Platt Perspective on Business and Technology

Addressing a common thread running through our recent economic and marketplace challenges – 1

Posted in macroeconomics by Timothy Platt on September 8, 2012

Anyone who has been even just periodically following this blog should know by now that I tend to take a more methodical and organized approach to business and economic matters, and that I prefer organized, analytical detail to broadly stated hyperbole. I still found myself at least briefly considering a title for this posting along the lines of “identifying and avoiding an impending perfect storm.” And in a way, what I would write here is an attempt to explain why that might be a legitimate way of summarizing a growing body of ongoing evidence. And I begin by making note of a diverse array of underlying threads:

• We all went through the financial crises that collectively comprised the Great Recession with its home mortgage bubble and all of the rest (as discussed in my series: Considering a Cost-Benefits Analysis of Economic Regulatory Rules, appearing at Macroeconomics and Business as postings 64 and loosely following.)
• But resistance to regulatory reform coming out of that, and for controlling and limiting activity of the types that lead to that crisis has been strongly, publically resisted, and certainly in the United States (see that same economic regulatory policy and law series.)
• And then some of the larger financial institutions that seemed to have avoided the more egregious of the short term profits, longer term losses mistakes that led to the Great Recession began to fall into similar problems, and I cite the trading failures of JP Morgan as a working example there (see Part 12 and Part 13 of that series.)
• And I add to this, a seemingly divergent thread of evidence, beginning with the Flash Crash of May 6, 2010 and continuing on to today’s news of the still very recent computerized, automated trading systems failure of the Knight Capital Group – that flooded the market with millions of bogus trades over a period of more than half an hour before it could be cut off. There was no kill switch, so even though this problem was spotted almost immediately, there were no mechanisms in place to shut this rogue, faulty trading down. Premium for all of this was placed on getting newer and faster-trading software systems online and bringing in those myriad small individual profit points as fast as possible, and with due diligence validation that this software even worked downgraded in importance when balanced against profit potential if it did.
• And no accounting of this type would be complete, at least in the here and now of September 2012, without adding in the London Interbank Offered Rate (Libor) interest rate rigging scandal, in which numerous banks were falsely misreporting and misrepresenting their rates to increase returns on their trades and to inflate their apparent creditworthiness, and both individually and through organized collusion.

All of these problems and issues hold at least one quality in common. They all bring into stark focus a readily apparent lack of reliability and underlying stability and fairness in the financial structures and institutions that our overall economy relies upon. They all come across as evidence of insiders gaming the system to their own personal advantage and to that of their immediate cronies, and at the expense of the public and marketplace at large. And that is why I began this thinking of “perfect storms.” And to bring that into perhaps clearer focus, I revert to the fundamentals:

• The principle force that drives recessions and depressions as well, is the breakdown of trust and confidence of the general public in their monetary and fiscal systems and in the institutions that maintain them.

A recession and even a depression can begin for more technical monetary policy, trade and other economic reasons. But these downturns persist because the public does not trust the institutions that they see as having caused those problems, and that need to regain strength if the economy as a whole is to move ahead again. That basic fact held for the Great Depression of the 1930’s and accounts for much of its ongoing persistence (as I discussed in Part 1 and Part 2 of my regulatory oversight series, above.) It held for the severe slowdowns and the deep recessions that I cited in those same postings as having preceded the Great Depression. And it has also held since the Great Recession, and on an ongoing basis drives the persistence of economic trends up for bubbles, and in the cases discussed here, down.

Economists acknowledge this basic phenomenon with their use of the Consumer Confidence Index and similar metrics. Right now, and focusing on the United States, consumer confidence in the marketplace, and for both ongoing business and for personal economic security are way down. Paralleling that, opinion surveys show that trust in the reliability and even in the basic integrity of Congress and the Courts and of government in general are as low as they have ever been measured. And the leadership of our major financial institutions seem intent on throwing gasoline on the flames by continuing to take public risks at other’s expense and for their own short-term gain. Congressional and other governmental oversight and vision have been equally lacking. If that sounds crazy it is because it is.

I will simply note in passing that this is all playing out in the United States against a parallel weakness in the Eurozone countries, as they face challenges of their own in the form of a still ongoing sovereign debt crisis, and as China faces its own challenges too (see my series on China as included in Macroeconomics and Business and also at Ubiquitous Computing and Communications – everywhere all the time.)

My goal in this posting has been to simply lay out some of the issues and challenges that we collectively face, and from a big-picture perspective. I am going to follow this in a few days with a follow-up posting. Meanwhile, you can find this and related postings at Macroeconomics and Business.

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