"Big questions" ... too hot to handle ?

The Renegade Economist posted an excellent blog (submitted by Sir John Whitmore) entitled the 'big questions are too hot to handle" ... this article chimed very well with many of my recent posts ... such as "Does Size Matter" (or more specifically "Does the size of the .... matter"!), "traditional economics is dead", "traditional education is failing", "BBC - journalism is failing" etc ... and it points to two questions / issues that have not been addressed ...

"In all the newspaper articles, in all the radio programmes and TV shows now exposing our MP’s expenses, and previously, our failed bankers’ bonuses, two core issues have been strikingly missed. One is to question the suitability of the type of people currently in both those roles to be there at all. The other is to question the wisdom of desperately propping up a failing, obsolete and unsustainable world economic system..."

The article then discusses them both in detail, and I would recommend reading the whole (as it's not long and it's very good) ... and here are a few of the main points below ... first of all question 1:

Let us start with the first issue. Individuals, tribes, cultures, nations and humanity all mature or evolve psychologically, psychosocially and psychospiritually over time in a broadly similar predictable sequence ... One of these models, a four stage one devised by Kohlberg and Gilligan, labels Egocentric as the lowest level, followed by Ethnocentric, then Worldcentric and finally Kosmocentric ... This model can be described as showing the size of the person’s consciousness or what the person includes in his or her field of care. A recent study suggested that some 77% of the world population is currently Ethnocentric or below.

This Ethnocentric stage is characterised by tribal orientation, nationalism, rivalries, adolescent behaviours, and the like. Let us consider now the responses made by the bankers and the politicians to media and public criticism. They were very similar.

* The claim that “Everything I did was within the rules.

* An inability to recognise that what they did was ethically or morally wrong.

* The excuse that “I made a mistake”, but the mistakes were all to their own benefit.

* An almost pathological inability to take responsibility, and to say “I am sorry”.

Anyone who has a teenage son will recognize these adolescent traits; however, when one is under 25 such behaviour is to be expected as an acceptable phase in growing up. Above 30 or so, and especially if one is a banker or a politician with power over many, such behaviours are not only unattractive, unacceptable, and inexcusable, they are positively dangerous. Why have the media not picked this up and pointed it out?..."

and went on to say ...

"... Introducing tighter regulations for bankers or politicians does not raise their level of maturity, morality or their ethics, it just limits what they can get away with. No, it is the type of people, the Ethnocentrics themselves, that have to go. Worldcentric people by definition and by their nature would not have abused the old regulations, let alone need new ones. Anyone below Worldcentric on the “chart” should not be selected or elected into positions of leadership in politics or big corporations, not just banks ..."

and progressing to the second point Sir John Whitmore went on to say ...

"... The second of the two issues was the failure of commentators to seriously question the capitalist economic system that has proved to be so fragile and unjust. It has brought wealth to half the world while the rest starve; it thrives on excess consumption and the inevitable emissions, and it seriously retards the evolutionary development of individuals and cultures. Bankers and politicians alike strive to prop up the old failing system which they abused, because they know no better.

It did not occur to them that this was a golden opportunity to start to create a viable, sustainable economic system in line with the requirements of emerging Worldcentric human consciousness stage. Putting off the inevitable only makes the next economic crisis bigger and sooner. Worldcentric observers are amazed, distraught by the primitive ethnocentric thinking of our politicians and bankers, but they are up against the power that they still exercise....

So why have these two core issues been bypassed? Because few can contemplate the demise of capitalism and so they retreat into a state of denial, and few so called leaders can face the fact that despite their profile and in some cases their cleverness, their behaviour is adolescent. They have no knowledge of the evolutionary imperative that determines our future and ultimately our survival, let alone any understanding of it, or are guided by it. Why not? Because our schooling has tragically failed many generations now by ducking evolution, in simple terms, it omits the development of emotional intelligence followed by wisdom ..."

