The gum of bubbles (Part 3)

The gum of bubbles (Part 3)

We got the scary number out of the way last week, and should now have a better understanding of the scale of our global economic bubble. We are all in deep trouble, the traders, the banks, the institutional agencies, and especially the average consumer or global citizen. The root cause of a stubborn global recession hinge upon the leaders we elected in various positions across institutions, incapable & unwilling to adopt a systemic view of our global mess.

Our regulators are pretty much powerless since the damage has already been done, whilst they were idly sitting by & comforting themselves with implicit assumptions. Consider just one sector, the world derivative notional value grew to more than 20 times the size of the world economy4, under their watch.  We are all guilty to some degree, even those of us unaware of the looming crises. Ignorance cannot be used as a defense when we preference entertainment above self-empowerment1. By doing nothing we tacitly contribute toward corrupt & socially harmful practices across the global economy. Today still, most of us ignore the signs, preferring to belief that we are in “capable hands” able to manage the situation, or that our expert risk managers and regulators wish to limit our risk, when the ugly truth is that they lack the power & knowledge to do so1-4. These sentiments are echoed by scientists from diverse fields1, 3, 5, including derivative experts, like for example Ph.D. mathematician (Paul Wilmott), citing “it is impossible to know the real values as it requires one to have and understand the details of each derivative contract, and since some of them have been and still are unregulated”4, implies many assumptions & pure guesswork. Now this is just trying to figure out what the heck is actually going on in the global derivatives sector. Since the US housing Bubble burst, its subsequent systemic effects across the world are still manifesting, with all governments, banks, ratings agencies, reserve banks and regulators desperately trying to figure out the nature and extent of the problem. This would be a good thing under normal circumstances, but we are far from normal and recall that normal equals “free markets” under the classic mechanistic school of thought, that include clumsy theories such as the Efficient Market Hypothesis. We now know that the market does not know best; we have also come to know that tax-payers pay the ultimate price of the mistakes made by a minority grouping (e.g. bailouts); we also know that the financial community have created instruments that they themselves no longer understand; we also know that the assurance bodies & ratings agencies are in cahoots, creating an incestuous industry. An industry capable of stalling global growth, create great & widespread poverty (e.g. Greece), with islands of extreme wealth (e.g. Tax havens). Thus expecting the very culprits of the global financial violence, to actually regulate themselves again, is beyond stupid. We have great scientific minds waiting to be called upon to help resolve our global challenges, yet we choose to stick with the mechanically minded, linear thinking leadership, unable to discern their asses from their elbows.

References:

• Udemans, F., 2008, The golden thread: escaping socio-economic subjugation, an experiment in applied complexity science, Authorhouse UK;

• White, M., 2010, Complex Adaptive Systems in Finance and Strategy, https://www.oocities.org/whitemark1/; Mantega, M., & Stanley, H., 2000, An introduction to Econo-physics: acorrelation and complexity in Finance, Cambridge University Press; Crocket, A., 2011, Reforming the global financial architecture: Key note address – Asia and the global financial crises; Asia Economic Policy Conference; Claessens, S., & Kodres. L., 2014, The regulatory responses to the global financial crisis: Some uncomfortable questions: IMF working paper; Research department and institute for capacity development;

• Arthur, W.B. et al, 2013, Economics and the Modern Theories of Cognitive Behavior, SFI working paper;

• Cohan, P., 2010, Big risk: $1.2 Quadrillion derivatives market dwarfs world GDP, Investor center, InvestorCenter;

• Pinker, S., 1995, The language instinct: the new science of language and mind, Penguin Books;

• Mantega, M., & Stanley, H., 2000, An introduction to Econo-physics: correlation and complexity in Finance, Cambridge University Press;