Duties of Regulators - Role of Bankers

Duties of Regulators
Role of Bankers
2010 04 17
Solvere Lim Swee Keng SM(MIT), MBA(Law)
Margaret Li Zhong Qi BEcon(BeijingU), PhD(NTU)
http://blog.163.com/solvere@yeah
http://solvere.blogspot.com

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2010 03 19 Singapore’s Business Time “Lots to Worry About Despite Recovery” Prof Barry Eichengreen, Professor of Economics at the University of California, Berkeley talked to Vikram Khanna, Associate Editor of Business Time.
The thoughts presented at this interview are inadequate in depth and breadth, weak in logic and reasoning.
For us to overcome this crisis, progress without recurrence we need greater wisdom.

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Summary

On Roles
Banks are lubricant for capital flow between supply and demand.
Banks are not significant wealth generator. If they are, most likely it is through distortion, exaggeration, fabrication.
Shared with Late DBS President Richard Stanley (2008 11 19) and Bank Negara Chief Dr Zeti Aziz (2009 05 09) agreement come spontaneously.
Regulators are responsible for ensuring banks toll the line, and serve this very purpose faithfully.

On Innovations
The first of four requirements for any invention is it must be simpler than existing solutions.
If one is making simple more complex it is not an invention.
The last requirement for invention is it must not cause harm to the society.
These are the crystallization of human wisdom; failing to comply will result in grave harm to society.

Innovation in finance industry must comply more faithfully than engineering invention.
Not only because assets held in banks are the more liquid asset, can be easily manipulated, it is also because there is no law of nature to governed it, we need man and law to govern it, which are weaker than the immense forces of nature.
If money is misused, all transactions affected, everything lost their anchor.
It impacted the whole society, the world, whether they are a party to it does not matter at all.

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State of World Economy

The severity of this economic crisis was defined by Allan Greenspan and Ben Bernanke. They are defined in greater and greater measure, clearer and clearer tone. By 2009 07 26 this crisis is defined as more deadly (“virulent” both uni-vocally used) than the Great Depression.

Great Depression without being resolved constructively ignited the worst destructions in human history. Even after two nuclear bombs detonated that ended WWII, calamities of Korean and Vietnam wars extended that destruction to last beyond 3 decades.

This lasted longer than the great depression itself until electronics industries bring world into recovery, peaceful prosperity.

Therefore, the resolution of this crisis peacefully is of paramount important. Serious studies into the cause and effect, solutions and actions must be performed with vigor and rigor, commit and speed.

Any wishful thinking, without proven foresight, logical insight, sound reasoning reminds me of Chamberlain.

Economists can afford to do so, but not governments, especially governments of nations vulnerable to international crisis, conflicts, like Singapore. Comparing to her population size, Singapore suffered one of the most brutal events in WWII.

Prof Barry Eichengreen provided a concise summary of what economists around the world have stated over and over again. But he has not answered key questions that governments raised:

2009 07 26 Mirror - Queen Elizabeth “Why it is so big, no one detected it”
2008 10 11 New York Times - Warren Buffet “Beware of Geeks bearing formula”
2007 08 08 After the market closed, the quants (financial engineers who quantified financial parameters, the more technical way of calling Geeks) gathered at One World Financial Center, Merrill Lynch, New York wondering where did they go wrong?
Three years on, the Geeks yet to provide logical answer.

Academics, including Prof Garicano at London School of Economics:

“at every stage, someone was relying on somebody else and everyone thought they were doing the right things…”
Queen Elizabeth described this as “awful”

Mirror.co.uk 2009 07 26

For such awful thing to happen even after many leaders inquiries, something must have really gone wrong, gone badly wrong.
Prof Eichengreen interview reaffirmed these wrongs are not addressed.

First, Prof Eichengreen said double dips, here, there, everywhere without explaining why it can end at double dip and why not single dip, why not three or more dips?
This is like seeing pendulum swinging without seeing the string holding on to the lobe, and whether the string can hold on to the lobe, when the lobe is getting bigger, heavier, as more labors, brains (not just China, India…) joining the same economy without new industry, new jobs!

Who do not know this is big trouble?
Scholar is to provide root causes of this trouble, even better, solutions.

On one of the igniting factor of this crisis - financial innovation, Prof Eichengreen said such should be allowed:
1. without giving reasons what these innovation really serve,
2. why these innovation are needed,
3. where has these innovation gone wrong.
These are inadequate statement, can only be accepted by the non-thinking, useful only to people without responsibility.

Financial Innovation

Finance is not the most difficult topics to comprehend, even children can be trained to managed their pocket money.
It is nothing more than number, all values must be converted to number.
It does not involve physics, chemistry, evolution.

Human has gained great wisdom since industrial revolutions.
Innovation, for that matter, invention, has been clearly, wisely defined in Patent laws.

There are four requirements for new ideas to be qualified as a patentable invention.
The very first requirement is an invention must be simpler than prior arts.

How can Economists do not realize what is simpler? What simplification actually is?
Globalization of economy is the most significant innovation in recent time.
A real, significant benefit everyone enjoyed is making complex banking transaction instantaneous, accurate, reliable, secured and available to everyone, transparent to regulator.
This is how technological innovation made global economy tick at simply a click.
How can Economists do not realize what a real innovation is?