This article provides more great insight (and there are other articles / blogs / interviews there too - hence I've added a link to the Renegade economist web site), as well as adding my comments to the article itself below:

"... This is a great article and for me it re-enforces the 'battle of the future', a 'battle that transcends nations' ... and a 'battle of values' ... I describe this battle as

Leanomics vs Poweromics & Ignoromics

Where

* Leanomics = People taking responsibility for adding value and continuously improving the situation for others (e.g. customers, communities, overall environment), based upon fundamental values such as trust, honor, responsibility and respect.

* Ignoromics = People are either effectively ignorant of the situation (e.g. the overall environment) or not prepared to take responsibility to make sure it changes for the better.

* Poweromics = People using position and power for their own personal gain, based on poor moral values, self interest and greed.

Traditional 'economics' is too narrow in scope, out-of-date and effectively dead (nb Dr. W. Edwards Deming, a 'creative outsider' highlighted this over 20 years ago) ... and following up on his work, and the above definitions ... what prevails today is a lethal combination of Poweromics & Ignoromics (nb 'partners in crime'), which the growing groundswell of 'Worldcentric'/'Kosmocentric' people are starting to challenge - take a look at the following about the 'battle of values' too for instance ... and the wider blog for more examples of the application of Poweromics around us (including the failure of traditional establishments such as mainstream education and the media also referred to here).

A link there also points to this blog too, pointing to the great work being done here (and by others) - so keep up the good work ... as there's a long way to go in this crisis before we see any significant change ... e.g. in the 'behaviours' from those 'leaders' in 'power' (... because most of the 'current leaders' are unlikely to 'grow up' and/or will fight hard to avoid losing their 'positions of power' ...)

However, the internet will change everything eventually, including power, politics and economics ...!

David Clift, Future 500 Leader, UK ..."

History tells a story ... and it will continue to do so too!

Stephanie Flander's blog "Is economics a busted flush" turned out to be a great blog with lots of great comments & insight. It raised many issues (and many responses) see my two earlier posts "traditional economics is dead" and "traditional education is failing" ... but it has also much to say about 'creative outsiders', history, and the 'future history' too ... for instance take a look at a few of my comments (and others people's comments) below:

... 'Creative outsiders' (such as Dr. W. Edwards Deming) create breakthroughs because they are not constrained by existing frameworks and accepted norms (e.g. steered by mainstream education/practice). They are also naturally curious, ask lots of basic questions, and are often able to see things in a very different light. Traditional establishments/enterprises are well known for becoming almost 'blind' to new concepts/ideas ... they regularly reject (and sometimes fear) them too (for as long as they can at least) ... because they often undermine much of what they had previously come to understand (e.g. see Einstein, Galileo, Newton, Wegener ...) and it may not fit their frame of reference too (e.g. created by traditional mainstream education). This is why businesses regularly get overtaken by more innovative ones ... and it is 'why nations will fail' if they 'fail to be curious' too ... and it turns out there is a subtle cultural element to this too [Q: and do you think this favours countries like the UK/US?] ... This is turning into a very interesting/insightful discussion/blog ... well done for starting it off Stephanie .... (Post 88, leanomist)

... and the response to the question ... "Well yes, it favours the UK but it does not,,,now.,.favour the US. The problem with the US is that on the whole it is too conservative. It favoured Europe because there were a lot of independent thinkers (aka. rich, spoiled brats) who got into science. Those thinkers ran off to the US, but since WW2 they have been heading back to Europe and India, and with their departures the USA share of global GDP has been dropping. This is the kind of demographic megatrend that really shapes the national economy, and it transcends national policies. I think that we might see changes now - as Western enclaves like Shanghai in China become more attractive as places to REMAIN, as opposed to platforms to move on to MIT or UCLA, then the number of patents per locale per year (interesting metric) might shift in favour of China" .... (Post 98, FrankSz)

... and my response ... "The shift in knowledge creation from West to East is an interesting one, and this video is probably worth a look if you haven't seen it before (it also eludes to more fundamental failures in education too - which this blog has also been discussing). People from the far east also turn out to be more questioning and curious on average too. The east is also starting to train lots more scientists themselves as well, and some research establishments in the UK are already moving their work over there instead of doing it in the UK. A mega-trend indeed (with both short term and long term implications), and one that links well with the point I tried to make earlier - i.e. 'why nations will fail' if they 'fail to be curious' (nb and/or 'fail to understand, or act on, what they find!'). As we say, interesting times ahead - and another good point which shows yet more weakness in traditional economics, as well as some of the fundamental weaknesses in our economy (... you may also be interested in this blog too) ..." (Post 109, leanomist)

... and moving on to consider a little history (and the 'future of history') ...

