration, with a few expletives thrown in for good measure.

However, I look to this episode and try to draw a lesson from it. An economic lesson and this is what I came up with:

Gloves come as pairs. To the two handed individual, one glove is not really fit for purpose, except if you decide to permanently put the other non-gloved hand in your pocket, thereby proverbially 'tying one hand behind your back'.

This is what happened, figuratively speaking, during the lead up to the financial crisis.

Accounting regulatory standards meant that Financial Asset valuations had lost one of its gloves. The intentions were good, but as financial instruments increasingly became impaired the 'Mark to Market' ruling of IAS39 meant it forced banks to write-down instruments to market values.

Effectively the Profit & Loss account (Income Statement) became the dumping ground for the now 'toxic' assets. In the past any revaluation was done via the balance sheet.

The intentions of IAS39 were good, with a stated aim of increasing transparency and better valuations of banks and financial institutions, however, this was drafted and conceived during the go-go boom years, not anticipating a catastrophic downturn such as the one we just experienced.

Another factor I am paying a bit more attention to these days is the pricing of risk into financial products. As previously commented, if risk is priced in properly and this resulting premium capitalised as a reserve, then we should have a buffer for the rainy day.

The one problem or challenge we face is competition. Competition generally should encourage innovation, efficiency and cost reductions, via scale, however, it also encourages risk taking at the expense of risk pricing. This is one of the areas whereby our 'free-market mechanism' fails the test and does not 'balance the books' effectively.

How and what we do to address this deficiency is the stuff future blogs will explore in more detail.

But for now, the one-gloved 'soul' has had to wave goodbye to a matching pair.

theMarketSoul (c) 2010
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Asset bubbles: Not just valuations, but what and how we value

Where is the next Asset bubble likely to emerge? And what class of assets will drive and become the next bubble?

This is a question that is addressed in The Economist of 9^th-15th January 2010, p.65 "The danger of the bounce". Link: [The danger of the bounce]

The arguments are clear and concise enough; however a further factor to consider as part of the general historical trend and valuations analysis expounded in the article is the accounting distortions recently caused and driven by IAS 39 – Financial Instruments: Recognition  & Measurement.  The problems with IAS 39 are being addressed by the IASB, however, in a nutshell the challenges we face at the moment is thus:

Having changed the historical cost accounting valuations of corporate balance sheets to ‘the dumping ground of the "mark to market" tyranny’ on the Profit & Loss (Income Statement), we are not currently comparing apples with historical apples.  Having switched to "mark to market" accounting and utilised the Profit & Loss account as the dumping ground and not the Balance Sheet, we are currently looking at corporate balance sheet asset and liability valuations that are not what they were or have been over the last 100+ years of the historical comparison cycle referred to in the article.

Now I hope and trust that this issue is so blatantly obvious and has already been corrected and factored into the analysts calculations, that I am wrong about this; however, my experience of the analysis in the past, does not fill me with enough confidence to ensure that this is not the case.

Further to this, the fact that the debate is already starting about Asset bubbles, is good and an encouraging sign, however, there is also the little matter of risk (outside of pure compliance risk) and the pricing and factoring of this into the asset valuation equation, which needs to be highlighted and debated further.

Part of the debate this column attempts to stimulate is a ‘true and fair’ economic factor cost model and approach to understanding economic discourse in general.

So, let’s continue adding value and centring our arguments around this important issue.

theMarketSoul ©2010

An unfinished Poem...

Don’t Hurry

The world will still be turning

And time will run your emotions

And we will still be living.

The struggle is in knowing

And wisdom still eludes us,

Like the sands of time

Its flowing

Should we catch it now or just keep it going?

theMarketSoul ©2010

The Last Good Day of the Year

As the last (or as some claim, preliminary) day of this decade dawned, I thought about the irony and constant ‘conflicts’ that live and economic activity always presents us with.

The last 18 months in particular was evidenced by a constant attack on the ‘Western Capitalist’ model, due to the deep and prolonged recession, set off by the Credit Quake of 2008 – 2009.

As it is a ‘Quake’ and not a ‘Crunch’, we have and still are experiencing aftershocks of varying magnitudes.

