Wednesday, October 08, 2008

Hard times

Let us pause in life's pleasures and count its many tears,
While we all sup sorrow with the poor;
There's a song that will linger forever in our ears;
Oh hard times come again no more.
'Tis the song, the sigh of the weary,
Hard times, hard times, come again no more
Many days you have lingered around my cabin door;
Oh hard times come again no more.
— Stephen Foster, "Hard Times Come Again No More" (1854)

No one knows what tomorrow may bring, but at the moment something more than fear or even panic seems to be gripping the world of international finance. It's like finding yourself in a strange place, with no road signs, no recognizable landmarks, and everybody speaking a language you can't understand. There's a sense that the crisis is beyond anyone's ability to comprehend, let alone control. Or, if you want a different metaphor, an engine that has lost its speed governor, turning ever faster, and no one knows where the cut-off switch is, the engineering diagrams are locked in a cupboard, and nobody remembers who keeps the key.

The global economy in which billions are shifted with a few keystrokes, the mysterious formulas and algorithms that the movers and shakers placed infinite faith in, all our sophisticated engines of wealth generation, seem suddenly like docile pets that have reverted to type, gone feral.

I hardly have a moment to call my own today, so I'll link to some thoughts along the same lines written by John Robb at Global Guerrillas. He says:
In the case of the current financial collapse, the global shadow banking system (a globally inter-networked collection of unregulated financial products) is approximately $450 trillion, as compared to a US GDP of $15 trillion or a global GDP of ~$60 trillion. Put another way, the financial liabilities of the highly leveraged Deutsche Bank are 80% of Germany's GDP and Barclay's liabilities are 100% of the UK's GDP. As the leverage underlying the shadow banking system unwinds and more banks fail, the scale of the loses experienced will rapidly exceed nation-state budgets. …

The speed at which shocks spread in this globally interconnected system is faster than the response time of governmental institutions (tight coupling). In this financial crisis, the cascade of failure in the system spreads at the speed of information networks and computer automation in trillion dollar increments. …

The system's function is beyond understanding. This is due to a lack of data (opacity either due to the nature of the system or by design as in the shadow banking system), the number of variables or connected systems, a lack of long term historical data on its operation in its current configuration, etc. The result is that efforts to mitigate the system's excesses produces pyrrhic victories (where the corrective action produces negative outcomes, like how efforts to ramp biofuel production impacted food prices). Worse, due to the system's complexity and the lack of an effective means to address its excesses, we are reduced to treating symptoms of failure (as with the Paulson plan) and even then under violent debate.
Time brings much that is new into our lives. But hard times are all, in the end, a lot like they have always been. And it looks like they have come again.


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