Tuesday, March 17, 2009

Oh how big a world it is.

As I read the newspaper this morning and again the woes of the financial system and AIG in particular, I am struck by the complexity and inter-connectivity of the world we live in. Unfortunately, we as laypersons have a hard time wrapping our minds around the shear size and volume of the issue. We go about our business and go to work, thankfully, or school or whatever impacts our daily lives and don't fully appreciate the scope of how big a world we live in. Politicians and economists can be seen on the news programs and financial shows and in ten minutes boil down problems to the simplest terms.

The problem for us that are not single-minded or focus-driven is we don't know the complexity of how businesses are interconnected. Take for instance GM. What would happen if GM shut it's doors for two months? Who would be impacted? Well, the employees you say. Yes, and many others. There are those that make the cars, take care of the line, the machinery, electrical systems, computer systems and the like. Also impacted are those that have contracted to keep the facilities in good repair. Now you are looking at painters, a different set of electricians and plumbers, HVAC techs, office systems etc. Add to this suppliers of all things deemed minor but that none of us could live without, everything from paper clips to toilet paper and the companies that supply those products. And GM has hundreds of facilities around the world, not just in the US and Canada. All these companies will feel the effects of a shutdown or severe slowdown. They in turn cut back on items they need and the hole just keeps getting bigger.

That is something most of us can understand. We can see the tangible items if front of us and it starts to make sense. How do you do that for financial items? AIG has insured brokerages and banks against losses and now must make payments to them based on contracts to cover their losses. That's what insurers do. To most of us financial instruments might as well be particle physics. We have little daily contact with them so their intricacies don't relate. The financial markets are so interconnected it is nearly impossible to unravel the chain of money as it weaves its way from one to another. It might be easier to unravel spider webs in a haunted house strand by strand.

Unfortunately for our political leaders, they must try to make us understand all of this. The problem is they don't understand it either. The complexity of these markets is so enormous that everyone specialises. The bailouts are put forth in a bill that fails to address, and could never address all the issues that will arise. (I won't even think of ranting on bonuses for anyone of failing companies here). If you aren't sure I'm correct consider this; why didn't any of the financial shows see the failings of the markets, financial institutions and brokerage houses et al coming? One or two persons in the financial world don't really count. Where was Warren Buffet when the little people needed him?

Next: Particle physics and the quantum end of the universe.
Oh, Happy St. Patrick's Day!!!

1 comment:

  1. "Particle physics and the quantum end of the universe."

    I think we had that discussion in college will drunk at a campus bar. Engineers...we can't even turn our brains off when drinking!