The US Financial Meltdown: A sign of systemic failure of the capitalistic system? Peter Lye-28 September 2008

As the financial crisis unfolds itself over the last 14 months starting with the sub-prime mortgage crisis and cumulating to the recent almost complete annihilation of the once mighty investment banking community with Merrill Lynch selling itself out to Bank of America that once vowed never to step into this arena of banking, Lehman Brothers folding into chapter 11 bankruptcy and the last two remaining pillars

of the industry, Morgan Stanley and Goldman Sachs giving up the freedom under investment banking into the regulatory arms of the Feds by metamorphosing itself into a bank holding company to tap a larger source of funds not available to them as investment banks. The need to separate investment bank into separate entity was created by the Glass-Steagall act of 1933 partly to prevent a conflict of interest from arising between the differing activities as well as to protect the smaller depositors from the relatively higher risk propensity of investment banks. Has this act served its purpose in the light of today’s crisis or has it helped to provide the fertile environment for brewing this crisis by exchanging greater business latitude with narrower source of funding? Are there lessons that we should have learnt from the hedge fund crisis in its handling of derivative instruments that resulted in the frightful demise of LTCM and a near panic in the financial markets then? Are all these a sign of systemic failure of our capitalistic system and deludes a trumpet call for shift in course away from capitalism or a major re-engineering of what defines capitalism for it to function healthily as no system is perfect?

The Glass-Steagall act of 1993 was enacted to prevent private banks whose main activities is investment business from owning deposit taking banks and thereby protect the depositors from being exposed to the more risky stance of investment banks. It also sets out to limit the type of related transactions that can be done between bank holding companies and investment bank to plug potential loop holes from being exploited. This was how most of the investment banks ended up as private entities until the recent decade or so which witness many of them going public to tap a larger source of capital. The last major investment bank to go public was Goldman Sachs amidst much fun fare on its stock market debut. This has the effect regulatory wise in placing these publicly traded investment banks initially from the Feds to full autonomy following the Glass-Steagall act and onto the arms of the SEC on their debut on the stock market. What dimension does regulation have on the behavior of these entities?

First of all, in my mind, regulation is like all things in life besides death and taxes for there is no absolute surety. The business arena is like the battle field that soldiers fight on. We can and must expect casualties. However, there must be enough safeguards in place to prevent catastrophic events like the 2 nuclear events that resulted in systemic wide failures or its financial parallel of the massive run on banks leading to a near collapse of the banking system in 1930s. Regulation is there to provide a framework to facilitate the business of risk taking and equitable risk reward for market participants.

Secondly, regulation is there to ensure an acceptable level of market transparency to facilitate business transaction. Chief amongst these is perfect price information as the Holy Grail underlying the capitalistic system. Even in today’s advancement in telecommunication that enables almost instantaneous dissemination of information worldwide, total transparency is still very much like a mirage in the desert; it seems to be there but it is not there. Some of the impediments to total transparency are product and supplier/customer differentiation, sufficient market liquidity in terms of having sufficient market participants in the product, human behavior and regulation itself which sometimes impedes transparency in the interest of achieving it by narrowing the conduits by which information can be released. Human behaviors like insider trading and market cornering is very anti-thematic to fair play and there are legislation in place to discourage such behavior by punitive measures when caught including jail time and leveling discovery and prosecution process through things like burden of proof, and rule of evidence as such crimes are not only difficult to discover but also difficult to proof beyond reasonable doubt as the gold standard required by our legislative framework. There is an ongoing joke that an acquittal does not equal innocence but that there is insufficiency evidence to proof guiltiness beyond reasonable doubt.

Thirdly, regulation is there to provide orderly clearance of trades executed in the market. This is done differently to suit the differing markets. On one end of the spectrum we have exchange traded products like stock and shares to provide almost perfect certainty in trade completion and payment without any concern about counterparty risks as the exchange and clearing house sort of provides the buffers. At mid-point where most physical trades take place, we have non-exchange traded products that uses currency as a value proxy of the product exchanged for. Stability of currency exchange rates and a good legal framework for dispute resolution is important to create market certainty. On the opposite end of the spectrum, we have the age old barter trade that does not involving any currency. A poignant observation about this financial meltdown is a partial breakdown of the trade execution resulting in a very fast downward price spiral of unprecedented velocity as most of these instruments are not even cleared through an exchange and ability to complete the trades is dependant on perception of counterparty risks one of the major factor in selectivity over counterparty and thereby narrowing the market and price in the process. We should re-examine whether an exchange should be setup for some of the instruments that are traded on a bilateral basis to avoid a repeat of such incidence.

