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26 Responses to “Financial Markets - Time Out from a Ticking Bomb!”

1. Justin Davies Says:
   September 21st, 2008 at 12:07 pm

   There is enormous resistance to change within the financial services industry. You get change only where alternative activity is rewarded - the dealers get rewarded for deals, mortgage lenders get rewarded for writing more mortgages, directors and executives get rewarded by the stockmarket for continued improvement and higher results. All of this is short term, systemic reinforcement of the status quo.

   Try to work against that status quo - ie change remuneration structures - could lead to talent looking elsewhere, or for the firm reducing the incentives for performance. Leaving that herd is going to take real courage and come at a personal cost for the people involved. In a country the size of the US, a single firm here or there wont make a difference.

   What is the answer? As you allude to here, market forces are the strongest - behavior will change only when aligned to self interest. Awareness of the issues is the first step.

2. Greg Gerritt Says:
   September 22nd, 2008 at 10:03 am

   I wanted to start off my discussion, which i will follow up with over the next few days, by commenting briefly on one point in Larry’s article. He notes
   “George Soros is a large beneficiary and critic of the system. One of George’s fundamental concerns is that credit is dramatically outstripping economic activity. This is code for: people are buying on credit, and incurring substantial personal debt faster than the economic system is creating productive, sustainable and substantive, bankable value (case in point – the sub-prime fiasco)”

   My point is that Soros sort of hints at the ecological catastrophe, that there is no real economy to invest in, the oil is depleting, the forests disappearing, soil washing away, so we see the financialization of the economy, Wall st playing with funny money instead of investing in the real economy. Reality says that unless we heal ecosystems and base our economy on sustainable principles we shall see Wall St do this sort of thing over and over again. And see our government bail them out to all of our detriment again and again. It is really time to Green the economy if we are to stop this disastrous merry go round.

3. Larry Quick Says:
   September 22nd, 2008 at 5:16 pm

   Justin - is it a done deal that the industry won’t self-transform itself into something more resilient? Are you saying they need regulation to do it? What awareness is needed?

   Interesting point Greg. I look forward to your follow up on this subject.

   I would also be interested in what some of the financial markets people think about this point.

   Todd Davies? And any of your colleagues?

4. Larry Quick Says:
   September 23rd, 2008 at 8:37 am

   Interesting piece in today’s New York Times from the German chancellor Angela Merkel. Apparently Angela did warn the G7 last year about what I see as the superficial value created by superficial products: Europe and Japan turned a cold shoulder on Monday toward a American request that they bail out banks in the manner now being proposed in the United States.

   NYT (http://www.nytimes.com/2008/09/23/business/worldbusiness/23euro.html?_r=1&ref=business&oref=slogin): “The German chancellor, Angela Merkel, also took the opportunity to criticize the United States and Britain for opposing German efforts to put greater regulation, or at least reviews, of the financial sector on the international agenda last year, when she was chairwoman of the Group of 7 industrialized nations.”

   “Everyone who produces a real product knows what it looks like and what standards it is up to,” Ms. Merkel said. “One also needs to know with a financial product what’s involved. Otherwise, these sorts of things happen that we then all have to pay for.”

   I am unsure that it is all about regulation to temper the greed of markets. But, maybe if the directors and guys earning the bonuses had to pay back bad debts - that might help to re-shape this type of behavior?

5. Todd Davies Says:
   September 24th, 2008 at 2:03 am

   Thanks Larry. I touched on a number of these points in my original piece here which are worth reflecting on in light of recent developments.

   http://www.resilientfutures.org/how-we-can-help/risk-governance-assurance/strategic-risk-intelligence/

6. Greg Gerritt Says:
   September 25th, 2008 at 11:41 am

   Wall St versus the planet

   The collapse of the investment banks and the destruction of ecosystems. An intertwined tale. Greg Gerritt 9/24/08

   The Collapse of the investment banks and the corporations that insured them against their own greed is a startling turn of events. The masters of the universe, the wealthiest crew on the planet, ran out of productive things to do, started creating new ways to manufacture money out of froth, whipped the froth into a frenzy, made billions, and had no idea what to do except ask for big hand outs from the government when the froth collapsed.

   The answer of the bought politicians is to give buckets, no boatloads, of money to the same people who created the big mess that threatens the lives and livelihoods of people all over the world, and ask them to do it again, only this time to be a bit more careful in the name of keeping everyone employed.

   People are reacting to the Bush agenda bailout in nuanced ways, mostly denouncing the specifics, which are horrible, but generally stating that a bailout of Wall St is the right approach, if only done this way or that. Critics on the left are denouncing it saying if the tax payers are buying all this stuff, they ought to get the rights associated with community ownership in saying how it will be run, and while the critics on the left are correct, if we own it, it ought to be run in ways that are open to the community’s input and benefit the community, but the analysis still lands short of what is needed to actually resolve the problem.

   What most observers seem to be missing is the idea that the fundamentals of the economy have changed over the years, primarily the situation in the realms of natural resources and ecology on planet earth. The reality is that in an economy based on ever faster growth it is becoming harder and harder to make fortunes in the on the ground economy. Too many ecosystems are disappearing and collapsing, too many natural sinks are full, minerals are becoming harder and harder to recover, and ever greater quantities of almost anything are becoming very difficult to find.

