Wednesday, 25 March 2009

Deep Impact

I said before that the original Obama saving package would not be enough and it isn't. Every day there are news of more money being asked to be spent, more national debt, more losses being posted by banks and insurance companies, more requests for "revitalising" the world's economy. What amazes me is that the model that is causing all this chaos, based on false assumptions and plain wrong Maths, the Black-Scholes monster of derivatives and hedging, is still up and running with no foreseeable replacement. Asking for more money and more expenditure as a solution, is now becoming more and more a question of faith, void of any intellectual fundament, like a child that thinks the sea can be emptied by carrying water in a bucket into a sand pothole if "enough" trips can be made.
Last week Jeremy Paxman interviewed the FSA Chairman Lord Turner on the BBC2 Newsnight programme. He tried to pull out of him words of condemnation against the UK Prime Minister Gordon Brown's oversight on financial matters. Lord Turner's reply was that no one was responsible as the actual financial situation was a humongous intellectual mistake (sic) where everyone was happy to participate. He stated that even the IMF, less than 2 years ago, was willing to validate the extraordinary volume of indebtedness of the Western World as it was fundamental for growth. He agreed that the world's financiers have been incredibly dim/stupid, I think including Gordon Brown and himself in this assessment. An "intellectual mistake" was the closest understatement he offered.
The most terrifying thought is that, as I write these words, students from Harvard, Oxford, Cambridge, Delhi, Tokyo, are still learning to use this "intellectual mistake" model in their "business studies". They will graduate this summer and enter the job market, if there is any market left, with the same drive for profit as their previous colleagues.
This model was originally pushed through by the biggest financial brains of the XX century namely Ronald Reagan and Margaret Thatcher. Why are we still surprised? Reagan's Star Wars project is child's play in comparison and probably announced to divert attention from the main economical issues that both UK and USA were implementing (honni soit qui mal y pense). This article in the Economist tells the whole story! If Reagan was some kind of Darth Vader (maybe the Star Wars connotation is not at all lost on this), it looks like an entire plot to put down the Eastern Block economy by counterfeiting edollars and over evaluating the output of the Financial Services of the United States and United Kingdom was a deliberate act. Originally thought as a long term strategy, it was gazumped 2 years later by Mikhail Gorbatchov's political rise. But the monster was already unleashed and when Reagan and Thatcher were out of their jobs, everyone (not a lot of people though) forgot the reason for having this model in place. They also "forgot" because they were making copious amounts of money in detriment to the "poor" economies.
The model is dead! Incredibly everyone is still shouting "Long live the model!" as there is no new model! The current actions are mainly done to try "feeding the monster" until it dies. I fear that the "monster" will survive us all and we are dramatically running out of time.

The President: We will not tolerate any disruption of our way of life. Our society will continue as normal. Work will go on. You will pay your bills. There will be no hoarding. There will be no sudden profiteering. I'm freezing all wages, all prices. What a bottle of water cost you yesterday it will cost you tomorrow.

Now we'll take a few questions.
Jenny Lerner: Mr President!
The President: Ms Lerner.
Jenny Lerner: Ahem. Uh, Jenny Lerner, M... MSNBC... Um, Mr President, why wasn't this announcement made sooner?
The President: Well, until we knew we could build the rocket and the comet could be intercepted, we saw no reason to alarm the planet.

Morgan Freeman exposed the only intellectually valid model 10 years ago in a Hollywood Doomsday type movie, the one that can be applied for the next 3 years. Without a doubt he is the best American President paling into insignificance the likes of Michael Douglas, Harrison Ford and Bill Pullman. This model has no financial growth, no inflation, no recession, no growth, no stock markets, no foreign exchange... change, no greed, no "performance" payouts; it is a big FAT 0 (zero). The only sufferers will be people directly linked with these activities and believe me they will shout the loudest. Others will include the media "financial analysts" who will scream as loudly. They will have to find a new job overnight. What a shame. Somehow I have the feeling that no one will shed a tear for them.
In the meantime I will be waiting anxiously for a similar announcement by the 44th American President.

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