Asset Bubbles,Information Assymetry & Abundance Mindset


Interesting solutions for reducing the occurrence of asset bubbles here, but i wonder how practical some of these solutions are.
Make sure public leverage does not become excessive” –

    Who decides what is excessive ?

Develop better corporate governance protocols.

    Very subjective & difficult to ascertain efficiency in terms of mitigative capability achieved from this.

Develop systems to recapitalize the financial system more quickly, with less taxpayer exposure – How do we ensure that this doesn’t lead to risk-taking ?

Impose shorter term limits on certain public officials – This one seems like a good option – It works with the RBI in India- From the perspective of someone who works in governance and organisation design space, I think we need to be careful where we set short term limits and where we dont – Organisations that play a governing role w.r.t compliance and systemic changes ,need to allow for a round robin mechanism that maintain a 60% -40 % distribution between Stability and Change in the team that governs.

Identify sources of “hidden leverage,” – Introducing multiple players and preventing an oligopoly of information flow is good from the perspective of information asymettry as discussed below – However, it is also essential that we dont confuse independence of perspective with the presence of multiple players; Even when we have multiple players, we could have oligopoly of information sharing and perspectives!

The discussion chain at the site,indicates the issue we have, this is quite simply the case of how much information asymmetry we’d like to allow within the economic system as a fair mechanism for meritocracy to operate with – To let people with the best ideas win.

Bubbles occur because information doesnt flow or because the information that could lead to real-value pricing is wilfully hidden – What matters is how we structure economic systems of risk-reward to never let the balance tilt too far in favor of those that would like to win at the expense of everyone else. If the economic system is designed to glorify and accept mechanisms that subvert information sharing mechanisms or simply prevent information sharing – Then it would without doubt lead to the disasters we see today. As a young engineer, I sometimes believed highly litiguous democratic societies could prevent or reduce information asymmetry ; however the events of the recent global financial collapse and its origination in the US, does clearly indicate that is not true! The fact is globalized free markets are not exactly ‘Free’ , not when it comes to flow of information. When it comes to the financial aspects, we seem to have moved very little from the days when Nathan Rothschild brought British Government Bonds armed with the forty-eight hour advance notification of Napoleon’s defeat!

When information that could change the true or percieved economic valuation of an asset changes rapidly, it is quite clear that arbitrage opportunities will be plenty – What we need is governance mechanisms designed around the concept of ‘abundance mindset’. There is enough for everyone in this world and what we need is the perspective that creating short term dynamics of shortage will lead to long term instability and an unreal sense of scarcity. Wealth creation is not a Zero-sum Game ; It does not have to mean that someone loses. I had a short discussion yesterday with someone who wanted to believe that stock-markets and trading ‘creates wealth’ , Something I dont believe. I could be wrong here but I firmly believe that the secondary market for finance needs to be governed better. If a select few are allowed to win at the expense of everyone else, it wont be long before we start creating social imbalances and spur rebellion. Arbitrage is good if it is used as a levelling mechanism and for price-discovery, but arbitrage as an economic driver for wealth creation is not a sustainable mechanism.

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~ by exploreamaze on June 14, 2010.

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