To Markets

Practitioners vs theoriticians

It would be a better world indeed, if practiotioners preached instead of theoriticians who do not operate in the real world. In the context of banking crisis - 

I remember reading years ago in Warren Buffetts annual report that derivatives 'were financial weapons of mass destruction '. Today he stands vindicated, similarly i read Dr Richebachers views 'But in America’s new money culture, policymakers and economists make no difference between wealth created through saving and investment in  the real economy and wealth created in the markets through asset bubbles, engendered by extremely loose money and credit'. This was in year 2004. 

And finally Mr Nassim Taleb put forward his views on the markets too as a foot note in his book The Black Swan in 2006 "Globalization creates interlocking fragility, while reducing volatility and giving the appearance of stability. In other words it creates devastating Black Swans. We have never lived before under the threat of a global collapse. Financial Institutions have been merging into a smaller number of very large banks. Almost all banks are interrelated. So the financial ecology is swelling into gigantic, incestuous, bureaucratic banks – when one fails, they all fall.  The increased concentration among banks seems to have the effect of making financial crises less likely, but when they happen they are more global in scale and hit us very hard. We have moved from a diversified ecology of small banks, with varied lending policies, to a more homogeneous framework of firms that all resemble one another. True, we now have fewer failures, but when they occur ….I shiver at the thought."

So many practitioners have been warning about a blowup but the people who are supposed to see and act, didnt see it because the current crisis says Mr Taleb ' was unavoidable and NOT A BLACK SWAN, just as a drunk and incompetent pilot would eventually crash the plane. And I kept receiving insults for 12 years! ' 

It is funny that people in the know, directors of banks, the federal reserve did not see this coming, in fact whenever i asked a mutual fund manager here in India if a crisis in USA would pull our markets lower the answer was an emphatic 'No' and then to my question about is there anything that may cause the markets to go lower again the answer was no, and i was again(sigh) lectured on Indias favorable demographics, growing exports, gdp growth etc., And everytime USA was used as an example, there are so many computers per person there, i remember even seeing a presentation that our credit -to - gdp ration was low compared to US, hence banking industry would grow. I thought why should that matter? May be US citizens are borrowing way too much, isnt that wrong for household debt to be very high? No sir i was told , thats the way to 'grow'.

Finally, I heard the CEO of a big US based brokerage in 2006 who said that his company was giving loans to householders on the basis of rising property prices and i couldnt help thinking, didnt i read that US housing is a major bubble ? No sir i was told again, they had exciting plans for India and had recently acquired a company i was working for then. Fast forward to 2009,the CEO has been fired, the Indian acquisition sold at a huge loss and the company has exited the home equity loan business in US altogether and is trying hard to survive.  

What were these people thinking? or were they thinking at all. Looks like the world needs more of practitioners and less of theoriticians who have never operated in a real world up and down, cyclical world before. 

The best theoritician award goes to Thomas Friedman for writing world is flat, he should have written The world is flattened instead.