Below is a clip of a book review “Fool’s Gold” about the global financial meltdown written by assistant editor of the Financial Times who ‘oversees the global coverage of the financial markets’. This review was published in the NYT: June 15, 2009. I think that this viewpoint expresses human fraility very well.
I have collected the keywords from the clip of this review, indicating and ascribing the human actions : self-inflicted, lack of supervision, naive, reckless, "downright stupid", hubris and greed, using complex jargon, over-reliance upon ‘innovation and creativity’, based upon faulty premises and finally to cap it all, folly of using mathematical models to predict human behaviour.
Apart from showing us how delusional humans are, I think that the predictable aftermath comments by the politicians and bankers that are being currently announced contain the following statements: “ oh well…. that was then…. we've learned our lessons… we've got a regulatory system in place now, so it won't happen again….”. In short, we will have regulation in place, that is all now history. I pause to reflect; that despite all of the reassuring assertions, fundamental change will, NOT happen. Yes, we will have regulation and overseeing etc. But that, for me is not the fundamental problem. Regulate and administrate the banks to the n-th detail, the banks will soon collapse in a bureaucratic conflict against the notion of free market attitude of the banks.
We will be doomed to repeat the lessons, like the end to boom and bust, tomorrow is another day. And like Scarlett O’ Hara rebellious and attention-seeking motives like these key words in the artical are only but a cracked mirror, an imperfect reflection of human behaviour itself. We can also infer, like the models used to predict human behaviour, regulation (model rules) will fail.
However, this “Fool’s Gold”, such an apt title, can only be defeated in my opinion, by openness, transparency and critical dialogue based upon knowledge. The very things that our politicos are suspicious of, and banks themselves shy away from any sunlight, seeking to hide away from behind walls of secrecy.
Gillian Tett of The Financial Times writes that the global financial meltdown, which economists estimate could result in total losses from $2 trillion to $4 trillion, was “self-inflicted.”
… the “entire financial system went wrong as a result of flawed incentives within banks and investment funds, as well as the rating agencies; warped regulatory structures; and a lack of oversight.”
the current global financial crisis is a story about people who thought they were the smartest guys in the room and who turned out to be remarkably naïve, reckless or, in some cases, downright stupid……hubris and greed and heedlessness, about people
…by focusing on an elite group of bankers at J. P. Morgan, who in the 1990s were pioneers in the world of derivatives, and who later came to regard what other firms and hedge funds did with their creation with dismay.
Ms. Tett explains how bankers “delight in swathing the concept” of derivatives in complex jargon…”…. She shows the premium that young hotshots there placed on “innovation” and “creativity”
Ms. Tett describes how banks invented increasingly complex derivatives, “all based upon the fundamental premise that the default risk of bundles of mortgages had been virtually erased by the process of bundling and then slicing them” into so-called “tranches,” which were supposed to give investors a choice of different levels of risk and return.
Her book starkly illustrates the folly of using mathematical models to predict human behavior and the Las Vegas-like bet-making embraced by many bankers.
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