Saturday, September 20, 2008

"Financial 9/11": Greed is not always good; but what about asymmetry?


Well, Jim Cramer could not have been more blunt yesterday, when he said that our whole economy could have stopped function. For example, I could have gone to an ATM even at a solid bank (the Bank of America) Monday morning and found it would no longer dispense cash.

The media continues with speculative details about the federal bailout package, and the Wall Street Journal weekend edition is indicating that much of it is still unsettled and “controversial.” It hardly sounds like a completely done deal yet.

I started this discussion yesterday, but we have come to translate our view of personal morals (or “moral hazard”) in terms of free markets. We say we have a meritocracy in which we can “measure” people in terms of fiat money. As I indicated yesterday, science fiction writers can have some fun exploiting this idea.

A free market is supposed to give the young adult, once free of his parents and able to function on his own, the freedom to map out his own course in life based on his own talents. But the market needs to be stable and sustainable, and not subject to infrastructural collapses, whether from the environment, from war or terrorists, disease, or financial instability.

One problem in the financial crisis is “asymmetry.” That is, a small number of people can disturb the system with arcane instruments (in this case, “credit default swaps” in toxic combination with some abusive short selling practices), for their own gain, engulfing others without their knowledge or consent. A basic principle of a market system (particularly in insurance, as we noted yesterday) is accountability. If one can cause a result in the system, one should be accountable to someone. Some of the more controversial investment practices shelter the “investor” from personal accountability, to the system and to others. Some set up inherent conflicts of interest. These were supposed to be covered by Sarbanes-Oxley in 2002, but we find that the potential conflicts that can come up run much deeper than we had supposed. It is all to easy for parties to engage in supposedly lawful activities where they stand to benefit from the demise of others who are not aware of the situation.

But asymmetry applies in a lot of other areas. One is Internet speech and reputation. We’ve explored that a lot recently. What’s happening is that individuals are growing into a culture where they don’t see the hidden ways that their lives depend on the unwilling sacrifices of others. Whatever we think of the “family values” debate, at least it forced the issue that one only gets the needed start in life because of the dedication of others (parents and other family members) and, even if one does not have children, one might be expected to return the same to others.

In many families (particularly in non-western cultures), parents make a lot of “socializing” their children to put loyalty to other family members above developing their own talents. We are rightfully critical of this cultural practice when it leads to tribalism, group conflict, or obsessive patriarchal behavior especially among men who see themselves as following and privileged by religious principles. Yet, often family solidarity and blood loyalty comes about as a result of necessity. In a world that can not be counted on to remain stable (or for a family locked into poverty by culture) functioning within the family still remains a source of personal identity for most, but not all people. Unfortunately, the instability we see around us (including, now, the recent “Financial 9/11” or “Black Wednesday”) can come down hard on those who need to follow their own course in life.

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