However, the irony of economic activity is the dichotomy the theory and reality actually presents us with.

If we focus on just one of these little ironies, it is the story of scale.

Economic theory would have us believe that ‘Economies of Scale’ is desired as the Total Cost curve is lowered, thereby maximising profit at the point where the Total Revenue curve is at its apex and the Total Cost curve at its base, with the gap in between representing profit.

Yet, with banks being “too big to fail”, this flies bang in the face of the economies of scale theory.

Therefore, there is a delicate balancing act and a ‘Stakeholder’ management approach that we need to follow and implement in the years to come, in order to address one of the inherent weaknesses in the way in which we have managed and controlled the capitalist economic system.

Don’t get me wrong on this point though, I am still arguing for a Libertarian approach and philosophy. What I believe the problem is that the libertarian philosophy is watered down and contaminated; thereby diluting and distracting focus from its core principles, thus rendering it merely an aspiration rather than a true and meaningful alternative to a more politically controlled socialist approach to economic life.

One of the goals and aspirations I have with this blog is to inspire and educate, thereby encouraging a constant questioning of the status quo which will hopefully lead to a change in mindset and economic growth “so that we can encourage the growth and development of sustainable human endeavours ...”, as the concluding sentence in the header to this blog page testifies.

To this end, I wish everyone a very prosperous and happy start to 2010, whether it be the end of the first decade of the 21st Century or the beginning of the second decade...

Let 2010 be the year in which we encourage more equal and equitable access to markets for all willing and able participants in the capitalist market mechanism. However, let us all have tolerance and respect for the points of view and practices which do not encourage a truly libertarian philosophy and approach too. It is only in sharing and respecting that we will all get along and make progress somehow.


theMarketSoul © 2009

The Value of Structure

Most of my musings on this web log is focussed more on economic themes and ideas.  However, today I want to turn my attention more to the value question related to corporate structure and the importance and significance that structure can play in change management and the behavioural aspects around a corporate restructure.

Recently I was involved at an organisation that had admirably survived the credit quake of 2008 – 2009, without any serious casualties.  No redundancies had been made during this period, as the focus very quickly turned to managing and controlling overhead costs.  Trading volumes and values had been severely affected, with a significant dent to the gross contribution line, however the pipeline of new product launches kept supplementing the existing strong product proposition.  There had just been slight deviation in overall underlying profitability due to a loss of focus on the customer.  This was mainly due to the corporate structure not servicing the market in the most effective way possible.

It took a few months for the group leadership to realise this, but once the challenge was recognised, the cogs of corporate restructuring was set in motion.

And this is exactly the root of another problem scenario:  ‘Corporate Inertia’.

I find it very sad and demoralising when employees who have served their corporate masters very well and over many years come up with phrases like: “...I am just waiting for my cheque...”, referring to the expected windfall from a redundancy package.

But, I have digressed enough. 

Structure sends a very powerful message.  Delay causes uncertainty and frustration.  Invisible leadership causes the ship to list wistfully and wastes opportunity.

As a very poetic Felix Dennis once stated in his poem “How to get Rich”:

‘But take it from me,

Execution is key’

So the real value in structure is by minimising the opportunity cost of wasted time.

Employee motivation is a very difficult thing to reinvigorate, once the ship has listed woefully.

My simple massage in any corporate restructure and change management effort is this:

Do it fast, effectively and be visible and accessible as a new leader taking on the responsibility of managing the division for value.  Time is short, energy a precious commodity which should not be wasted by focussing on the right things at the wrong time.  Some reflection, a slight pause to catch ones breath is permissible; but do not forgo the opportunity to get everyone on board and in the right seats once the bus leaves the stop.... 

theMarketSoul ©2009

Obituary - Paul Samuelson (15 May 1915 - 13 December 2009)

It was with great sadness that I read the Paul Samuelson obituary in the Times of 14 December 2009.

As an eternal student of economics I remember reading Samuelson & Nordhaus's 'Macro Economics' as an undergraduate commerce student. Terms like "the paradox of thrift" will remain with me until I too will grace the equivalent of the Viking's Great Hall of Warriors in Valhallha...but first I must find my 'sword of doom' to wield in battle against other greater minds on this battle field for the ground-swell for knowledge and understanding in the arena of Applied and Behavioural Economics.

