Clapping with both the descriptive and the invisible Hands
How did it all happen? What went wrong? Does the store no longer work?
I have some good news and I have some bad news. The good news is: yes. Markets work. The bad news is, our world is not a perfect world. At least, it is not perfect in the sense described in Economic ideas Books for the invisible Hand to do all the work. This time, the descriptive Hand must help the invisible Hand do its thing.
Markets do not control in vacuum. They do not control in Wonderland. They control in our imperfect world. If we want markets to work, we must comprehend how our real world differs from the perfect world of perfect store Theories.
"Self" Interest
In October 2008, Alan Greenspan said: "Those of us who have looked to the self-interest of lending institutions to protect shareholder's equity -- myself especially -- are in a state of shocked disbelief". Ok. Let me spell it out. The qoute lies in the word "self-interest". The fact is, store ideas is based on an assumption that both sellers and buyers will take decisions in their best interest. But since disunion of management and proprietary ages ago, the word "self" is no longer valid. There is no self. Who is to say which "self"? Is it the managers, workers, short-term owners (usually speculators and quick cap gain seekers) or long-term owners, those who in fact have the long-term "interests" of the "self" in mind, heart and pocket?
First, let us say that for the store to work, we need laws, courts and promulgation to protect the idea of personal property or ownership. The store will not work if the conception of property is not there or is unprotected. To buy, is to regain the title of proprietary of the goods bought. So, we need a "regulator" in that area to start with. This means erecting a government to make laws, build courts, hire promulgation officers, or even agree on an arbitrary body elected to take these responsibilities if you are an anarchist.
Now, when a Loan Officer knowingly approves a loan to a borrower who will most likely default, does he commit a crime or not? He and his superiors who allow such practices, have compromised the long-term "interests" of the shareholders, the wholesaler really, for now, the "real" owner of the money lent. When person else introduces what is known as Teaser-Rates, where unqualified borrowers are lured into borrowing amounts they can never repay, by setting up a project of initial Payments which are significantly Lower than Real payments to come, overtly promoting the firm and covertly to delay the delinquency, or the discovery of default on such a loan, again, that should that person, his bosses and watchdogs all combined be locked up?
These officers and managers deliberately act Against the best interests of their Own employer, their own shareholders, for now, the real owners who pay their Fat salaries and bonuses hoping that such kind compensation will make those officers look after the owners "self" interests. They trust them to protect their assets. Such hope was proved false. Such trust was systemically ill-placed. Why? Because the more those officers lend, the more they make "temporary" profits of money which is not in fact theirs or even owned by their company. Every person borrows from somebody else. And the leverage ratios are staggering. They can reach 1:100. Meaning that an intermediary could have debts of 0 million (in funds borrowed from real banks or yet some other intermediaries) and assets of 1 million (in toxic loans to unqualified mortgages). This firm has an equity of only million but is gambling with 0 million! Great! What makes things even better, they securitize their toxic assets yet with some third firm which means they exchange the risk to another entity. And the other firm transfers the risk to another. And so on. It is the perfect bubble. A perfect pyramid project of defrauding the real owners of the money, the easy depositors in real banks, of their hard-earned money.
A Pyramid Scheme?
El Rayan and El Saad of Egypt's noted pyramid project of the 80's are innocent kindergarten toddlers compared to these guys whom we can never in fact blame because we all knew and all watched. So, the loan officers and the Ceos get their Fat bonuses for these seemingly distinguished achievements. These achievements, however, are short-lived. Like all fraudulent schemes. At last they are exposed when the pay-back comes. Like all bubbles, they At last burst. Into tears. Only person else's tears. So, have the officers and their superiors committed a crime? It depends. By the time the company, or the cheaper for that matter, collapses, those officers would have retired - or are happy to retire - and live favorably on the Illegal or semi-legal fortunes they had made by abusing the power given to them.
The perfect ideas is based on one assumption. That a wholesaler would all the time work to accomplish his best economic interests. But what happened here is that the wholesaler (who in fact owns the business) is dissimilar from the wholesaler who represented him at the time of giving the loans or selling the merchandise. Both people (albeit being labeled as the seller) have dissimilar Interests. This is a clear case of disagreement of Interests. Worse, the managers who set the Lending Policies inside the seller's assosication have a dissimilar set of interests as well. Worst still. The Short-Term Investors who bought the stocks of the Sellers company, do Not in fact care about the Long-Term interests of the Company. Because they make a quick buck of capital gains (speculation) and then they sell the stocks and go their way. another set of conflicting interests. Worse still. Even the long-term owners, they do not in fact own the money which their employees had lent or even a fraction of it. Their very leveraged firm borrowed the money. They will not, in theory, suffer from the consequences because their toxic waste is securitized with some other firm who in-turn transfers the risk to another firm and so on. The chain is long, sophisticated, complicated and Every person is windup an eye or even two.
The money, at the end of a very long chain, truth be said, is owned by some poor guy who deposits his savings in a local bank. Or a group of guys who cut a piece of their wage and save it in a pension fund. Or some foreigner, Arab, Japanese or Korean High Net-worth individual or Foreign Bank (and its depositors) who trusts Uncle Sam sufficient to buy treasury bills which are systemically used to cover an trillion communal allocation deficit and rising and an mountainous number of Us hidden consumer credit. Truth be said, Every person is accused of greed. Everyone, one way or another, knew, or at least felt that it was too good to be true. Well, guess what? It ain't true.
Governance
Now, to preclude all these crimes and misdemeanors, quarterly police cannot go snooping colse to in the books and course guideline papers of venture fellowships and banks. Hence a lucrative job of person else is created. This is the Sec, Securities and exchange Commission. Here the regulator's job will be to install measures and course guidelines to make sure that the practices of the management contribute a equilibrium in the middle of the interests of all stakeholders involved. These guidelines come to be amongst the Rules of Internal Governance of every venture company. But we still have a big Pr job to try to rid the communal of this blinding greed. Then outline out what to do with the United States of America who insists on providing unsustainable lifestyle to its lucky citizens on the charge of the rest of the world. By the way, the trillion, these are just the communal debt. hidden Us debt to foreign creditors is probably many times more than that.
Splitting of "Self"
The easy disagreement of Interests has arisen from complexities and sophistication, sometimes deliberate over-sophistication designed to boggle anything who tries to trace the leakage. For instance, disagreement of interest and the "splitting of the self" came when we separated management from Ownership. A modern management Must-Do. It came with these fancy derivatives which exchange risk and responsibility to person else. It came when venture became more lucrative, and therefore more important, than working the land, producing gadgets or waiting on tables, serving others, providing real value. Today, some argue that out of each , ninety four cents would come from virtual economy. Where no real value is added. Fiction money. This is when "the self was split". It reminds me of "splitting the atom". It unleashes such a great deal of unruly power. And I am not just talking about heat, pressure or radiation. I meant the power to corrupt human conscience.
With freedom also comes responsibility.
With great power comes even greater responsibility.
Let us hope that those who have power and the freedom of using that power have actively operating conscience and an sufficient sense of responsibility.
Splitting of "Self"