My Take on the Financial Crisis

by Sam on September 17, 2008

This is my analysis of the financial crisis and it’s relatively simple: The more removed you are, the less control you ultimately have.

The further you are removed you are from a situation or an object, the more difficult it is to monitor and control. Time is not your friend and things can spiral out of control quickly and without your knowledge.

Think about Americans and food. As we have become so removed from our food (we collectively eat more and more processed, fast, fake food) that we have lost respect for real food. We’ve forgotten what it takes to actually have and cook real food. As we become increasingly comfortable with this disassociation we loose our ability to make good judgment calls. We end up doing what’s easiest. We go for the quick fix. We go for what tastes good without actually considering whether it’s good for us.

The same thing has happened in finance. The main conduits controlling the money have been increasingly removed from money. To some extent they’ve forgotten what it takes to earn and make an honest dollar through sweat. Money is meant to honor an exchange. Over the past 10-15 years we’ve come to see computers manipulating huge sums of capital online and financiers using ambiguous instruments like derivatives. It’s okay for hedge funds to use bizarre arbitrage and unsafe leveraged positions because they are ‘smarter’ than we are.

Our disconnection has come back to haunt us again.

Nothing is too big to fail and from what I’ve personally seen, scale is not always better.

Here are some other posts of mine on the state of the economy:

Time to be Worried? (January 2008)

When to Cash Out

Frustrations with Media Coverage of the Financial Crisis

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  • That's a very interesting view, and I wish I knew more about economics to be able to comment about it more directly, but I still have a perspective on the issue as a whole.

    The American taxpayer finds him/herself caught between a rock and hard place because of the irresponsible actions of a highly priveledged few. Ultimately, we're going to have to lend them the money they need or go down in the ship we thought someone had control of.

    However, before anybody sees a dime, there should be some very powerful controls in place (which your article alludes to):

    1. We want our money back. Everyone on Wall Street will understand that, because they don't give away money for free either. And we want it back with interest.

    2. A bi-partisan Congressional investigation will take place to a) determine if there is any criminal activity involved, and b) to determine the best regulatory structure for a system that has clearly outgrown its previous controls.

    3. Legislation will be passed to limit CEO compensation based upon company performance, and the compensation figure will include severance packages and forms of non-monetary advantages the position provides.

    If we don't do the three things listed above, we will see this situation happen again, and it might be far worse the next time. Greed is a disease, and unless it is treated radically, it will always grow back.

    P.S. Thanks for a great site. I especially liked the Meet the Press segment. I missed it, and I'm really glad you had it here for me to see.
  • omg
    interesting view, but hedge funds are in there for trades, and the problem is that without regulations those trades and the deals sealed by i-banks have become more and more leveraged (30-1 in some cases). Its not that they are removed from the money, its that i-banks now want a quick buck for their books, if that means leveraging to the hilt, so be it.
  • Hey OMG,

    My point is simply that the more disconnected we are the more likely things are to spiral out of control without us be fully prepared to deal with those consequences. For example, Hedge Funds operate outside of most standard operating rules/regulations, and thus, are more disconnected.

    My statements are more observation - obviously there are many more variables at play here
  • We as a society have lost sight of the future in our focus on me now attitude. Easy quick fixes are very temporary. You have the right perspective on things.
  • Thanks Mountain View! It'll be interesting to see if today's government cash
    injection sustains a rally moving forward
  • Sam-
    Thanks for checking out http://ryanagraves.com

    I recently posted on how the Financial Crisis may help tech startups...let me know what you think.
    http://ryanagraves.com/09/24/2008/secret-of-how...

    I wonder, what is the best way to reconnect the right people to the market and in tern regaining control?
  • Hey Ryan...I'll check that post out

    Hmm. Howard Lindzon and Roger Ehrenberg have great posts on this topic

    http://www.informationarbitrage.com/2008/09/on-...

    http://howardlindzon.com/?p=3853
  • I'll check them out. Thanks Sam.
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