From 'Analysis to Synthesis' is my current battle cry. As a Behavioural Profit Mechanic I have through subtle means tried to persuade traditional accountants to appreciate the 'Art of Accounting' versus the science of the purely technical application of their chosen vocation.

Statements like 'dancing around the cauldron of the monthly management account stew' are completely misunderstood and construed as a maverick's flight of fancy.

Yet analyse the deeper meaning of that statement and you will discover that I am battling against the 'tyranny of the status quo' by creating a visual metaphor for a totally worthless exercise of chopping the financial story-board into these artificial time frames called calendar months, in order to create or colour a picture of financial performance. And yet every management accountant will have to come clean and confess to the most dreaded phrase of this tyranny...'Let's just accrue to budget'.

Any guilty consciences out there?

I for one will admit to in the past having fallen victim to this practice...

Have you?


theMarketSoul (c) 2009
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The commerce of transit

We are off on holiday and yet again sitting in the 'holding pens' called airport transit lounges.

I look around me see if there are any economic lessons to pick up on, as our laboratory is a constantly seething, bubbling cauldron of activity.  Yes, off course I am referring to the laboratory of the experimental, behavioural economist...
And the answer to the question is a resounding yes.
 
An airport transit lounge is a hive of commercial activity.  A few are individual travellers, pairs or family or loose- family groupings.  Some are grumpy, happy, tired, confused  (you obviously spotted me in the crowd) and a range of other states of being.

Everyone knows they are only there for a specified period of time and are desperate to avert the chasms of boredom enveloping them.

Hence some clever people invented the 'Duty Free' shopping experience. What a great way for retailers to boost their profit margins, whilst making us all believe we are saving money because the sales (or consumption) tax has been removed?

We are off to another transit hub, where they introduce another twist in the tail - the foreign exchange issue. Better leave your calculator behind and trust in the information asymmetry of the estimate conversion factor...

theMarketSoul (c) 2009


 
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The Hypocrisy of Turmoil

I am experiencing an increasingly level of frustration and disillusionment with the existing debates and discussions, both political and otherwise, going ‘live’ and being aired with reference to the free market system and markets in general, in the face of the current global financial crisis and turmoil (also referred to in earlier blog postings as the Credit Quake).

My frustrations have a few key themes:

1. Lack of the correct language being used
2. Lack of an understanding and appreciation of the free market system in general
3. Lack of a differentiation between mechanistic systems and human behaviours (partly stemming from a lack of the correct technical language being ustilised) [The morality of the market vs the morality of people (also referred to as agents) operating within the market]
4. A lack of appreciation and understanding that economic value and measures are not monetary related, but that money is a subset (via Monetary Economics), within the wider discipline of Economics.

Part of the challenge of this blog and other blogs of a similar ilk is to raise the bar as far as the general discourse is concerned.

Please tune in from time to time to help support intelligent debate and a fruitful learning experience.

theMarketSoul © 2009

Dublin blues

I have just returned from a 25 hour 12 minute stay in Dublin. Don't ask me how I can be so accurate on the exact duration of the stay. Apparently it is because I own a wrist watch, can read and interpret time and was not blind drunk and 'over imbibed' during my entire 25 hour 12 minute stay.

Moving swiftly on to the next paragraph...

What struck me most about the trip was how different the atmosphere and people were in Ireland. Now I only spent time in the Ballsbridge area, very close to the old / new Landsdown Road stadium.

We won't re-visit the 15 - 10 defeat the Springboks suffered on Saturday at Croke Park against the 6 Nation champions Ireland, except to say that it was highly insensitive to the gorilla bands of Springbok supporters scattered all over the sports bars and pubs in Ireland to screen the match again during the time that they needed to drown their sorrows in the national dark liquid... Personally, I blame the mist and fog over Croke Park for this latest installment on our misadventure of an autumn rugby tour.

