Who would have thought that the collapse of the American housing market would signal the end of an era for the world's most prestigious investment banks? The U.S is in-between a rock and hard place to rescue the financial sector of the world's largest, most important and most competitive economy. At what cost? We are, according to Nassim Taleb, the prolific black swan visionary, socializing losses and privatizing profit. That is the world of capitalism turned on its head.
The crisis goes fundamentally deeper than the interconnected failure of banks and other financial institutions in an increasingly interlinked and globalized world. We need a collective re-examination of leading economic, finance and management theory and practice in order to evaluate where and why it has gone wrong.
It is far too easy to blame greed on Wall Street. Greed is healthy; without it we do not have the Darwinian economic animal spirit of capitalism. Without greed we would not have banks, health insurance or even mortgages for that matter. Greed is a force for innovation, hard work and ambition. The blame lies in the sharing of risk and reward. Institutions have become too big to fail. Without economic Darwinism, the rotten survive, and with it bad practices and empty suit risk/reward models.
The problem is that greed and risk management do not mix well with current investment banking models. They are in fact creatures whose interests, even though they pretend to speak the same language, are juxtaposed. Risk management in itself is almost an impossible venture because:
a) Risk is too complex and interconnected in a globalized world for any human being to comprehend accurately and effectively, b) Unknown and unexpected events with previously unrecognized connectivity spring up from places where we never saw them coming (black swans), c) Risk managers are rarely appreciated or understood, and d) Assessing the correct value, impact and occurrence is almost pseudo-science.
Some so-called gurus claim that risk management (in hindsight) should have given investment banks the knowledge (foresight) to steer away from the iceberg of doom. Risk Management is always a science that relies on (biased/faulty) hindsight in order to attain foresight that we can never accurately interpret or understand. Furthermore, us mortal humans lack the objective internal stochastic instruments to judge the real-life world in terms of potential/real events/impacts.
Banking in the future will inevitably be increasingly socialized and/or nationalized at a higher cost, with potentially the same risks and (moral) hazards if we fail to learn from the past. I think it's time we start teaching students and practitioners the history of finance and financial economics. Let's start with Financial Meltdown Economics 101.
The crisis goes fundamentally deeper than the interconnected failure of banks and other financial institutions in an increasingly interlinked and globalized world. We need a collective re-examination of leading economic, finance and management theory and practice in order to evaluate where and why it has gone wrong.
It is far too easy to blame greed on Wall Street. Greed is healthy; without it we do not have the Darwinian economic animal spirit of capitalism. Without greed we would not have banks, health insurance or even mortgages for that matter. Greed is a force for innovation, hard work and ambition. The blame lies in the sharing of risk and reward. Institutions have become too big to fail. Without economic Darwinism, the rotten survive, and with it bad practices and empty suit risk/reward models.
The problem is that greed and risk management do not mix well with current investment banking models. They are in fact creatures whose interests, even though they pretend to speak the same language, are juxtaposed. Risk management in itself is almost an impossible venture because:
a) Risk is too complex and interconnected in a globalized world for any human being to comprehend accurately and effectively, b) Unknown and unexpected events with previously unrecognized connectivity spring up from places where we never saw them coming (black swans), c) Risk managers are rarely appreciated or understood, and d) Assessing the correct value, impact and occurrence is almost pseudo-science.
Some so-called gurus claim that risk management (in hindsight) should have given investment banks the knowledge (foresight) to steer away from the iceberg of doom. Risk Management is always a science that relies on (biased/faulty) hindsight in order to attain foresight that we can never accurately interpret or understand. Furthermore, us mortal humans lack the objective internal stochastic instruments to judge the real-life world in terms of potential/real events/impacts.
Banking in the future will inevitably be increasingly socialized and/or nationalized at a higher cost, with potentially the same risks and (moral) hazards if we fail to learn from the past. I think it's time we start teaching students and practitioners the history of finance and financial economics. Let's start with Financial Meltdown Economics 101.
