A lot is being said about the financial meltdown. I think we have plenty of scribes scribbling to their hearts content on reams and reams of paper.Makes me wonder about the role of information in this meltdown. I think this started with the heightened degree of permeability of finance as an industry in itself.
No longer does it take an informed or educated guestimate to state an opinion on the status of markets, scrips, businesses (not necessarily in that order). Everybody has an opinion and everybody expresses it freely. After all freedom of speech is a long touted 'right' to have.
But when these opinions, lead to corresponding actions and altered perceptions is when things start going awry. The Rpower listing signaled a collapse which the Indian markets have yet to recover from. Not that Rpower was the cause... it just was the messenger, and we surely know that we should not blame the messenger for the news he delivers.
Meanwhile, I was told about this rickshaw-wala, who had subscribed to the Rpower issue... PAN card non-withstanding, income proof blissfully ignored... he subscribed. I, for his sake hope that he did not get allotted any shares.
Nevertheless, a wise one once told me.... the day the 'aam' populace starts subscribing to businesses hitherto unknown to them.... at previously unseen market highs... you know that a reversal is just around the bend.
I recently happened to watch this advertisement of bharti axa life, I imagine, regrading insurance in minutes. Wonder about the prudence behind such schemes. Where is the due diligence, the risk assessment, the medical record keeping, the disclaimer issuance etc. Sub prime loans, were loans granted to potential NPAs (known knowledge) with the sole purpose of being all inclusive. Come one, come all... everybody become a home owner.
The problem here is... it ain't that easy to build a home and it shouldn't be. Reform and progress is about overall inclusiveness.... cohesive growth... but not at the price of devaluing the very goal.
By making a house available to all and sundry, the very process of acquisition of a home was reduced to be 'no big deal'. Tim Harford in "The Undercover Economist" writes about the Power of Scarcity. Scarcity in its owns sweet way builds value... not only in tangible (monetary) terms but also in intangible (aspirational) terms.
The system is going through this much needed shake-up, to ensure that the 'outsiders' get weeded out. NINJAS have no place in a housing market, that intends on securitizing their receivables and masking their credit worthiness while passing it on. Rickshaw owners have no place in equity markets at 21,000 levels. Prudence lies not only in inclusion of all but also in exclusion of some.
Re-emphasize that equity is THE RISKIEST investment opportunity. It is not for all and sundry. Maintain its exclusivity. Create a position and an alley for everyone... but don't let the imbeciles ride on the highway.
Finance in itself, seems to have a direct impact on our everyday life a lot more than other industries eg. biochemistry, media, space science, defense, pharmaceuticals, plastics etc. Not everybody feels that he/she is an integral part of those industries, in spite of using their products on an almost daily basis. Seldom heard anyone talk about decentralizing mining mechanics, or structuring feed dispensers in a different fashion within a fermentation plant. That might well be the reason for these industries not wilting under the 'information overload syndrome'.
It's not that they do not feel the heat of a financial meltdown... but they seldom are the reason for a financial meltdown. Almost all the crashes that we have seen in recent memory find root within their own ever expanding circles. {IT however is an exception, to some extent}
Too many cooks, do most certainly spoil the broth.
PS: The econocalypse sketch is thanks to CLSA bits and pieces edition: 5th march 09
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