   We all know about peak oil, the idea that from now until forever it will be harder and harder to bring more barrels of oil out of the ground on a daily basis, and that a civilization built on cheap energy is in serious peril. No one is starting new oil companies, though there is money being invested in new drilling equipment in the ever more desperate efforts to drill ever more difficult oil fields for ever diminishing pools of oil. Have we considered the role of forests in our economy, from paper, to lumber, to furniture, to fire wood, to a place of recreation, to a source of food? That forest products still under gird civilization, that deforestation is one of the primary causes of the collapse of economies through time? Have they looked at what is going on in the forests? How they disappear before our eyes, even in a place like New England in which forests return easily and had partly done so from previous deforestation? The only cut and run forests left in the world, the forests that in the past would have provided the raw materials to fuel the economic recoveries from Wall St insanity, are the two hardest forests to work, tropical rainforests and the far north. Then consider the massive amount of ever more expensive oil it takes to exploit these forests, and the greenhouse gas emissions that come from deforestation, and consider whether any natural resources will be able to help Wall St end this latest speculative mismanagement monster.

   You can not start the next Great Northern Paper, it would be a joke. Fisheries all over the planet are overfished and collapsing. In agriculture, think Monsanto and patented seeds, an attempt to make a fortune by cornering markets rather than develop global agriculture. Manipulation ballooned because all the farmland is already in production, and much of it is already severely depleted and eroded. Using genetic engineering, patented seeds and no longer allowing farmers to save their own for next year’s planting, bait and switch and watch Indian farmers commit suicide appears to be the business model these days. Then think about higher prices for food as the ethanol craze gets hotter. The airline industry is going broke, funny how that happened right about the time of peak oil. Are we actually seeing the demise /transmogrification of the automobile industry? It appears to be rapidly going bust in the US. One might say this is because there is more money to be made in the mental gymnastics economy and that corporations in other countries do not have to pay for retirees health care costs, but an idea that needs to be discussed much more is that there are physical limits that we are running up against on Earth and it will be harder and harder to make money in the production of things or in shipping them.

   If those seeking great fortunes can no longer rely on actual production to make money they seem to resort to the financialization of the economy, the use of innovative trickery to manipulate investments, to funnel more resources to them and their friends. More and more money has flowed into the financial sectors of the economy, aided and abetted by politicians at every turn handing over big subsidies for local jobs in the industry. What the “smartest guys in the room“ came up with this time for their aggrandizement was vastly inflated housing prices, partly because their friends in government helped create the policy of building no housing people could actually afford. This was then followed by selling unaffordable houses to people who had few other housing options, and then turning debts by people who could not afford the payments after the interest rates jumped on their bait and switch mortgage into investments for speculators. It was based on pretending the housing boom would last forever and therefore this was a very safe way to invest money. It is the economy of turning everything into an investment because the buddies of the rich in government will always say we can not afford to let the wealthy, the powerful, the providers of campaign funds, and the investment that drives our ever MORE fail. Just the little guy is allowed to fail.

   The apologists for the the failed economic model will point out Microsoft, Dell, Google as the future of the economy, but you can not eat a google or software. But how about Windmills, solar panels, and geothermal electricity as clean and essentially boundless and a place to see major investment and fortunes? Or pharmaceuticals, plastics, communications and nanotechnology?

   Yes, we shall have some Green Jobs building windmills, some jobs in modern manufacturing that seeks to dematerialize manufactured products, but ultimately unless we actually stop the shenanigans and start to really try to live within our means on Earth, the collapsing ecosystems will push those seeking fortunes into ever wilder and stranger financial instruments to make more money and hold on to their power, triggering financial collapses faster and faster followed by more funny money bailouts that we pay for so they can prop up the economy of more a little longer. Are we hoping for some miracle like a second planet to exploit? Yes, we can eat the planet faster for a little longer. Buckminster Fuller thought we might figure out how to make that transition, turning into a truly sustainable economy as we drained the last of the fossil fuels. But he also knew it would take sharing and an end to war as well as the end of the fossil fuel economy, and he figured it was a close race between a thriving sustainability and the demise of modern industrial civilization. Can we make that transition if we continue to let speculators steal us blind and then get bailed out by the government on the taxpayers dime? Can the banks continue to rob the people without spending ever more money on war, both to steal resources and to prevent outbreaks of people power when people get tired of the robber barons?

   Today, no one can prove that the ever more creative financialization of the economy is driven by ecosystem collapse, that the collapse is constraining investments in actually meeting the needs of the 6.7 billion of us that inhabit the planet, but the trend seems pretty obvious when you think about it, so maybe we ought to talk about this a bit more before we bail out Wall St with $700 billion that could heal ecosystems, generate clean energy, feed people, and before we feed the war machine to defend what Wall St seeks to impose on us.

   There is a big hole in my argument. Currently capital flows fastest to short term investments, quick buck schemes. One can not say that one can not make a fortune in the wood cutting business, there are still people getting sweetheart deals with tin horn dictators, and war criminal presidents and making money cutting wood despite the collapse of forest and forest ecosystems around the world and the moving of their residents to shanty towns. It is likely that over the short term people will expand some resource based businesses, the planetary resource base still exists, it is still large compared to the demand, even if it is shrinking, depleting, dieing. But it is still a diminished investment possibility. Yes, one can found the next mental gymnastics giant, a google or microsoft, but for the most part fortunes are made in the financial industry, the phony manipulation of money, and the rules the politicians write are designed to help that speculation rather than rein ii in. I can not prove that the financialization is currently driven by resource depletion. I am not sure if the right things are measured to prove it, and ferreting out the human motives behind any particular investment is impossible. But we can clearly see the sinks fill up, the forest, fish, soil and oil disappear and the smaller and smaller percentage of the economy based on actual production of tangible goods. We can not yet prove the ever more highflying gymnastics of the financial sector is related to running into the limits of the earth, but it is what we see, it seems the most logical explanation for what is going on, and it gives us fair warning of what lies ahead unless we return our economy to a sound environmental footing.

