How to view this system perturbation

ARTICLE: Global Stocks Sink as Crisis Spirals; Fed Moves to Thaw Credit, By Steven Mufson and Neil Irwin, Washington Post, October 7, 2008; Page A01

The analyst in me detaches in fascination: the profound interdependency of global economics being asserted negatively, it makes everything that came before it (9/11, Afghanistan, Iraq, SARS/avian flu, tsunamis, Russia/Georgia) seem minuscule in comparison.

This is the financial Y2K of our nightmares: demonstrating an undeniable, inescapable connectivity that renders all fantasies of great power conflicts essentially moot. The "common wealth," as Sachs would put it, is simply made manifest.

Arguably, this is the first great, system-perturbing crisis of globalization, because it truly captures all the main players in a way that previous ones did not.

As always, the question will be: What new rules and rule-setting venues emerge? Because eventually they must. The Asian Flu didn't do it, nor have any of the other more regional shocks since, but eventually you need some entities to emerge to monitor and manage these cross-border financial flows. This gap has been clear for many years, but as long as informal collusion among the largest economies has worked--just well enough--no one's been willing to surrender the power. Maybe this perturbation, then, is really the one.

That's how you need to view this global churn in a grand strategic sense: the opportunity to fill in profound rule-set gaps generated by all this rising connectivity.

In the right hands, this crisis becomes a huge impetus for new political understanding among the world's great powers, reminding them all that what really matters in this age is protecting and expanding the wealth among those being lifted out of centuries of poverty.

You either meet the expectations of that emerging global middle class or all of the other preferred "trainwrecks" are made insignificant.

This crisis reminds me of a Talking Heads' song that begins with Byrne yelling, "Everybody! Get in line!"

If anything, it reminds us of how irrelevant the whole "league of democracies" concept is.

It's called a "league of capitalist great powers," and it needs to be called to order--truly--for the first time in history.

Comments

[Peter Jansen]

Of course that Talking Heads song also includes:

"Our president's crazyDid you hear what he saidBusiness and pleasureLie right to your faceDivide it in sectionsAnd then give it away"

That about sums it up...

[William R. Cumming]

Fully agree that a globalization vacuum in finanical flow regulation has been clearly identified by current debacle in international and domestic finance. Problem is that political and other tradeoffs are being made implicitly without real knowledge of how to identify and calculate those tradeoffs. Some peasants may just have pitchforks.

[Agustin Mackinlay]

At long last! This is the post we´ve being waiting for some time now. Note that today´s COORDINATE interest rate cut is an unprecedented step in the realm of international finance. The Federal Reserve, the Bank of England, the European Central, the Riksbank (Sweden), the Bank of Canada, the Swiss National Bank AND THE PEOPLE REPUBLIC´S BANK all acted together for the first time in history!!!

[farhad]

the event of the end of sept-begining of oct is on a historical magntiude,no mistake about it.this time,is not just the working,andmiddle class,but also ingulfing the wealthy and rich class.that's whywe see so much panic in white house and congress.the roots of theproblem is in the nature of the system.Adam Smith & Ricardo sought,for every supply(product),there is a demand,its not so,because whenthe product is sold,the profit is invested to increase production,andin turn the supply get a head of demand,on the other hand,the wages are kept low(to make more profit),as a result;a balance between supply&demand can't be stablished,and eventually the market gets sachurated(and globally too,that,s why we see wars fornew terrotries and markets).the world is not endless.the solution forthis is sometimes;historical invention that can create new markets(likAutomobile revolution),the second solution is war(U.S learned aboutit in WWII),which bring empolyment and later power of purchase.if these remedies are not available,then they turn to stablish a credit &loan system plus increased defence budget,in order to keep the power purchase of the middle class up & going,by injecting ficticious paper money in the system,this actually started during Clinton.in 2oo4,when 5 member of the security exchange comm. had ameetingwith head of jaint banks(one of them Paulson of goldensach)becausefor every dollar of asset they had,they were borrowing EX; Lehman Brs $30(1 to 30),Merryllinch 1 to 32,Gollden Sachs 1 to 25,and they stablish the Net Capital Rule,so they can borrow more money,that's how they created the housing bubble.Where are we headed 1)towards a atomic winter.2) towards a more human and just sociaty.we have to see.

[Louis Heberlein]

The real need is to have regulations, and small business and corporate plans, focus on tangible aspects of economies like efficient energy, production, useful new technologies etc. rather than on the virtual and phony financial economy ploys which were ends to themselves rather than part and supportive of overall economies. Globalization in the information age did not create those phony virtual financial economy toys, but it did speed their expansion, and 'apparent' rapid return on investment while obscuring the real nature, risk and status of those toys.

Dumbing down the language of financial wording, and measurement of performance techniques to a level that most government and private interests can actually understand real conditions rather than 'talking the talk' will be critical. The reviews should also include layman discussions of whether the financial ventures would support, rather than divert investment from tangible and needed economic areas. Again, I'm taking about significant needs like energy and transportation rather than clothing, soft drinks etc.

That approach may slow the expansion of new financial ventures, but getting more of the public informed, and with an ability to 'vote' on them, will be important to establishing and maintaining confidence so that we are willing to act in ways that really share risks and rewards.

Those transformations will be much more important than changes in presidential administration and political party 'power' which will really be worthless without broader public understanding of conditions and needs.

More students should be exposed to layman oriented social economic histories from Tulip Mania through the flaps of the last century to see how optimistically gullible the public can be, and how some of those exploiting it sometimes convince themselves it is for good purposes.

[critt jarvis]

I pulled out hardcopy The Year 2000 International Security Dimension Project over the weekend.Seems like it's a good time to understand and heed the M-Curve of Influence.http://www.thomaspmbarnett.com/projects/y2k/Year%202000%20Int'l%20Sec_%20Dimension%20Proj_%20Report%20(Part%204%20of%208).htm

[Wiggins]

Amen.

One of the many rule sets that needs to change: adjust the group of seven to reflect the new economic realities:http://opposedsystemsdesign.blogsome.com/2008/10/07/expand-the-group-of-7/

[Louis Heberlein]

If big guy government and private sector players combine M-Curve of Influence with Information Warfare strategy and tactics they have tremendous potential to use those insights for good or evil purposes. There will be significant economic and social transformations coming. I hope the good angels are in the game.

[John Schneider]

the way I see it the current financial problems were largely caused by the lack of transparency in how the financial instruments work and specifically how they were valued by the holders of the derivatives. this became the trigger of a systemic failure.

a second systemic problem is that banks are regulated by national governments. believing that some international committee would do any better a job of regulating is naive. both a subject to influence by the financial businesses that would like to operate w/ no regulation at all

what is needed is a transparent banking & financial system so that key indicators like how much is kept in reserve, how leveraged positions really are or the effect of defaults is really known. there is a model today (from the software and hardware industries) that provides this called "open source" which has operated, grown and thrived next to "closed source" companies and now drives most of the internet. the rules by which banks operate must now be open sourced and businesses and governments, if they know what is good for them, should not do business with financial institutions that have not open sourced their rule sets.

I'm not a financial systems guy, I don't know hard this will be to do, but the folks that started the open source movement didn't know what they were up to either. I think that the first banks that start opensourcing their rule sets might find that they get more business going forward.