However, the three things that struck me most about this flying visit was the fact that:

1) It rained a lot in Dublin and the wind made it quite bitter and cold,
2) That even if people speak the same language as you, there is always the possibility that you won't be able to understand a word they are saying and finally,
3) I can't remember a single thing, because I must have been blind drunk for 23 hours and 12 minutes of this trip. (I needed the two hours to sober up at the airport or be put off my flight).

Therefore to conclude: It must have been a good trip, otherwise I would only have remembered the bad bits...

Have a good rest(ing) of the week.

I certainly need the recovery time.

theMarketSoul (c) 2009


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Corporate (email) Communication

Question asked on a business centric social networking site a few days ago:

Seeking Success Stories of NOT Looking at One's Personal Email at Work

I try NOT even to look at my work email at work.

There is this odd shaped device next to my computer that emits ringing sounds every so often. I try to use that to contact remote people.

Then I discovered these two appendages below my body. Apparently I can use them to get up from behind the desk and walk over to someone in the same building and get them to do things for me or share information with me. I found that utterly amazing!

I use that email thingy only to transport files across the network to people who might not have access to secure folders or servers on my end.

I discovered real people, with real lives and interesting tales to share this way.

Someone actually confided in me the other day that this is what life was like in the early to mid '90s.

It sounded great and I think they lived on a nice planet back then.

The other day another amazing thing happened. Somebody actually came to see me! I think I might have a convert here....





 *  *  *  *  *


I will be very happy to receive comments and examples of similar experiences as part of my research for an article entitled:  "The loss of civility in Corporate Communication".


Thank you.


theMarketSoul © 2009

The Set-up

How great is must feel to anticipate change in the political air, yet to have an exiting government set up the next parliament and hence government for failure?

           

Be it a new conservative, labour or coalition government facing the United Kingdom in May / June 2010.

This must be the ultimate deceit of the rules based political governing classes currently in office. 

What is it I am referring to, you might ask? 

The proposal to entrench in statute a target to half the current UK national budget deficit in four years time.

Let’s only consider two specific points on which this idea will fail:

1)    The current recession in the UK is not officially over.  This means that the overall size of the UK national debt has not finally been determined.  Which in turn means it is still a moving target and therefore futile to target until it is finally quantified.  Need I go on?

Off course I do, because I stated that I would give you two specific reasons.

2)    This statute will become a political rod that an exiting Labour government and party can wield in around 4 and a half years time (by the time the legislation is promulgated in law), just in time to fit nicely into the next electioneering campaign, once the next government has to call another election.

Hence the timing and the timeframe in which this legislative target sits must surely be vigorously questioned?

Quite frankly whether it is 2 or 3 or 6 or 10 years down the line, before we finally pay off the debt, should not matter as long as these two conditions can be met in the mean time:

1)    We can afford to service the debt

2)    We do not have to suffer crippling tax increases

And yet here we go, lauding the efforts of a government in the sun set period of its time in office, which is focussed on reducing the national debt, by their standard irresponsible target setting culture.

I believe it is a pure and simple SET UP.

That is why I advocate a principles based approach to solving the major problems and issues facing us today in the UK.

Principles by which libertarian economic philosophy approaches the challenges ahead.

For a fuller discourse on these principles, please refer to my earlier posting The Market is flawed, or not...

However, I happened to watch one of the great principle based games earlier this week.  The FIFA world cup qualification eliminator between France and the Republic of Ireland.  This in the same week as the UK government announced the futile legislative objective of enshrining in law a target to half the budget deficit within 4 years.

There I was witnessing the ‘Hand of Thierry’ meddle in the ‘beautiful game’ and influence the ultimate outcome, of a well established principle based game, and I thought to myself, even principles have their failings…

theMarketSoul © 2009

The evolution is coming...long live the evolution

Watch out, the evolution is coming!

I am going to change tack slightly today with this posting.  Yes, you might spot a slightly more serious tone to this posting.  There are two reasons for this.  Firstly I am trying to moderate my comments with the view of getting it published via a very reputable professional body and secondly I am going to veer off my usual pure economic track towards a more accounting / finance focussed discourse. 

Partly the reason for this is that I am preparing for an “Effective Budget Forecasting” workshop in early December 2009 in Kuala Lumpur and the other reason is to draw your attention to the coming (we have been waiting for this for quite a while now) evolution in the disintermediation of financial and management accounting information production.