7. Todd Davies Says:
   September 26th, 2008 at 7:11 pm

   Ultimately the financial economy can only disconnect from fundamentals and the real economy for a period of time before reconnecting again, usually with significant disruption. The big difference this time is the financial and tax engineers leveraged up on a much bigger scale and the general public joined in.

   RFN would argue that a deep understanding of immediate and emergent conditions at a micro, macro and mega scale, including some of those raised by Greg is a vital step towards a resilient future ie. thriving and prospering as conditions change around us. As Greg points out, there are other changes in conditions at a mega and macro scale which means that the consequences of this one could be and need to be different.

   We put out pieces from time to time which highlight some of the conditions as they emerge, and a lot of my pieces are on this: http://www.resilientfutures.org/author/todd

   For a broader view on how to apply this thinking, Larry’s work is an important read, particularly his piece on eight cost shocks: http://www.resilientfutures.org/author/larry

   Thanks for sharing.

   Todd

8. Laz Quick Says:
   October 1st, 2008 at 8:26 am

   Tues morning Sept 30th in Melbourne, Australia. I have just completed a 6:30AM Skype call with Fred Presley in New England, USA. We were to focus our discussion on the Smithfield East Village project. However, that was delayed as an email hit my desk about the rejection by the US Congress of the $700B bailout, followed by another reporting a 777 point drop on the Dow - all on top of my late night email drop-in to discover that Wachovia Bank had nearly fallen over (if not for the intervention of Citigroup).

   Oops! Ouch! and Hhhmmmm? ………… an interesting set of conditions - both immediate and emergent. An initial reaction could have many of us screaming to the bank to take out our cash, or something similar. And reason might have that appear a logical response - as I am sure we will see the likes play out across the globe, not only in the USA.

   But ……. I would add another view - a more Resilient Futures response to such a quandary of conditions. A principle in the Resilient Futures framework suggests that when a conditions change of this magnitude occurs, with a cool head, use the process.

   Firstly, the rejection and more so, the whole problem itself, is not a discontinuity - not something out of left field - it is a continuity that has been building for some ten plus years and those in charge have either played the denial or ignorance game. Hence, there are complex underlying drivers at play that at a deep systems level have flipped the state of the US economy and the world financial system into another state. YES - we do have what is called in resilience - a REGIME CHANGE!!

   We are now in a unique state - financially and economically - that we have never before experienced (just like the state change that global warming and climate change has already delivered to us). An analogy we could use is that the game that used to be played on a football field, is now played on a Quidditch pitch, with the Hufflepuff Cup as the prize. So, get your witches, wizards and flying broomsticks out on the field. Organise your chasers, beaters, keeper and seeker. Mind the quaffle, watch out for the bludgers, and catch the golden snitch. And above all, remember rule number one: players must not stray over the boundary lines of the pitch, although they may fly as high as desired.

   Ok, given our circumstances, the Harry Potter analogy is a tad trite and corny. But I hope you get my point. We really do have a systemic change of state, the old rules, models and processes don’t work anymore, and we need to think differently, and innovate - NOW!!! Waiting and deferring the systemic problems into the future for later generations to deal with (at a higher cost) is NOT an option. As Buzz Holling’s Adaptive Cycle illustrates, within these types of conditions and in such a state change, we have little real choice but to let go, reorganize and look to create more resilient growth.

   Note here – innovation by resilient thinkers is critical for any type of positive outcome. The Resilient Futures definition of resilience is: ‘whole systems, self-transforming in a flow with conditions, and prospering. That requires creative thinkers, using a creative process, to produce creative outcomes.

   So, what can we do using the Resilient Futures process. A bit hard to explain in a comment, but here is a start. Assess the problem and opportunity (as defined in a risk reward resilience analysis), understand the conditions, review, innovate and reorient capability, reorient expected value creation outcomes - and go like hell to proactively transform to meet the new conditions head on, in a resilient manner. Anything else is pure panic and irresponsible behavior - and time wasting - especially if you are a leader representing shareholders of any nature (business or government). It will be painful no doubt, but that is what happens when you correct the misgivings of so many years of misguided value creation.

   Now, in digesting the comment above it several BIG questions come to mind - did the architects of the ‘bail out’ package do this (act in a resilient manner) - or did they just come up with something that looked good on paper? Is that the reason why congress ultimately rejected it? Is the package better rejected than accepted? Though be it a painful reorientation, will the will and creativity of people and the true, systemic market forces eventually settle in a better state than if the package had gotten up?

   My thoughts are that the US economy is systemically not producing resilient growth, and if that isn’t fixed, no manner of bail outs are going to work. All they will do is in the short term parse and provoke the inevitable.

   Oh, and while dealing with a fundamental reorientation of business models, factor in climate change and other cost shocks that are also part of a greater regime change. They are still there, and also need the same approach - hopefully well before their own regime shifts have past a threshold of no return.