... "Dr W. Edwards Deming was a US citizen who was mostly ignored in the US and went to Japan (who welcomed him with open arms) - and the US/UK had to quickly send a task force over there to try to understand what companies like Toyota were doing differently to General Motors - which turned out to be virtually everything - and was effectively the start of the 'lean movement' - and guess what most in the UK/US still don't 'get' this, or understand it - and guess what happened to GM? ... a $170bn bankcruptcy (the biggest in US history). History tells a story, and I'm afraid it will tell many more in the future too ... which is partly why I'm charting everything and highlighting some of risks that lie ahead" ... (Post 149, leanomist)

... and in response to the following question "Somewhere around 60,000 people in the UK now have an MBA. Has anyone ever looked at what impact this has had on the economy in the past 20 years or so?" ... this historical perspective was added too ...

... "I personally believe history will answer this by simply saying 'they were part of the team that got us where we are today' ... GM (and most other US/UK enterprises for that matter) have a lot of them, whilst companies like Toyota are well known for MBA's, but for their lack of them ... I think this, in a small way, partially supports this kind of assertion too ..." [NB this is referred to in my book too]. (Post 171, leanomist)

There are interesting times ahead, and as I mentioned above, this blog is helping to chart everything whilst highlighting some of the risks that lie ahead ... so we can hopefully avert some of them*, 'change the course of history' and avoid us 'becoming history' too ! ...

* as 'Those who don't know history are destined to repeat it' [Edmund Burke, 1729-1797]

Traditional education is failing ...

On Stephanie Flanders blog yesterday a great discussion began ... which headed in many different directions and resulted in lots of informed/insightful comments. I supported the view that traditional 'economics' is dead, and published this post to say so too ... and a number of people started to question to role of 'education' too - 'economic education' ... for instance take a look at the comment made in Post 52 (random_thought) below:

"... perhaps for 30 years now we have had an academic system that teaches students the knowledge that is required to make money out of the flaws in the economic system - not how to design a better economic system that doesn't have those flaws. How many students have studied economics in the hope of getting a well paid job in the City? And how many have been driven by the desire to fix the system and make the world a better place?..."

I thought this comment potentially offered some profound insight, and a great question too ... so I responded in the following way (Post 55) ...

"...Good points and well made ... The existing education system has arguably been re-enforcing levels of 'incompetence' / 'greed' for some time - and this is exactly the same in leadership / management ( and political science ? ) too ... the education system is also probably 20-30 years out of date now too ( I know for certain most MBA's are - as they are often referred to as 'Maybe Best Avoided' now, and I believe posts 13 and 51 probably give us an idea where we are with politics at the moment too ) ... I believe we are beginning to get to the 'roots' of the problem now - and starting to see just a few of the challenges ahead e.g. changing this, as well as evaluating / re-addressing our nations 'fundamental philosophies' and 'value systems' ...!"

Another commentator then asked ...

"... If you "know for certain" then you can supply the evidence for your claim. I'm sure that the staff and students of our Business Schools would be very interested to see it ..."

So I obliged, (see post 67 below), though there's obviously lots more evidence available too ...

"... Anyone who has bothered to study 'lean', 'lean management', 'lean management systems' (and Dr. W. Edwards Deming's work - nb quoted earlier) know that business schools are 1-2 generations out of date - in fact most people with an MBA have to unfortunately unlearn a lot of what they have learnt at a business school before they can start to learn what they really need to know (e.g. to scrap, rather than re-enforce, arbitrary targets, league tables, bonuses, management by numbers ...etc etc etc) ...

