Friday, March 1, 2013

A Photograph, Not a Circuit Diagram

The Epicurean Dealmaker: A Photograph, Not a Circuit Diagram

A Photograph, Not a Circuit Diagram

Except in the simplest cases, one cannot expect observation alone to reveal the effect of the use of an aspect of economics. One cannot assume, just because one can observe economics being used in an economic process, that the process is thereby altered significantly.

The Iv-B parts of an economy are hidden, deceptive, and also mutate to avoid being observed. They actively misinform observers of their nature because gives them a competitive advantage compared to others who show their plans. Statistics in a V-Bi part of the economy then do not tell what is happening, if they do then the Iv-B parts will change so they are no longer accurate. This is a defect in the use of statistics for economics that cannot be fixed by its mathematical nature.

It might be that the use of economics is epiphenomenal—an empty gloss on a process that would have had essentially the same outcomes without it, as Mirowski and Nik-Khah (2004) in effect suggest was the case for the celebrated use of “game theory” from economics in the auctions of the communications spectrum in the United States.

— Donald MacKenzie, An Engine, Not a Camera: How Financial Models Shape Markets 1

Observers often just see this gloss or outer skin like a photograph, the circuit diagram is Iv-B and kept secret. if not then a competitors could work out what a bank was going to do with some certainty and then make money from its stock or anticipating its business moves. It is the same in poker, players must bluff or lose.

Before I begin, I think it is fair to concede our Cassandras’ contention that large commercial, investment, and universal banks2 are highly complex, risky, and opaque institutions.

This is iv-B.

It is also fair to say that most of the bad or downright naughty things which have occurred in the financial sector over the past several years (although not all; viz., Bernie Madoff) have bubbled up from the bowels of large, complex, opaque banks and their brethren.

This grows in dark places most free of I-O regulations because those that don't do this lose in a Gresham's dynamic.

But the notion that there is some sort of magical accounting regime which could simultaneously shine sunlight into the deepest reaches of multi-trillion-dollar global financial institutions, clearly convey the actual and potential risks these institutions face or create in their daily operations, and therefore usher everybody into a new era of financial transparency, trust, and mint juleps on the sun porch is simply ludicrous. It completely misunderstands what accounting is and what accounting is for.

It is like shining lights into dark cupboards looking for Oy-R contagion like cockroaches, they learn to anticipate this giving a false sense of security.

It is a rookie mistake.


Even the much maligned (by me) Securities and Exchange Commission understands the proper relationship of public accounts to equity investors. Remember that the SEC’s objective for public reporting is not to help you fully understand a business. It is to disclose all pertinent and relevant facts and risks about a business so an investor can make her own informed decision. Banks are big, opaque, risky, and complex. What do bank financial statements tell us? They tell us banks are big, opaque, risky, and complex.

They can also deceive about some aspects like special purpose vehicles to hide losses, this hiding of problems from each other can give a false sense of security in the industry and a boom which crashes when these chaotic cracks surface.

That sounds pretty accurate to me. The kind of disclosure our doughty duo proposes, including ludicrously simplistic “worst-case scenarios,” would not increase investors’ understanding of the real risks inherent in the mind-bogglingly complex business of global finance. In point of fact, these are only poorly or dimly understood by the very bankers undertaking them.

Iv-B businesses are not even well understood by all of those in them because they deceive each other, the management is often V making money from this deception like employing crooked salesmen and learn not to ask too much. This can backfire when these Iv salesmen collapse the company with fraud or theft.

Instead, it would promote a sort of unwarranted confidence that would be both dangerous and misleading.

Equity investors should be terrified of banks. After all, they are the last capital providers in line in famously and ineluctably evanescent institutions, firms whose very existence can wink out over a weekend if the depositors, counterparties, and institutional investors ahead of shareholders decide to take a powder. That is the nature of banks, then, now, and always. Banks are structurally short liquidity. When liquidity dries up, or becomes prohibitively expensive, banks fail, and they fail fast. It’s as simple as that.

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