   Related RFN article:
   - An Imperfect Storm: Resilience of Ignorance Within Eight Cost Shocks - http://www.resilientfutures.org/wp-content/uploads/2008/07/an_imperfect_storm_lquick_july_060711.pdf

9. Todd Davies Says:
   October 2nd, 2008 at 8:04 am

   Great interview with Paul Keating last night. Keating was the Australian Treasurer during the 87 crash and Prime Minister during the 90s recession. He makes some clear and easy to follow statements on why this situation is different and the mechanics of how this all works. It’s very useful watching.

   http://www.abc.net.au/lateline/content/2008/s2379522.htm

10. Larry Quick Says:
    October 2nd, 2008 at 10:13 am

    Thurs Oct 2nd 2008. Just watched the Paul Keating video that Todd refers to. I agree with Todd, a MUST watch video from one of Australia’s and the world’s smartest thinkers. Once again, ten minutes of your time - please watch it - http://www.abc.net.au/lateline/content/2008/s2379522.htm.

    As you will see, like most outside the USA, Paul is an emphatic supporter of the US financial bailout, and puts his reasons why in the interview. His reasons for doing so I think are interesting, and show a line of thinking not taken by those in the US opposed to the bailout.
    I think, from a resilient futures perspective, the fundamental reason between Paul’s support for the bailout, and those opposed to it in the US, is concerning – especially when you also take into account that the reason many in the US support it is equally as deeply floored.

    From a resilient futures perspective, here is my take on it.

    Watch Paul’s interview and you will see that he thinks the bailout is critical primarily because of the solvency and liquidity issues from a whole system perspective. That is the whole of a global financial perspective – not just the US economy.

    Paul intimates the knock on effects, through a whole, global economic system, both from a context of liquidity (the need for cash transactions to continue to actively flow through the global financial system), and a solvency perspective (the ability for the nodes in the network to have the financial capability to remain in the system – a solvency and trust position). No or slowing transactions, and no one or few capable of doing business – ouch!!!

    The RF thinking here is, you need to understand the system you are focusing on at scale (local and global, and all in between) when making such decisions. A key point is to also understand the level of connectivity – is it a tightly coupled or loosely coupled system? In this case it is a VERY tightly coupled, global system that the US economy resides in and a shock in a relatively smaller part of a global economy will impact all.

    A severe break in the flow of transactions or the disintermediation of the nodes of capability within the system – and who knows what will happen. And America seeing this thing from a myopic, locally bounded system and applying local band aids will not only cause disruption from a global view, but the feedbacks will have huge systemic, unintended consequences at the local level, and back out into the global system ……. And on, an on, and? No one can predict. Especially how it jumps to a broader whole systems perspective including social and ecological systems.

    The lesson hopefully learnt here is that the global financial system is too tightly connected, so small shocks like this in one area of the system can have huge impacts on another – without any recourse to action from any of the players – bailouts included.

    Keating also understands the deep cyclical nature of global financial markets. This was not a discontinuity to him – but more a continuous, emergent condition that commenced its impact in 2000 and was always due to play out in 2007/8. As he sees it, a 25 year cycle. The question is, if he knew it, why didn’t those in positions of responsibility within the system know and act on it. I bet those who are now short selling knew about it. What about George Soros – he clearly knew about it. As did others who wrote about it, some apparently informing us after the fact.

    So, my thoughts from a resilient futures view is that:
    1. America is acting from pure self-interest,
    2 Those that support the bailout think that somehow a $700B injection will solve America’s underlying, systemic, multi-trillion dollar economic dilemma – it won’t,
    3 Those that don’t support it and see it as propping up the ‘fat cats’ that created the problem in the first place with taxpayer cash – represent a small line item in a much larger issue,
    4 Self-interest and the for’s and those against are completely missing the point of why an action like this is needed, and that thinking will not direct required action resiliently in re-inventing the US economy in the context that the US now plays in a highly coupled, global financial system,
    5 Systemic reorientation of the global and local financial system will happen – but not around the US economy. These conditions represent a regime or state change, and the US economy is too far-gone and will need to recover through it making itself relevant to the world, not the other way around as has been in the past,
    6 As Paul Keating states, the next long wave is being instigated around China. I would also extend that to the developing world as a whole,
    7 Let’s hope that it is done in a much more resilient way than that of previous times, and,
    8 Such a reorientation of thinking and systems will not only have to happen at a mega and macro level (eg. government and global financial systems), but at the micro level of local business and community.

    For those who also share this view or similar and are keen to move toward a more resilient future should ask themselves three questions:

    1. What is the scale and nature of the system that my organization or community is bounded by?
    2. What are the immediate and emergent conditions that will impact it?
    3. Based on the definition of resilience – whole systems, self-transforming in a flow with changing conditions, and prospering – how capable are we to build a resilient future?

    Once again I reiterate – our situation may be complex, but it isn’t as diabolical as some would have us believe. In my paper: ‘An Imperfect Storm – Resilience or Ignorance Within Eight Cost Shocks’ I state that it will be the innovators using new thinking who are attracted to the new opportunities from conditions like this that will make a difference and make a dollar.

    Also, the flow on effect into other emergent conditions may also be interesting. For instance – will this state of economic affairs suppress consumer demand. I think so. And that will have a dual effect. Standards of living may drop, but also, the resultant consumption reorientation may have a desirable impact on carbon creation and climate change.