All you have to do is ask a few questions (e.g. what are the above?), look at current business school MBA syllabuses, and understand the differences between 21st century leadership / management and traditional leadership and management [e.g. take a quick look at table 2.39, P139, in the book below for instance] ... you'll find they are completely opposite, and you'll also find most business schools struggle to answer the basic questions above in any meaningful way (and find they are just as out of date as Wikipedia!).

I'm afraid 21st century leadership/management is mostly common sense, and very different to what we're accustomed to, and it's been mostly decoded now too (e.g. just take a look at "Lean World" ... it's available to read worldwide on Google Books*) ... all the Deans of Business Schools I've met and spoke to have read it and loved it, and the business students I lecture love it too ... it's a shame that business schools (all around the world) never properly researched it (or Deming's work for that matter - as they would have found they're inextricably linked) ... and/or never thought to tell students about it/write about it, as most people point out it's both profound ... and applies a lots of common sense ... which is arguably something we need a lot more of right now ...

... but the challenge today is not just one of education, but of politics and power (and the 'misuse' of 'power') too ... and that's yet another story again ... just take a look at http://poweromics.blogspot.com (and some of my posts here too e.g. P13 above) for instance ... but this will be eventually changing too, powered by the internet ..."

* http://books.google.co.uk/books?id=-8xAIgkewOUC&printsec=frontcover

Poweromics - Failing our People, and our Nation ...

"There can be no greater abdication of the duty of government than to send a nation's troops into battle insufficiently equipped to fulfil the strategic goals set for them by politicians. As the death toll mounts in southern Afghanistan, there is a widening gulf between ministerial assurances that the Army is properly resourced and the consistent claims by senior officers that this is untrue. Who is the country to believe?" [Telegraph 13/7/2009] ... 

... I don't think this question is a hard one to answer but if you need convincing take a look at the Telegraph article ... I was also interested to read all the comments by its readers, including this one ... "Brown is a poweromics person: that means he only invests in creating a social/industrial state that will vote for him: the NHS, Education, BBC, Civil Service. No Labour votes in the British Army" [Jamal Akhbar] ... a great explanation, and example ... let's hope we start to get some ethical 'leadership', and quick ...

Why Bankers aren't worth it ... and Government is failing

Robert Peston posted a great post on his blog today, entitled "Why Bankers are not worth it", which refers to a speech by Andrew Haldane (the executive director of Financial Stability at the Bank of England), entitled "Small Lessons from a Big Crisis". In particular Haldane looks at the returns generated by UK banks and financial institutions since 1900, to see whether shares in the financial sector have performed better than the market in general.

What this shows is that from 1900 to 1985, the financial sector produced an average annual return of around 2% a year, relative to other stocks and shares. So for 85 years investing in bank shares was "close to a break-even strategy", nothing special (and very much like a utility).

But in the subsequent 20 years, from 1986 to 2006, returns went through the roof: the average annual return soared to more than 16%, which was the best performance by financial-sector shares in UK financial history. And it's no coincidence that the pay of top bankers also zoomed up to the stratosphere. Which at the time upset only a few, because the bankers seemed to be enriching the owners of the banks, their shareholders (millions of us through our pension funds) ... but did they earn it?

Additional observations made by Handlane and/or Robert Peston include:

1. The collapse of banks' share prices in the past two years has wiped out most of those gains. What this means is that in the full period from 1900 to the end of 2008, the annual average return on financial shares was less than 3%, almost identical to the market as a whole. Which is what common sense would predict should have happened, since banks are to a large extent a utility, serving the needs of the wider economy, and its difficult to see how banks in general can therefore grow significantly faster than the wider economy.

2. Were top bankers much more brilliant than their predecessors between 1986 to 2006 such that they deserved disproportionate rewards? Haldane answers this question by breaking down banks' return on equity - the return generated on ordinary shareholders' capital - into its two component parts, which are the return on gross assets and the leverage employed by the bank.

3. If you want to know whether bankers are particularly skilful, you have to look at the return on gross assets. If one bank earns consistently bigger margins on the loans and investments it makes, that tells you it is probably doing something cleverer than its rivals.