Information technology has now for quite a long time threatened to live up to its panacea of providing better decision support or framework for senior management.  And yet here we are, almost a full decade into the 21^st Century, with still unfulfilled expectations and untapped potential.

Innovation and technology as one of the critical factors of production necessary to drive growth and advancement, through one of its elements, namely information technology, is beginning to deliver on one of its unfulfilled promises.  With IT now moving into a more mature development stage with more practitioners, better dispersed tools, general skill levels of those practitioners improving and more holistic applications and understanding of work-stream processes, I believe we are standing at the brink of the coming evolution.

Traditional budgeting and management information (MI) systems are ingrained into an organisational culture, much like all other processes and behaviours in general.

In order to change a budgeting and MI system and more critically, for this change to be successful, accountants have to stop thinking, behaving and acting like stereotypical accountants and realise that the evolution has now got some serious momentum behind it.  We won’t be able to hide behind pure accounting GAAP and IFRS statements and more importantly, our beloved spreadsheets and models, but will have to help change our systems and ways of working, via a cultural and behavioural approach to organisational change management.  Moving from annual budgeting to rolling forecasting systems should not just be about how the finance people approach the challenges, but also about how the rest of the organisation changes and adopts and adapts to systems like Value Based Management, Zero Based Budgeting and Economic Value Added® approaches.  These might seem like utopian systems for running and managing organisations, however, it is a lot more effective than purely focussing on EBITDA (Earnings before Interest, Taxation, Depreciation and Amortization) numbers for motivating and galvanising the troops to deliver.

An evolution cannot be achieved in isolation, all parts of the organisational system have to work together or be aligned towards this common purpose.

I the meantime, you and I still have our day jobs, fire-fighting exercises to concentrate on, so good luck with the evolution.

theMarketSoul ©1999 - 2009

Banking and spirituality

Now this headline really incensed me this morning:

The Sunday Times November 8, 2009 (There is your plug, you are welcome) – “Goldman’s boss: We do God’s work” - I'm doing 'God's work'. Meet Mr Goldman Sachs

How dare you! How dare you be so arrogant! Mr. Lloyd Blankfein.

I must have woken up today in quite a militant mood, this being remembrance day and all.

My daughter and I went to church this morning (my wife and son had a different engagement to attend at another church in town).

The entire nation was focused on the very poignant event of celebrating or more accurately commemorating fallen, but never forgotten victims of war, past and present, and then I made the fatal mistake of picking up the Sunday papers on the way back from church.

So, now let me explain my very limited understanding of trickle down economics and how it works:

We have a Credit and Liquidity Quake in the global financial system (see early posting on this site entitled “Comments from a 'lay-economist' on the Credit Quake of 2008 – 2009" ).

Either governments (read taxpayers) or investor angels (in Goldman Sach’s case Warren Buffett with a US$5 billion injection, see - LA Times article - "Buffett boosts Goldman Sachs with $5-billion investment" ), help re-capitalise broken and impaired financial institution’s balance sheets.

This ‘rescue cash’ starts looking for decent rates of return that money and other near cash equivalent assets cannot provide, and commences to froth up the stock markets.  We have a big bounce over the last 6 months in global stock bourses, however, very little of this new cash seeps out (or trickles down) to the next layer in the economy.  Fair enough, if big bonuses are paid to hard working bankers, (look you can only put 24 hours into a 24 hour day, no more, no less; if my mathematics does not let me down, whether you are an investment banker or a road sweeper) eventually they start spending this cash in the real economy and property assets and other non financial asset prices start experiencing a bounce and therefore all the folk who touch and are involved in trade and transactions connected to these other alternative assets experience an upturn in their fortunes.  Ergo, the next layer gets involved when the trickle continues further down, and therefore services connected to the previous layer experience an upturn in their fortunes…and so on.

So, we either stop making so much beef about the bonuses and just get it paid out so that the cash can be spent; however, Mr. Lloyd Blankfein, WE DO NOT COMPARE THIS TO GOD’S WORK!