    So, depending upon how you understand and respond to immediate and emergent conditions, within the systems that impact you, will determine you ability to be resilient. Let’s hope our American friends think the same way.

11. Larry Quick Says:
    October 2nd, 2008 at 5:20 pm

    Message from America:

    Just got this from a close US colleague - interesting.

    Heard an interesting interview recently with a guy who wrote a book call The Limits of Power. Forget his name. A retired U.S. Army Colonel. He makes the interesting point that Jimmy Carter in his “malaise” speech, which cost him re-election, was in fact speaking the truth to the American people…that we were living beyond our means in an unsustainable way, that we needed to reduce our energy consumption and our debt-driven lifestyle or face deep consequences to our national security and our economy.

    He was right and it’s playing out now.

    Ronald Reagan, far from being a “transformative leader”, simply told Americans what they wanted to hear…that we can have whatever we want and have it now, that our children, our grandchildren and the planet as a whole don’t matter.

    The country took the easy road, and we’re paying for it now. It will be difficult for anyone, even someone with Obama’s communication skills, to overcome the habits formed from decades of national self-indulgence.

12. Greg Gerritt Says:
    October 4th, 2008 at 12:13 pm

    My view of resilience is ecological as well as economic, and this bailout, and the influx of more money into a financial system looted by Wall St, will be an ecological disaster, spurring the destruction of more watersheds, more forest, more biodiversity, and slowing the transition to an economy that does not squander resources

13. Larry Quick Says:
    October 4th, 2008 at 12:22 pm

    Interesting point Greg.

    The Resilient Futures Framework is based on a whole systems view and recognizes the deep connectivity and interdependence of not only social, economic and ecological systems - but also other systems like, community knowledge, the aesthetic and built form systems that also play a huge role in human behavior and planetary health.

    So, I think we are aligned on that.

    What I would ask is - how do you think that the bailout will provide for an ecological disaster?

14. Todd Davies Says:
    October 5th, 2008 at 7:28 pm

    In reading these comments I’m struck by the parallels in the Garnaut Report on climate change (the Australian equivalent of the Stern Review). A key premise of Garnaut’s optomism about the diabolocial policy of climate change is is a belief that we are well placed for open platform innovation which will orient around solutions to environmental challenges. He argues that while there will be disruption and redistribution of wealth, at a whole of systems level with such innovation we can and will thrive and prosper. Encouraging words indeed.

    At the time of publication (this week), this is possibly the most comprehensive economic analysis on climate change available and hence for the boffins amongst us is an important read. For those of us with less time he has an audio transcript of his press release.

    http://www.garnautreview.org.au/domino/Web_Notes/Garnaut/garnautweb.nsf

    Todd Davies
    Practice Leader, Risk

15. Greg Gerritt Says:
    October 9th, 2008 at 10:24 am

    Question about ecological disaster: What I see coming from a reinfusion of money into the system is an effort to maintain the level of consumption, which means cut more rainforest to plant for more for biodiesel/soybeans. I see faster mining of coal, the wasting of more water, more sprawl in places susceptible to that. All the things that happen as part of the bubble economy and the culture of more.

    Interestingly I read an article on how capitalism is dependent upon one bubble after the other to keep up the appearances of prosperity, primarily because the underlying economy is so weak.

16. Larry Quick Says:
    October 9th, 2008 at 5:55 pm

    Thurs Oct 9th 2008. Bailouts abound - the USA, UK and many other governments apply taxpayer support to ease the tumble. Markets take short term relief, then continue behavior that suggests that such support may be relatively trifling, possibly a ‘fingers in a dyke’ strategy to a much deeper and systemic problem.

    If you listen to commentators like Australia’s Steven Keen (www.debtdeflation.com/blogs/) you get a sense that, this time, the ‘correction’ is one of major state change proportion - “We are not in a Great Depression–not yet anyway–but a key pre-condition for one has developed right under the noses of Central Banks: excessive private debt. In fact, debt levels today are twice as high as in 1929, which is why this financial crisis is causing far more carnage than 1929 did”. And, ”(US treasurer) Paulson’s Plan is like bailing the Titanic with a thimble.”

    Given Steve’s comments, maybe the financial system itself knows something that Mr Paulson and his international colleagues don’t know?

    In resilience science theory, Buzz Hollings speaks of the adaptive cycle (www.resalliance.org/570.php) where systems go through processes of destruction and reorganization, which are often neglected in favor of growth and conservation.

    Sound familiar?

    The adaptive cycle has two primary phases or transitions. The forward loop which is characterized by growth or exploitation and conservation, and then a backloop lead by collapse or release, and reorganization. Though, as Buzz states, the adaptive cycle is a ‘tool for thought’, and is primarily applied to ecosystems, it has always struck me that when I observe breakdowns and breakthroughs in teams, businesses, community and the like, it is extremely useful to think about things within these two cycles, and four states.

    It could be argued that over the past ten to twenty years - at a global, and national/regional level - the tightly connected financial system and related economic system have been doing everything to ‘max’ a position in the forward loop, with an emphasis on maintaining a state of conservation. As happens in forests, when you do that, eventually the forest will burn through over-growth, and self-impose a state change as it enters a back loop and releases energy to later reorganize into a different form.

    The bad thing about that is that there is a huge amount of heat, and a lot of players get burned - even those that wandered into the forest, and didn’t know the conditions in that environment.

    Still sounding familiar?