4. By contrast, leverage - or the ratio between a bank's gross assets and its stock of shareholders' equity - is the Las Vegas part of the return on equity, the contribution made by a punt or a gamble.

5. The important point: for any rate of return earned per unit of a bank's gross assets, the return on shareholders' equity rises as the assets-to-equity ratio rises - or, to use the jargon, as leverage rises.  Increasing leverage is a simple and automatic way of increasing returns to shareholders and there's nothing terribly clever about it.

6. Maximising leverage is the equivalent of buying a house with the maximum amount of debt: it looks like an awfully smart thing to do when everything's going up up up, but is the fastest way to lose money when the economy turns.

7. Haldane found that (since 2000) the rising leverage fully accounts for movements in UK banks' ROE [return on equity] - both the rise to around 24% in 2007 and the subsequent fall into negative territory in 2008. In other words, in the seven years before the crash, British banks' bumper profits were in aggregate generated wholly by a massive increase in leverage by the industry: and in Haldane's view, these would be returns generated by gamblers' luck (the jackpot from the roulette ball landing on black) and we all playing the price (because the Government couldn't allow then to fail because of millions of people's savings), in the form of the worst global recession since the 1930s, now the bankers' luck ran out (when the wheel spun to red) ... ie it was nothing to do with skill or ability.

8. The overall level of bankers' pay was inflated over the past few years by the rewards they scooped from the leverage gamble, not due to their skill, hence the title of his post!

Robert Peston went on to discuss ways of preventing bankers from repeating these reckless gambles again ... eg i) cutting to a level commensurate with an industry that's closer to a boring utility than to a wealth-creating, entrepreneurial venture [NB This has not happened yet. In fact, if anything, bankers are pumping up their pay packages again], ii) Regulators imposing a legally binding maximum - and at a relatively modest level - for the ratio of a bank's gross assets to its equity, the leverage multiple, to restrict bankers' freedom to gamble. iii) Owners of banks should be very cautious indeed about rewarding bankers for the returns they generate on equity, and should focus rather more on the returns earned on gross assets. iv) Introducing 'moral hazard' into banking to persuade bank chief executives and employees that they'll really suffer personally if they place reckless bets that go wrong.

 

All are good ideas, but there's more to it than this, as Brown and Darling have a great deal to answer too. It was they who created the non-robust tripartite approach to regulation, to 'profit' from it and increase public spending ... for instance take a look at my comments (and others on his blog too) ...

 

 

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Post 156 (Leanomist) wrote:

 

A provocative article, some good insight and some great comments - my joined up highlights (and a few of my own comments) include:

 

1. Wee-Scamp wrote:

"This is a good article but I also think we need to look at banks, their leaders and their shareholders in the context of what they achieved for the country ... In the UK's case their activity did huge amounts of damage to manufacturing, slashed the business birth rate, pushed house prices through the roof, created record household debt levels, created a record trade deficit and so on and so forth ... "

 

2. BankSlickerminustheR wrote:

"This is just fraud on a massive scale...but who will grow some cajones to go after these banksters and start prosecuting these vermin ... The discussions on regulation reform are shaping up to be a complete whitewash ... We have been soft soaped and shafted by The City ... and they are being given carte blanche to do it all over again! GIVE US A NEW GLASS-STEAGALL (EQUIVALENT) LAW - NOW!"

 

5. John_from_Hendon wrote:

"The other critical element in the explosion of the 'fake' returns of banks was to permit asset price inflation to be seen as a good thing (which of course it is not, and has never been, and if we are to get a recovery this must be fully understood). This was achieved through successful lobbying of the banks and their economic friends educated in institutions which themselves became dependent of the finance sector (See Harvard) to have mortgage costs and house prices removed from all inflation indices (these indices being used to measure the effectiveness of monetary control) This was insane and inevitably led to the collapse in the price of money, which itself let to the 'necessity' to loan this worthless money to less and less creditworthy customers on poorer and poorer security which let the CDSs and CDOs etc. etc. which led to the global collapse ..."