A little sense of humility and thought needs to go into your words and deeds so that ordinary folk can get on your side and support the ‘noble calling’ of banking; or you risk the wrath and fury of the general public and a lot of work for the PR industry to help repair the damaged reputations investment and retail bankers still face.

As for spirituality, I trust your conscience will seek some catharsis and quiet reflection in the days to come.

An apology will also do nicely.

theMarketSoul ©1999 – 2009

The Market is flawed, or not...

Fundamentally we are looking here at an issue or more accurately described as a "battle between Civil and Political Society".
 
The rest is a matter of degree (or weighting) attached to the forces influencing these battle lines.
 
What I mean is this:
 
Civil society values stem from classical liberal and now more accurately libertarian philosophy, which advocates:
 
1.  Minimal government
2.  Private property ownership
3.  The rule of law
4.  Minimal taxation
5.  Personal responsibility
 
Political society has a different approach and view of the world, with at its core a desire to achieve 'social engineered' outcomes, via increased government mechanisms and interference in free or 'free-ish' markets and its focus on behavioural aspects of human (and market) interactions.
 
It is this tug of war between the two groupings that then creates opportunity and opportunism (which for good ends or bad) gets exploited by unscrupulous market participants as they know that the reach of the 'rule of law' falls well and truely short of creating a guiding 'moral compass' or what I refer to as 'The Market Soul' © 1999 – 2009.
 
The Market Soul is in essence an inner guiding principle which springs forth from the well of higher levels or awareness of our own Spiritual and Emotional Intelligences.
 
A new book to be published soon by Dr Lieselotte Badenhorst entitled "Loony Intelligence" explores some aspects of these cognitive intelligences better.
 
To return to the issue at hand, which is that the Free Market is flawed, I would argue that in the opening gambit the argument is flawed; that the Free Market is not flawed but does require an injection of a moral and spiritual guiding compass, something referred to in the original article as: "for companies to start[ing] to embrace corporate ethics is their leader 'getting religion'."
 
The system is not perfect, but the degrees to which political society and civil society shape and draw the battle lines between how and when governments interfere, how to regulate effectively, how to encourage personal responsibility, either by 'socially engineering it' or 'farming it out to the market', how to pay for this system (fair and equitable taxation) and the framework within which we operate, 'the rule of law', is what will shape and inform the agenda in the near to medium term future.
 
The outlines of the debate and agenda is only now beginning to take shape, but in the meantime the unscrupulous agents in the market are making hay, whilst the attention is distracted or incorrectly focused on the wrong areas of trying to deal with the fall out from the crisis and the way in which we will deal with the mountain of debt still coming at us like an ever increasing
avalanche….
 
Idea Merchant at theMarketSoul © 1999 - 2009
 
Original article referred to in the above posting:
 
http://www.cimaglobal.com/cps/rde/xchg/live/root.xsl/Insight057153_7260.htm

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Market Failure - What market failure?

The market is a mechanism, with price as one of its major tools, in order to ‘clear’ or allocate scarce resources.

In centrally planned economies a political elite fulfill the role that price would in order to determine the allocation of the resources.

In a market lead economy price fulfils this role.

The problem is that price (or value) is not always a perfect measure or instrument to send a signal to the participants to ‘clear’ or allocate all the resources effectively and efficiently.

In certain circumstances the market is therefore seen to or perceived to fail, however this is an error in logic, it is not the market that fails, but individual participants within that market that fail.  They fail because of the fact that information asymmetry prevails and not every participant has access to capital and resources at the right time in order to set or take the most efficient clearing price.  The problem is that is not necessarily the market that fails, but individual behaviours of participants in that market that puts a strain on the market and therefore forces it towards a new equilibrium point. 

This is what we recently and so spectacularly experienced as another deep recession.

The focus should be on developing better and more sophisticated tools (other than price alone) to grease and ease the wheels of the market allocation system.

Some would call these tools better regulation, however true libertarians believe in these two maxims of efficiency and effectiveness:

(1) Spontaneous Order

(2) Creative Destruction (Schumpeter)

theMarketSoul ©2009

Comments from a 'lay-economist' on the Credit Quake of 2008 - 2009

More debt cannot solve the current debt crisis!