    The good thing is that, with a lot of energy being released, the propensity to create in the new state abounds. Taking what is left that will grow in the new environment, under a new set of emergent conditions, and innovating new capability in tune with the emerging, new state. And, the people most likely to succeed are those who can master and expedite the jump from old to new. In previous but gentler longer-term transitions, Microsoft, Australia and the Beatles.

    The choice as to if and when to make the leap is usually a very personal one, as it is usually the individual actions of a few that have the least baggage to carry across the divide that make the jump the easiest. Large organizational forms with big investments in the past by their nature are coerced into trying to innovate the old dog into doing new tricks. While more free thinking and relatively unattached innovators just see the abundant opportunities.

    A word of warning - investment in the old ways could be a lost investment. Half burnt, but still overgrown forests will always eventually burn and, when they do, they could also take the work done to salvage them with them.

    And, more familiar?

17. Larry Quick Says:
    October 10th, 2008 at 7:07 am

    The Oil Drum has an article by the ecological economist Herman Daly on the Credit Crisis, Financial Assets, and Real Wealth.

    I think the article reinforces my previous point on overgrowth of supposed financial ‘assets’ and real wealth, and the points I raise in the article “An Imperfect Storm - Resilience or Ignorance Within Eight Cost Shocks” about such ‘assets’ being superficial wealth.

    Daly writes:

    The current financial debacle is really not a “liquidity” crisis as it is often euphemistically called. It is a crisis of overgrowth of financial assets relative to growth of real wealth—pretty much the opposite of too little liquidity. Financial assets have grown by a large multiple of the real economy—paper exchanging for paper is now 20 times greater than exchanges of paper for real commodities. It should be no surprise that the relative value of the vastly more abundant financial assets has fallen in terms of real assets. Real wealth is concrete; financial assets are abstractions—existing real wealth carries a lien on it in the amount of future debt. The value of present real wealth is no longer sufficient to serve as a lien to guarantee the exploding debt. Consequently the debt is being devalued in terms of existing wealth. No one any longer is eager to trade real present wealth for debt even at high interest rates. This is because the debt is worth much less, not because there is not enough money or credit, or because “banks are not lending to each other” as commentators often say.

    Can the economy grow fast enough in real terms to redeem the massive increase in debt? In a word, no. As Frederick Soddy (1926 Nobel Laureate chemist and underground economist) pointed out long ago, “you cannot permanently pit an absurd human convention, such as the spontaneous increment of debt [compound interest] against the natural law of the spontaneous decrement of wealth [entropy]”. The population of “negative pigs” (debt) can grow without limit since it is merely a number; the population of “positive pigs” (real wealth) faces severe physical constraints. The dawning realization that Soddy’s common sense was right, even though no one publicly admits it, is what underlies the crisis. The problem is not too little liquidity, but too many negative pigs growing too fast relative to the limited number of positive pigs whose growth is constrained by their digestive tracts, their gestation period, and places to put pigpens. Also there are too many two?legged Wall Street pigs, but that is another matter.

    Growth in US real wealth is restrained by increasing scarcity of natural resources, both at the source end (oil depletion), and the sink end (absorptive capacity of the atmosphere for CO2). Further, spatial displacement of old stuff to make room for new stuff is increasingly costly as the world becomes more full, and increasing inequality of distribution of income prevents most people from buying much of the new stuff—except on credit (more debt). Marginal costs of growth now likely exceed marginal benefits, so that real physical growth makes us poorer, not richer (the cost of feeding and caring for the extra pigs is greater than the extra benefit). To keep up the illusion that growth is making us richer we deferred costs by issuing financial assets almost without limit, conveniently forgetting that these so?called assets are, for society as a whole, debts to be paid back out of future real growth. That future real growth is very doubtful and consequently claims on it are devalued, regardless of liquidity.

18. Todd Davies Says:
    October 10th, 2008 at 12:35 pm

    It’s amazing how many commentators are coming out of the woodwork on this stuff, but how little of it actually allows you to make sense of it. In speaking with an analyst from one of the banks recently (the guys who give you recommendations on whether to buy stocks or not), I was struck by two comments.

    1. Our economics people have stopped doing forecasts. Things are changing so quickly that they’ve just given up until things stabilise.

    2. A leading central bank official advised us 12 months ago that sub-prime was ‘just a storm in a teacup’ and not worth worrying about.

    Clearly not even the experts know where things are going, which is a key premise of my arguments for strategic risk intelligence: http://www.resilientfutures.org/how-we-can-help/risk-governance-assurance/strategic-risk-intelligence/

    One thing that does keep on coming up is whether these issues are a Main Street or Wall Street issue and how these feed into eachother.

    My take on things is that the financial markets are a complex adaptive system which are tighly coupled between markets and have been deregulated to an extent that they act like organic systems rather than being controllable by a single country (see my post on ABC, hedge funds et al for some of the rationale http://www.resilientfutures.org/2008/06/allco-abc-babcock-should-we-have-seen-these-coming/)

    In terms of feedback loops and how Wall Street will hit Main Street, the things to watch out for are:

    1. When a threshhold hits in relation to serviceability of debt (eg. loss of job, large spike in repayments or living costs)

    2. When a security theshold hits (eg. shares fall below 70% of the amount loaned causing a margin call)

    3. When a loan is due to expire and funding has to be renegotiated (ie. the leader wants to look at 1 & 2, and wants more bang for their buck).

    4. When 1, 2 or 3 causes a forced asset sale at lower than expected prices, or cost/job cutting to maintain serviceability.