 

72. At 12:42pm on 03 Jul 2009, stanilic wrote:

"...In the light of what you describe one can only ask what were the regulators doing whilst all this was going on? It was not as if there weren't enough of them under the new Tripartite system introduced in 1997 by you-know-who. Was there a sub-text at that time nobody noticed as looking at current circumstances I doubt very much if you-know-who had the ability to think it through on his own?

So we have bankers cutting and shutting debt instrument thanks to deregulation, massive development in computing power, mathematical modelling and a perception of a new paradigm. Talk about The Bubble as it was once known.

More significantly we also have governments using this explosion in presumed wealth to expand the base of the state into all parts of the economy and society on an assumption that the government cares. Inevitably government will not regulate the bankers too hard as they too became dependent upon the money. So we now had a Double-Bubble.

Both of these events at the time pushed the remainder of society into a cul-de-sac where we were left to live of the remains of the feast. It became very difficult to create commercial value in real terms because the rate of return on investment was vastly inferior to what could be got from The Bubble. So we lost a million manufacturing jobs.

Now that the Bubble has burst we remain still at only the start of the new times. The state is a bloated shell that needs to shrink in size. The banks want life to continue as before: well they would wouldn't they? And the political will to move on is just not there.

The real economy once discarded as too cheap and too poor is now underpinning the lot. The balance of power in the economy has changed; but nobody has noticed yet.

At least the bankers got their new paradigm: it is not the one they expected but then they never are. Time to change and change big because (old cliche coming round the bend) those who refuse to learn the lessons of history are doomed to relive it.

The public are in a hanging mood because they understand times have changed but those who say they are our betters have not and probably cannot. Time to encourage the others, methinks..."

 

125. ExcellenceFirst wrote:

There was me thinking that just a little bit of reality was seeping into the public consciousness, and that maybe, just maybe, we were getting towards the stage where we could start to put our intellects together and devise an appropriate way out of this mess which is of our own making - all of us ... And then I read the comments to this post, and with the notable exception of stanilic (above), everyone's come to the conclusion that the independent decisions of banks and bankers are wholly to blame for the situation we are in. It will never cease to amaze me the power of the establishment to mould the thinking of people into whatever shape it wants. Absolutely unbelievable ... So the reality is that we still can't make any progress in sorting ourselves out, because, other than a handful of people, everyone is heading off on a mental wild-goose-chase. At the end of which we will end up with reams and reams of "action" none of which is remotely close to addressing the issues that need to be addressed ... O brave new world that has such people in it..."

 

144. ExcellenceFirst wrote:

"I think we should start by reacquainting ourselves with reality. And top of the list would be the criminalisation of using deception for advantage. So goodbye most advertising, promotions, public relations, marketing and spin. Communication becomes genuine and honest. Making progress as individuals requires us to do things better - and not to waste time and effort to work out more and more convoluted ways of describing what we actually do as being better than that which it replaced.

 

The point is that we will have to do this sometime, and sometime soon. There will come a time when so many people refuse to believe a word they're told about anything, that government of the country becomes impossible. We're moving ever closer..."

 

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And my observations:

 

It is amazing to see the Government (Gordon Brown and his Darling) focus on blaming the banks, when it is they that introduced the flawed/ineffective tripartite system of regulation, which allowed lax regulation to prosper so they could build up the economy (and hence public services) based on the 'short term economic bubble of profit" that resulted - and all at the expense of the real economy! Shame on them - and all who allowed them. Given Gordon is supposed to be a religious man - perhaps he should re-read the ten commandments and scriptures related to money lenders.

 

 

David Clift, a Future 500 Leader

 

PS Contrary to popular belief, Brown and Darling are not dealing with the crisis - They want to maintain the tripartite system and Darling is now having to 'plead with the bankers' not to start the bonus culture all over again e.g. take a look at http://news.bbc.co.uk/1/hi/business/8131898.stm (and http://poweromics.blogspot.com for a wider perspective too ). They created the problem, refuse to acknowledge this, and are failing to fix it too (and people allow them to).

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