Fourthly, although much has been argued about governmental rescue plans like the US$700 billion dollar life line proposed by US Treasury Secretary Paul Hanson and seconded by Fed chief Ben Bernake could create a wrong precedent in the future for companies that view themselves as being too big to fail like banks and insurance companies from behaving responsibly, I believe that the rescue is not likely to perpetuate such behavior if done with enough punitive measures on current owners and managers. However, I do have a concern over the equity of such a life line as it tend to favor the richer who has reaped the benefits and now want someone to help pay for their loses. This could be an inevitable situation as a collapse of the economy will inadvertently affect the poorer sector of the population. As to who would ultimately shoulder the cost of the lifeline, in the case of the USA, I believe that it is more likely to be under written by almost everyone world wide as the direct or in-direct holding in the dollar is so widespread that US will be tempted to monetized the debt in more ways than one. You could argue that you do not hold any US$ but whichever currency you are holding, your central bank is likely hold part of their reserves in US$ to back the currency. We are lucky that in the past decade of so, we have an additional reserve currency in the form of the Euro which is less open to manipulation being controlled by many financial secretaries within EEC.

I tend to conclude therefore that the recent ongoing financial meltdown is more of a regulatory failure than a failure of the capitalistic system and therefore it is not time to resurrect the Berlin wall as such.

  

Peter Lye aka lkypeter

Safe Harbor. Please note that information contained in these pages are of a personal nature and does not necessarily reflect that of any companies, organizations or individuals. In addition, some of these opinions are of a forward looking nature. Lastly the facts and opinions contained in these pages might not have been verified for correctness, so please use with caution. Happy Reading. Peter Lye 

Societal Equity, Mobility, Meritocracy and The Population Question: A Singaporean Perspective

I must begin this note with what it means to be a Singaporean. I am born and bred in Singapore but I do get questions about my nationality now and then and I wonder why. Perhaps it is my mannerism, intonation of my speech or some strange gene in me. This has set me thinking about what defines being Singaporean means to me and the populace at large.

I grew up in a Housing and Development Board (HDB) housing for most part of my life like about 80% of the population. HDB is government subsidized housing which is made affordable by the government through a series of selective grants ( based on a range of factors like income, marital status, family size etc and a clever structuring to funnel part of personal retirement fund called Central Provident Fund (CPF) to pay for part of it. Actually, it can be generally safe to say that the 80% that live in HDB in Singapore is mostly in the bottom portion of the 80% of the population. The 20% that does not live in HDB are generally and mostly the richer lot who can afford private housing or the destitute that live everywhere on the other end of the spectrum.

I am also a Chinese race wise but has been labeled openly by my Chinese teacher as a yellow banana that is yellow ( Chinese generally have a yellowish tone to their skin colour) on the outside and white on the inside meaning Anglo Saxon in orientation. I actually do not blame them at all for doing so as I have had occasions during my late teens of not only scoring terribly in my Chinese language tests like in the range of 10 to 20 marks out of a perfect score of 100. To add injury to it, there was once where I scored 11 /100 and wrote my Chinese name wrongly on the test script. When the teacher scolded me in front of the entire class, there wasn't even a shred of remorse in me as the whole class broke out in laughter and I found it hilarious as well. He told me that I ought to be absolutely ashamed of not being able to write my own Chinese name correctly at 15 years old but I could not stop laughing with the rest of the class. I tried to explain to my Chinese teacher that I am far from being a yellow banana but am very Chinese in my outlook and love and appreciate Chinese culture, history and music having acquired these by reading about them from books about Chinese culture written in English. Language of music is very universal anyway. I also challenged him that a good handle or weak handle of the language does not necessarily equal to ignorance or dis-taste of the culture. 

I just have a mental block when it came to working with block wordings of the Chinese language and was more in tune with the Romanic letter of the English language. I am not ignoring the fact that language, culture and politics are deeply inter-twined but the relationship is more complex than a simple contingo parallel. Anyway, I only need to convince myself and did not feel the need to justify to those around me about my orientation or the seeming lack of it where the Chinese language is concerned. 

The deal breaker came when the academic results were out for the year and my Chinese language teacher was my form ( mentor ) teacher. I was fourth in class overall but I scored 35/100 for Chinese. I was accorded the honor of being personally invited to his office for a preview of my results before it was made public to all. He asked me a trying question on how he should fill out the form teacher comments. I told him that I would rather have his opinion of me in the raw be it positive or negative and he thought that was a dis-respectful and cheeky response but I looked him straight in the eyes that I meant it. He asked me if I had purposely failed his subject out of spite as I had shown promising results in almost all other subjects. I told him respectfully and factually that it was an improvement as my earlier score for Chinese language was 11/100 and he did not take that very well. A form teacher comment of something very factual that I have done well generally but have to work harder on my Chinese sounds reasonable. I left his office feeling happy that I have done well as I could not be bothered about my Chinese language performance at all. I have given up long ago and was prepared to face the prospect that a University education in Singapore was near impossible as passing Chinese language or your mother tongue was a pre-requisite for entrance into University then but the ruling has since been changed. I did feel bitter about it initially on a personal front and thought that the government could afford a wider spectrum of measurement on University entrance but was prepared to pay the price since I have made a conscious decision to not to pass the Chinese language and there was enough forewarning on this for me not to feel victimized although such feelings do run through me at times. Anyway, I secured a polytechnic education and thereafter went through some trouble to get to University without any remorse and all smiles.