Making simple into complex is definitely against the first principle of invention.
Financial innovation, initiated by Paul Sameulson using the Thermo-dynamics model to described market behavior. This evolved into Black, Merton, Scholes Derivative models. They lump what can be detected, quantified, accounted for, into complex, modifiable, impossible even to count.

Since then, bigger, more complex wrongs were made by famed economists.
Therefore accountants are guided away from the first principle of accounting – measurable, accountable and transparent.

It is the failure of engineers in educating economists on the basic of modeling; grave errors were allowed to happen.
It is the failure of accountants to stand firmly to their ground in face of famed economists, quantifiable accounts become alchemist’s formulation.
With astonishing failure so fundamental, Financial Innovation failed the last of four requirements for patent – Not Harmful to society.

It is a regret that economists, instead of soul searching, coming forth to provide unproven opinions to regulators.

Nobel Prize for Economics should be renamed Nobel Prize for Economy.
Else, fervent competition among scholars to create most unwieldy formula not only do not help the economy, it indeed aggravate weak economy into global crisis – these made economists no different from alchemist, the rapid act of vaporizing wealth of nations is it not similar to arson?

Any Economists who still insist on freedom of innovation must be reminded this – Booby traps, Weapons are not allowed for patent filing. Every effort is made to eliminate Nuclear weapons.

Can financial innovations that are proven so destructive, be allowed?
I attended only few classes of Economics, when I was doing my Master in Mechanical Engineering, major in System Modeling at MIT. I am sympathetic with the Economists, many latter became Financial Engineers. We must help them out in a constructive way, before more destruction is engineered.

“for my dear Friends who are Financial Engineers”
page 47, “Post Industrialization Dynamos” ISBN 9810 833558

It is a regret that economists, instead of soul searching, coming forth to provide unproven opinions to regulators.

Duty of Regulators

The above provides fundamental understanding of what went so badly wrong in economics study.

Therefore, the key for handling capitals must be emphasized again.
Capital is the most liquid form of all classes of asset. What regulators need to do is to ensure the three principles of accounting – measurability, accountability, transparency.

Any attempt to fool regulators by going against these three principles, they are likely to be fabrication, destruction, if not felony in the making.
Any regulators seeking advice from Economists without seeking Modeling experts from Engineering, bound to fail due to seeking the wrong doers on work already shown to be wrong.
With such simple, rock solid anchor of accounting, only the less competent would say:

“the loan officers of those institutions knew far more about the risks involved…. than even our best regulators at the Fed capable of doing.”

Testimony of Alan Greenspan
Before the committee of Government Oversight and Reform
2008 10 23

Regulators must be competent to understand subject matters before they are qualified as regulators.
If they failed in competency, they must improve their competency than leaving it to those to be regulated.
This is the fundamental requirements of gate keeper, quality control….

Role of Bankers

Now we come back to the subject regulators regulating – Bankers.

Immense jobs and wealth generated when engineers invented semiconductors, IC, computers, communications. Many companies gained public listing around the worlds, billionaires a handful.

Investment bankers who assisted in these public listings gained high reputation; soon they are considered as banks.

2001, Solvere detected technology no longer adequate to drive world economy. Over abundance wealth cumulated over the technology boom found no real opportunities for investment - Interest rate will go negative. This is new fabrication by man, therefore there is no existing law to govern it.

“Real Economy, Realities of Economy, Economic Realities” 2001
http://cognose.blogspot.com.2007/08/real-economy-realities-of-economy.html
Compiled in “Cognose – Recover the Lost Key to Infinite Wisdom” 2005 Winter ISBN 9810 513757

Because there is no law to govern it, the impact will be unprecedented. This was immediately shared with a person whom Solvere felt may be needed to lead a sovereign fund. So they happened.

Technology powered boom propelled the investment bankers to become the biggest earner having biggest profit margin.
But when technology innovation stagnated, fewer new public listing took effect. Major industries are reporting less than 1% profit or making big losses, how could investment banks still reported high revenues, high profit margin?
Clearly, these are no longer real wealth generated.
These are wealth fabricated through exaggeration, manipulation.

We must go back to the very basic of what is the role of a bank.
The Bank is a lubricant for market economy - it helps liquidity move faster, more efficiently between real supply and demand for capital.
The banks should not be, cannot be, can never be a wealth generator.
If they are, most likely, the value is through distortion, manipulation, exaggerations, fabrications.

If bankers know their role, they can live happier by managing their greed better, resisting the temptations when their peers lost the wisdom, sacrificed their chaste.

These were shared with late DBS CEO Richard Stanley (2008 11 15) and Bank Negara Chief Dr Zeti Akhtar Aziz (2009 05 08), they concurred spontaneously, without a shadow of doubt.

Conclusion

It is through wisdom we alerted ourselves from wrongdoing.
It is through understanding the basic role of each party, the basic requirements for managing wealth, doing invention, can we avoid investing in great wrong, self-destruction.

Investment Bankers are not bankers.
Bankers are lubricant for liquidity flow, not a wealth generator.
Even investment Bankers cannot create wealth; they can only catalyst, facilitate, concentrate, expedite, intensify, proliferate wealth creation.

Regulators must know the key role of banks, and basic requirements of innovation.

Human are full of creativity.
We need only few good inventions, the rest are mostly marginal improvement, if not irrelevant, if not harmful, destructive. Most inventions are forgotten.

this article is sent to Finance Minister, Singapore, Chief of Monetary Authority of Singapore and Prof Barry Eichengreen