Finance 2.0 (2008)

Finance 2.0 –

Crisis! Superstructures or back to Cooperative Public Services

“All information, no matter what the source is, is digtalizable, measurable, transportable and infinitely copy-able.” This is the reality of the digital web world. Nowadays we are being overwhelmed by the consequences of t”his reality in the financial sector.  

Businesses, amongst others banks and insurance companies are adapting to the new “condition technologiqe”and search, with the help of digital technology, new ways to earn money. The redefine their business and adjust the strategy and the organization of their companies.  

In the public sector we can see the same development taking place. Step by step the possibilities of the web are integrated in a country’s government. The digital world is penetrating the state-structure, the criminal courts, the methods with which the police catches criminals and the ways the State communicates with you via the social security number.  

Finance 2.0. Here are some thoughts for inspiration. There has been much written about it already. That the focus on short term on stock market gains of the financier and the shareholder (!), together with a system of bonuses and premiums, not always leads to the desired outcomes, is, by now ‘conventional wisdom’. Therefore I will present a different angle.  

No “fixed point” 

 The question I want to ask is whether the individual shareholder in the market driven digital world acts as a sorcerer’s apprentice. He is able, by changing the settings of his home computer, from individual rational decisions to create a macro chaos. The mechanisms that everyone has set for themselves for being successful will together lead to an uncontrollable result.

The market and a total digital world cannot always bear each other. Why? Every system whether mathematical, social, philosophical or physical needs a fixed point. There is a need for ‘something or someone’ who oversees the situation and the links, who bears the responsibility and has the power to act upon it. This ‘something or someone’ does not exist at this moment within the financial system.  

In the Dutch justice system this fixed point is the Hoge Raad der Nederlanden (the Dutch “supreme Court of Justice”). The Hoge Raad is indeed a fixed point, however, it is a moving fixed point. The Hoge Raad gives explanation of ridged legislation (“rules”) and brings it in consensus with the spirit of the times (“principles”). This is in this system the fixed point. In the traffic between large states it could be the atomic bomb and of old there have been geopolitical constants (2) . In the Soviet Union it was the Central Committee. Like a falling leave can cause a disaster like Katharina, an individual shareholder can, with the use of the web, cause a financial cyclone. With the current system nothing can be done about it and all current forms of control stand powerless. Off course, emotions play a large role in the process, both in panic as in euphoria. Emotions do play a role in decision making, just because there is no fixed point. What happens when a bank refuses to return a child’s two pence, one can already see in Mary Poppins. In earlier days gold was the fixed point. Then the dollar. The dollar was a fixed point as long as it was convertible and the Dutch and French banks believed in that. And now? Trust? While a fixed point is in this system is missing, the system is per definition unstable. Such a fixed point has to be constructed and organized on short term.

Lessons of Aeroplanes and Nuclear Reactors 

 My opinion is that in the year 15 aW (The web exists 15 years) construction flaws in the system will become clear which did not bother us because in bW everything was more peaceful and less voluminous.

One of the lessons from the aviation industry is that the software operates and the human being controls. Humans have the last word. If this principle is turned around, it starts to fail while it is principally impossible to oversee all events beforehand and to adapt the software to all possible happenings. It is an instable system that most often works but often fails. The rules and algorithms that will function in a normal situation can work against you in an extreme or abnormal situation. Then the effects of the sorcerer´s apprentice will occur.

My observation is that the financial world has given away the governing to rule-based software: The computer gets the last say. Whoever has the smartest algorithm wins. Rules are easy to program, people a lot less. With this revolution no one is responsible for the result anymore. No one will take the responsibility for the final result. You stuck with the rules, didn´t you?  In a formal “governance”setting most people show a rule based behaviour.. 

Everything is very understandable when one looks to the speed with which individual shareholders need to make decisions based on an enormous amount of information. However, it takes us, to talk in Kierkegaard´s (3) terms, to the inhuman.   

So, if we define the problem of stability in the financial sector as a problem of in principle unattended processes, processes that operate without human interference, we can look at the control architectures of nuclear reactors and such. Nuclear reactors find themselves in the same situation with the respect to the decision-making and control architecture. All small pieces that have their own micro rationale and make their moves accordingly. However, on a macro scale they can give the system a big blow.  

As far as I know, nuclear reactors have three independent calculating systems. Two systems monitor and give their results independently. The third system checks these results and when there are differences between the independent results, the third system takes over.  


Two Possible Solution Scenarios

I foresee two possible designs of closing scenarios in this situation: either a global super structure with a global public financial infrastructure where commercial banks can lean on. Or back to the bank situation where actual persons are responsible for the financial flow, like thelocal cooperation from back in the day, small scale and all participants acting within their circle of influence. All other consensus solutions will be pointless and lack a “fixed point”. 

I will start with describing the  global super structure as a way to create a fixed point. Like the control architecture of nuclear reactors and their three hierarchical connected computer as I described above.  