    When these things happen you not only see a redistribution of wealth, but you see a series of state changes beginning to occur such as:

    a. Job losses leading to lower spending power
    b. Reduced buffers in wealth leading to lower spending power
    c. Industry consolidation and firming up of industry power by large incumbents.

    We don’t aim to be experts on what’s happening, but aim to use resilience thinking to help understand the conditions and how they feed together, and how individuals can make a difference.

19. Mimi Katzenbach Says:
    October 12th, 2008 at 1:27 am

    As a futurist who uses dramatic models, I find this discussion here a fascinating example of “theatre of the absurd,” and confirmation of Vaclav Havel’s view of its purpose in civic life.

    Havel (who was a playwright before becoming president of the Czech Republic) says that the theatre of the absurd should be taken as a “warning” that we are in a condition of “despair” and existential meaningless. When we understand that absurdity is a warning (rather than cynically shrugging it off or taking the meaninglessness as “the condition” impervious to change) we commit to “existential acts” of real, authentic meaning, says Havel.

    “Riskless risk” is economic theatre of the absurd, one clear example of many such meaningless actions in the new derivative game (including “bail out”). The resilient response is “real wealth” which corrects for meaninglessness and launches a new economy.

    In terms of resilience, Havel sees theatre of the absurd as part of a process in which meaning and authenticity is RECOVERED — i.e., a resilient process. The warning that we are absurd catalyzes the resilience of reality and meaningful action. This is the take we need on our current economic situation: that this is all a warning that we need to ‘get real.’

20. Todd Davies Says:
    October 14th, 2008 at 8:43 pm

    Tonight Australia’s Prime Minister announced that he was launching an ‘economic security’ package. Remember my discussion on security? Well it was just a matter of time before this phrase was coined by our smooth talking PM.

    On Australia’s prime time national current affairs program, a panel representing different perspectives discussed the measures and what they mean.

    The bit that I found fascinating was the commentary from Australian Industry spokesman - Heather Ridout. In recent weeks when I’ve been battling to get anyone to acknowledge or discuss the tectonic forces other than the credit crisis. Heather summarised how the credit crisis must be considered in the context 4 or 5 others which Larry discusses in his 8 cost shocks paper - food, oil, energy etc. How very refreshing.

    From an Australian perspective, this segment is worth listening to, if only to listen closely to what Heather is telling us from the boardrooms of Australian industry. From my perspective it’s great comfort to know that a great mind like Heather Ridout is on a similar wavelength to RFN, and that industry is also considering these things as part of their own organisational resilience. Link provided below.

    http://www.abc.net.au/7.30/content/2008/s2391077.htm

21. Todd Davies Says:
    October 15th, 2008 at 8:18 pm

    The 7:30 Report is giving me so much good fodder these days. Tonight’s commentary in relation to Kevin Rudd’s blueprint to update the Basel II accord included a great quote. “As unwelcome as any crisis is, they do provide an unparallelled opportunity for leadership.”

    This augers well with my proposition that reaction to something after it has happened may be leadership in some senses, but reacting to a crisis after it is happened is not what we would call “resilient leadership”. Crisis management possibly. Testing the resilience of the system, possibly, but resilient leadership - no.

    Here’s the original thoughts on that one: http://www.resilientfutures.org/2008/08/resilient-leadership/

    But of course, in our PM’s defence, understanding the whole of system perspective and putting forward a blueprint which addresses the whole global system rather than just acting domestically or waiting for people to act is a very good thing, for economies everywhere.

22. Tom McLeod Says:
    October 16th, 2008 at 9:12 am

    Serious question that has been somewhat overlooked to date - how can we educate Joe SixPack as to the lessons of this crisis.

    I agree that there is now a confluence of commentators (and they all seem to speak on the 7.30 Report).

    My concern is that Joe doesnt watch the 7.30 Report.

    Are we therefore destined to repeat these mistakes?

    PS - And dont even get me started on the McCain - Palin response to the crisis.

23. Laz Quick Says:
    October 21st, 2008 at 3:45 pm

    Tues Oct 21st and I am just getting my head out of the flurry and fur balls of the reporting on the financial crisis (AKA ‘guides thru the crisis’ of the likes of Fox and the Oz commercial free to airs), and into some thinking. Also, my head hurts from listening to the people who caused the problem telling me how someone needs to solve the problem.

    I started with my Thurs Oct 9th 2008 thinking - “Bailouts abound - the USA, UK and many other governments apply taxpayer support to ease the tumble. Markets take short term relief, then continue behavior that suggests that such support may be relatively trifling, possibly a ‘fingers in a dyke’ strategy to a much deeper and systemic problem”.

    We are in a MAJOR state change - and I ended this piece with this: A word of warning - investment in the old ways could be a lost investment. Half burnt, but still overgrown forests will always eventually burn and, when they do, they could also take the work done to salvage them with them.

    I noted on Oct 10th the Oil Drum article by the ecological economist Herman Daly on the Credit Crisis, Financial Assets, and Real Wealth that complimented this thinking. Herman made his view clear when reinforcing that economies are not creating real wealth - “Real wealth is concrete; financial assets are abstractions………”. And that will also find it very hard to create real wealth as: “Marginal costs of growth now likely exceed marginal benefits, so that real physical growth makes us poorer, not richer….”