All we are doing is buying time, (in essence restructuring the principal debt burden) and deluding ourselves that the fundamental problems have been solved. Which of course is not the case.




I think Paul Samuelson defined economics in one of his textbooks as “...the study of scarcity...”



Yes, the crisis was born out of the scarcity of liquid funds or assets, but a large contributor that became a key driver which exacerbated the crisis was regulatory driven, especially the misconstrued IASB (International Accounting Standards Board’s) IAS39 Financial Instruments: Recognition and Measurement standard.



Remember, money or monetary values (currency) only act as a proxy or crude measure for the ‘real economic’ measurement of value and output. At a basic level we have been experiencing a large equilibrium shift away from the traditional factors of production (land, labour, capital and technology & innovation) and the holders or owners of these factors of production, to a fairer distribution and access to these factors of production.



When the equilibrium cannot be maintained at a specific unsustainable level we experience some form of ‘discontinuity’, such as the current crises we are experiencing.



In the old Western oriented G8 or now G20 democracies (and one or two new monarchies throw in together with a quasi-communist regime for good measure), the old G8 leaders thought they were immune against the odd banking crisis . Recall here the Asian Crisis of 1997-1998, the Russian Financial Crisis of 1998, the Argentinean default of 1999; all minor disturbances in the developing economies which did not affect the West.



However, with ‘The Great Moderation’ (thank you Ben Bernanke for that one) so recently behind us, the Great Credit Quake of 2008 – 2009 suddenly meant that the entire G20 club and beyond were dragged into the quagmire.



Therefore, my belief or opinion is that we are still in the midst of a major equilibrium adjustment and the ‘step down’ or up from the previous level will continue to be uncomfortable for many years to come. Asset classes will continue to try to find their new sustainable equilibrium valuation levels, and the stoking of the fires by governments with sovereign debt will only continue to contribute to dragging on the crisis for longer.



Ultimately, the market mechanism did not fail, but a few key players within those markets failed spectacularly. Pumping more liquidity into the system will NOT heal the moral hazard created before and now supported by the current interventions.



Growth is rightly touted as one of the mechanisms by which we get ourselves out of this crisis, but I can see two other unpopular tools at our disposal, one being raising tax burdens generally and the other lesser of the two evils being inflation.



Shall we jump, or wait to be pushed?


The Market Soul © 2009

Confessions of a Behavioural Profit Mechanic

Observing the dung-beetle had me suddenly mesmerized by the thoughts of the impact of the annual organizational lying ritual.

Yes, you are correct in thinking; we have just been through the budgeting process.

Fascinating laboratory work for the typical pin stripe suited behavioral profit mechanics amongst us, with laptops and complex spreadsheets geared up for the task.

Doesn’t matter which large or medium sized organization you go into, observing this annual ritual is either a distinct pleasure (for the sadists among us) or a very drawn out, torturous agony inducing activity.

But it all boils down to exactly the same thing my dung-beetle friend has been up to:  Moving piles of c**p from one place to another.

So what is the value in continuing to entrench this annual ritual into our organizational man or woman’s psyche?

Especially in turbulent times!

The cynics amongst us argue that it keeps the been-counters occupied.  True, there must be some value in keeping those poor (pure) folk slaving away over their budget spreadsheet models late into the night.

But it is the Senior Management Team, the wise elders, whom I ultimately blame.  These are the dungeon masters who routinely get the instruments of torture out, mainly their sharp wit and senses of sarcasm and then put the product or business unit owners and managers, with their been-counters in tow, through this process.  If it was not for their (the wise elders) profound sense of loss of touch with reality, the poor folk who keep the management information beast alive, could be put to better use by adding significant value to the new science of business analytics and value added decision support.

I know the entrenched behaviours are all focused around the ‘rain dance’ of the bonus pot the wise elders so fervently guard.  Maybe we should rethink the way in which this annual ritual is observed?

theMarketSoul ©2009

A Quote of Note

"So let me fill my children's hearts, 
With heroes tales and hope it starts, 
A fire in them so deeds are done, 
With no vain sighs for moments gone."


Stuart Adamson (Big Country - Eiledon)