Reasoning along this road it would be a possibility to let several computers from the various stock exchanges feed an overall computer. Which could possibly be located at the IMF. If the overall computer notices instability it can respond at once, obviously authorized by the IMF. This way we create, as a part of the system, pressure and counterpressure, something that now has been arranged institutionally but not as a part of the system itself. Which would lead to the governance loosing in turbulent times.  Governance is in principle reactive, it always observes  and because of that it will always be too late. A quality of the forces that the sorcerer´s apprentice set into action it that they cannot be turned around. This asks for an anticipating principle. There have to be signals before an escalation, and on which a system could respond. Who has a creative solution?  When we choose for the super structure as a solution paradigm the stock market can be market driven however, the financial infrastructure including the suggested control mechanism should be a public and international infrastructure, under the authority of the IMF for example. The IMF would become the infallible fixed point. That is the only path, both practical and theoretical, I think to close the system. The financial infrastructure should be a public affair, it is too important to leave it up to the market. 

The other option is a return to the public service character of banking. In the current financial world the connection between the depositing and the allocation is lost. With a return to the cooperation type of  “public services” banking  the trusted savings and loan bank as a public service I do not mean a return to the past, however, it is about finding a way of cooperation in which unity between depositing and allocation of money is restored. We need systems or constructions which leaves the responsibility to humans. In the principles of small scale there is a connection. The principles of deciding, paying and enjoying are connected “in one hand” This is also applicable on a large scale, where humans need to bear the responsibility and should be held accountable for their own actions and their consequences.  

Does this mean the End of the Legal Person and Corporations? 

In an anonymous legal form like an Inc. is nobody responsible. Legal persons may be perceived as a trick to avoid being personally responsible of the consequences of  one´s actions. Do you realize that the big companies show organized psychopathic behavior? You should watch the documentary The Corporation about this subject. Companies cannot feel, cannot enter a relationship and tend to make others responsible for their failures. According to me the theme of this crisis is the lack of taking responsibility on the financial markets. One of the main causes of this is the existence of the legal person (often “liiliteds”) itself. Healthy and mature people do not damage themselves. They take the responsibility for their own actions. If we could discard the concept of a lega;s person much would be gained in the area of responsibility. The way that Lloyds of Londen has its responsibility questions solved by making the “Names” fully responsible as a natural person, you are personally responsible and can lose everything, could be a good example for the future. Non-executive board members in the Netherlands can e.g. only be appointed as natural persons, not as legal entities, being an elegant way to really put them in a responsible position. 

No Growth without Roots 

In an previous article in INCROWD, I predicted a fall of the banks and other financial companies. However, it took place earlier and with more dramatic consequences than even I imagined. The movement that I sketched in that article, the marketplace for banks where they can lend money, the ´moneyskype´ is, in fact, the scenario to own responsibility, the de-institutionalization and the ´return to own the vegetable garden´., or are just some examples of the new way of banking I believe. 

A possible ´total makeover´of the financial market means in the first place renewed attention for norms and values of the directly involved parties, I think. Remember: no growth without roots. What are our and their values as bank and shareholder?

What if you would have retired today and your retirement pay was put away in shares? Then you immediately understand that such vital business should not be left to an anonymous market that eventually blames its own failure on the government.

We have the chance now to correct this system failure now, because the arrogance of the banks will be a little less. Let´s use it.  

I think there is no choice. Either organize a worldwide control system, hoping that they will be steered by wise men instead of gnomes and quickly institutionalize the financial infrastructure. Or a return to the public service focus. I hope that individual competence and and the honest and fair way of looking at one´s own shareholders behavior and in return communicates about it will become more qualifying towards his or her success. Authenticity of the bank, the bank as an anchor in the society and the trustworthiness of the bank company are, according to me, key. The Gemeentekrediet of Belgium and the Algemene Spaar en Lijfrente Kas are more or less part of Flanders as well as the Postbank in the Netherlands. They are authentic anchors. Be careful with them!  

I have the hope that principles will eventually win of the rules. Rules will lead in their worst consequence eventually into the inhuman. 

A lot of questions in this problem have been not been asked and answered yet. However, in the field between micro- and macro rationality I am convinced of a couple of things. How it exactly works, I don´t know, people a lot smarter than me will have to break their heads of that. My intentions it has been to share a couple of feelings and maybe some insights.  

As possible actions I suggest that mathematicians and social administration scientists, experts in the systemtheory should look at it. I think that the answers should come from that side. Mathematical simulation, those kinds of things you know? I don´t know whether they dos such simulations within the IMF or the Bank of England. If not, they should consider to talk to the constructors of nuclear reactors. The understand the dynamics of sorcerer´s apprentices. Did you know that about 70% of innovation in a certain branch comes from outside of that branch? When one looks with members of the same branch to new and smart ideas, one creates a blind spot. So don´t! It´s a good moment for bankers to start shopping at the other side of the fence.  

I would like to talk with you! Are you in? Who follows?



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