    Daly also quotes - “Frederick Soddy (1926 Nobel Laureate chemist and underground economist) pointed out long ago, “you cannot permanently pit an absurd human convention, such as the spontaneous increment of debt [compound interest] against the natural law of the spontaneous decrement of wealth [entropy]”.”

    Mimi’s great input on Oct 12th: “I find this discussion here a fascinating example of “theatre of the absurd,” and confirmation of Vaclav Havel’s view of its purpose in civic life”.

    Mimi stated: “Havel (who was a playwright before becoming president of the Czech Republic) says that the theatre of the absurd should be taken as a “warning” that we are in a condition of “despair” and existential meaningless”.

    On the 14th & 15th Todd reinforced a key point - maybe we have passed through a variety of thresholds and are in a complete state change, and are desperately holding onto our dream of the past with crisis talk, bailouts that don’t work and summits to retain the good old days, and boys??

    On the 16th Tom begged the question - “how can we educate Joe six pack as to the lessons of the crisis?’ (Tom, isn’t ‘Joe SixPack a fave term of Sarah you know who??;-)

    Taking this all in, I think Mimi is spot on - the crisis conversation, its problems and solutions are ‘THEATRE OF THE ABSURD’!

    The definition of absurd is: the quality or state of being ridiculous or wildly unreasonable. That to me sounds like what we are hearing in the whole debate on the credit crunch and financial crisis.

    This is a state change, the conversation we are hearing is absurd, so lets start a new conversation??

    What I am saying is that, this conversation needs to progress from talking about what is needed, rather than what has happened, and where the old system should now go. The new conversation needs to take on the shape of innovators, creating resilient futures, within a complete state change.

    Usually this type of challenge starts with deeper, source thinking (can be very abstract and difficult to get), graduates to the conceptual (ideas and propositions), then to the concrete (tangible things that could be done), and then to communications that even Joe SixPack can get. I know there is a rush to get the new way down pat, but that usually turns into a mess of the same stuff you had before.

    Let’s start here.

    But before we end this one - does anyone have a title for the new state we are going to discuss - and maybe a rationale for the title?

24. David Platt Says:
    October 22nd, 2008 at 5:28 pm

    Great comment, Larry. The time for working the old system to death is past and we desperately need a new conversation.

    As I follow this thread and keep an eye to what is happening in the world, two things concern me.

    One, I think we are in grave danger of squeezing the lemon to a point where there will be nothing left. And two, we are deeply into a state change without any real conversation about what we are going to do.

    By and large our focus is on mitigation when our systems are screaming for adaptive responses and innovation.

    The current financial system seems to encourage pure opportunism and profit at any cost. One needs look no further than the following piece written by Warren Buffet to see how difficult it will be to break free of that thinking.

    http://www.nytimes.com/2008/10/17/opinion/17buffett.html?partner=permalink&exprod=permalink

    What sort of conversation might we be having right now if someone like Warren Buffet had suggested that now is the time to invest in solutions to many of the problems we have created for ourselves? What would the world look like if instead of being encouraged to squeeze more out of a system that is clearly broken he was instead advocating for investment in sustainable and resilient solutions to issues such as climate change, water shortages, population growth and environmental degradation?

    Now that would be a powerful call to action.

    If we are serious about the resilience of the global community, shouldn’t we be asking questions about how we can reorient the system so that we can all prosper - whatever that might mean?

    In short, I agree with Laz. We need to move this conversation to one about innovation in the face of this challenge.

    We all know what many of the problems are. Let’s start looking at the opportunities.

    Can we be part of the group that creates a new, resilient financial system?

25. Larry Quick Says:
    October 22nd, 2008 at 5:34 pm

    Great stuff Dave. You may have touched on a possible theme: A Resilient Financial System - what could that look like?

    Or, maybe, Resilient Economics?

26. Todd Davies Says:
    October 26th, 2008 at 11:10 pm

    We can always rely on Larry to ask the tough questions.

    I suspect that the resilience of financial systems is similar to the resilience of ecosystems - if the entities within those systems are resilient then the system itself is resilient, and if the system enters a significant backloop the resilience of those entities is tested.

    We see this in ecosystems - if entities (species) are not resilient, then the system itself can flip into different states, therefore not being resilient.

    In the financial markets and now the real economy, we’re seeing ’species extinction’ of non-resilient entities, and strengthening of ‘dominant breeds’. The challenge of this is with less competition (biodiversity), the system itself could become brittle as there is increased dependence on this small population of dominant entities. Maybe the ACCC is a ‘biodiversity agent’ to keep our economy resilient. Sounds good to me.

    My endangered species watchlist for today:
    - Recipients for LIAR and NINJA loans who could never afford them (new species - bankrupt)
    - Over-leveraged individuals
    - Highly geared and financially engineered trusts
    - Financial engineers
    - Highly geared companies
    - Mortgage brokers
    - Non-bank mortgage financing

    New dominant species
    - Big 4 banks
    - Companies with low gearing which don’t mind picking up distressed assets

    So apart from trying not to do some long term stock picking, my current focus is to help explain the concepts of the RF process to people to help people to lead resilient organisations.

    My latest article attempts to use this week’s financial events in Australia to do just this. Enjoy!

    http://www.resilientfutures.org/2008/10/axa-perpetual-challenger-as-the-backloop-grows-stronger-it-draws-more-entities-in/

    Todd

    PS - If anyone is interested in doing a resilience health check on their organisation or cause, now would be a good time. The tectonic plates are moving.

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