Recently, I have been reading about the current financial crisis, macro-/micro-economic theories, testimonies of brokers specialized in derivatives, options, futures, swaps and other fantastic inventions in the world of financial instruments.
If nothing else, I have learned two things. First, this is yet another world I don’t understand, not even grasp. Second, the financial world has mostly been exploiting small investors, the same people who now are expected to bailout the industry, and beyond. I think, this is quite ironic.
I have to admit, for the little I understand it, the world of a million and one concepts for financial instruments is intriguing, at least for its intricate, nearly unmanageable, and generally misunderstood complexity. At the same time it is perverse, probably along most of its dimensions, from sexual obsessions at work and parties to the sentiment of satisfaction in face of events like 9/11 or the US invasion in Iraq. If you know how and want to do so, you can make money out of every tragedy: inhumane, but probably true.
The world of a few experts who really understand it, is a world that to average citizens like me, appears, well, appalling. Nevertheless, some of us are attracted by it. I think, while the mathematical theory at the roots of this world must be incredibly fascinating, I believe there can be only one reason why someone may be attracted by its practical execution as it has been the case in recent years: Greed. I mean, infinite greed.
In our interpretation of nature, physics plays a major role and over time scientists have described some of nature’s properties with what we call conservation laws. There are a number of them, the conservation of energy comes to mind. In accounting, there is something similar, what we call balance sheet. Assets on the left and liabilities on the right are balanced. If you want, the measurable property “subtraction of assets with liabilities” of the isolated system “my household budget” does not change as the system evolves. Hence, Assets=Liabilities. A simple rule. All the more it is surprising how digging into the world of fancy financial instruments feels to be a discovery of a place where everybody is convinced it is imperative to make lots of money from nowhere, ideally from nothing, i.e. we can all and only get rich.
In reality, it seems to be a classical application of the 80:20 rule: 80% of investors make sure that 20% get rich. Or more likely, 90:10 or perhaps 99:1? Here are my two cents of an incompetent investor and economist (hence, probably worthless): The next time you think about using leverage, make sure you have the means to write off the credit you commit, right when you start to speculate.
In face of greed, risk seems to vanish entirely to nothing. The irony of all this is, we can start regulating the markets as much as we want. I believe, fact is, those efforts won’t tackle the problem at its root, which seems to be human greed, one of the seven deadly sins in Catholicism. If old techniques lost attractiveness because of regulation, I believe it is only a matter of time until someone comes up with new ways to aliment greed.
And history repeats itself like the most beautiful fractal.