I think I qualify to brand myself a Singaporean Chinese and proud to be a son of Singapore.

Of late, there has been very livid debate in our otherwise morsel reporting on Singapore matters in our media on the topic of equity, mobility, meritocracy and our population or the forthcoming lack of it in our society. This got me very interested as I was on the verge of ending my subscription to the our english language daily newspaper called the Straits Times as a means of dealing with inflation to fuel my Coke habit. Some say I have a blood type of neither A,B,AB or O but C for Coke.

Firstly on societal equity. Here, I do not think in terms of the simplistic far left communist or the far right capitalist or the undecided socialist. I believe that the concept is far more mutli-dimensional to be measured along a single continuum. 

It is my belief that first of all, it is both a macro viewpoint and collectively measures effort/reward outcomes. On a personal level, it is the level of justice, compassion and humanity that exists in the deep recesses of our being that propels us to equalize it. So what does all these means? 

Chief amongst them are justice, compassion and firm belief that all men should be born equal although experientially, it seems otherwise. The key operative is should and therefore a need for going beyond birth rights to have in place mechanisms to make the playing field more just and level for all. The less endowed generally have a stronger motivation to overcome their inherited disadvantages. The privileged might in some instance have an equally strong motivation to maintain their lead save for the altruistic ones who would lobby for better societal justice or equity mostly out of their generosity and philanthropic bias. 

Last but not least, the politicians are also very mindful that one level of wealth for all as in the communist system nor the large rich/poor gap that the capitalistic system tend to produce will do. There has to be  some equalization that has to be done to narrow the rich/poor gap as it tend to create cracks in the society that could make way for widespread revolutions that could cripple a society. This is my starting point for societal equity in my limited intellectual brilliance. It is not meant to be comprehensive but serve as a macro shot into important and defining parts of the picture.

Social mobility is a great dream maker for the under dog in a society to propel forward and can be a nightmare for the elite not to regress from their high point. I have learnt very early that the concept of wealth and poverty are at times a relative concept rather than a absolute one. For example, a person that has started the race with little living in a poor neighborhood would start to feel very elated as his material dimension improves while still staying in the poor neighborhood but with relatively better house fittings, clothes, food compared to his neighbors. However, should he elect to move to a richer neighborhood for which he has marginally afforded to purchase with a slew of loan instruments that could leave him cash strapped, the feeling could be different. In this new surrounding, he is not likely to ace the neighborhood in terms of material well being as he is now a new entrant to this class and most probably at the bottom of the pecking order of this neighborhood. There could be a sense of regressive feeling wealth/poverty wise which is largely relative rather than absolute in nature.

Meritocracy is a very noble and just concept in that it pre-supposes no bias whatsoever but pure and blind pursuit of it could result in the opposite. Entrance census of students in ivy league schools that largely operate on a meritocratic basis have proven that a disproportionally large part of the students are from family with better background as indicated by things like income, housing district, paternal/maternal education level etc compared to the general mix of such factors in the general population. Why is this so? Some frame the debate along the lines or nature ( meaning better genes ) or nurture ( better upbringing ). No matter what the reason be it nature or nurture, a dichotomy has happen in terms of ill matching profile. Some recommend affirmative action to keep things in check. I have no easy answers and give it some thought and you be your own judge.

The last topic pertains to breeding or population or the the lack of it as our birth rate goes into deep dive from a population replacement ratio of 2.1. A whole slew of economic incentives have been dished out by the government to encourage pro-creation. However, if we examine the package as a whole, there seems to be some form of selective breeding in terms of better incentives directed at certain quarters of society. In the name of equity and diversity, I feel strongly that we should remove all such bias for possible selective breeding. The magic of human kind lies partially in its diversity and this could be why incest is an almost universally pungent and criminal act.

Peter Lye aka lkypeter

Safe Harbor. Please note that information contained in these pages are of a personal nature and does not necessarily reflect that of any companies, organizations or individuals. In addition, some of these opinions are of a forward looking nature. Lastly the facts and opinions contained in these pages might not have been verified for correctness, so please use with caution. Happy Reading. Peter Lye

Technology Stuff and Technology Staff

As technology becomes more pervasive in our daily living, it is not uncommon for technology stuff to fail, technology staff supporting the technology stuff takes a beating.

Technology Stuff created by Technology Staff who are not perfect will not be perfect either. We seems to rest upon the false belief that Technology Stuff is perfect when in truth, it is as good as their maker save for their consistency which means it can be consistently right or consistently wrong.

Peter Lye