Demise of Empire – 4 Horseman Film

Last year a couple of big finance stories caught my attention. I had just seen the movie Inside Job .

What was very interesting to me was the idea that economists and other academics in the finance world had been utterly compromised by the global financial meltdown.

The other story concerned Wachovia bank laundering $400b of blood money but more on that one later.

In fact they (academic economists) have been completely implicated in the demise of the system yet those very same people were reappointed to high ranking roles by the Obama administration. So point 1 – same old, same old means the same results which is privatise assetts – socialise losses and that bailout was US$700b.

(Add both numbers together and that is $1100b and that is thought to be a tip of the iceberg read of that problem.)

Follow the money. $700b is a very big honeypot and what has happened to that money?

The Four Horseman Film attempts to answer these questions and more. Accountability and public policy results?

“Four Horsemen is the debut feature from director Ross Ashcroft which reveals the fundamental flaws in the economic system which have brought our civilization to the brink of disaster.

23 leading thinkers –frustrated at the failure of their respective disciplines – break their silence to explain how the world really works.

The film pulls no punches in describing the consequences of continued inaction – but its message is one of hope. If more people can equip themselves with a better understanding of how the world really works, then the systems and structures that condemn billions to poverty or chronic insecurity can at last be overturned.

Solutions to the multiple crises facing humanity have never been more urgent, but equally, the conditions for change have never been more favourable.”

Update: In NZ? – listen to this interview from Kim Hill show today (5th of May 2012)

 

The Four Horseman is currently showing in New Zealand at the Docu Edge Film festival

Ann Pettifor interview is 30 mins but well worth watching. It is not in the film. Key answer from Ann: “We have to regulate & control the banks” – Keynes & Roosevelt had the right tactic back in the 30’s.

Another related story from April last year

How a big US bank laundered billions from Mexico’s murderous drug gangs As the violence spread, billions of dollars of cartel cash began to seep into the global financial system. But a special investigation by the Observer reveals how the increasingly frantic warnings of one London whistleblower were ignored”

That large banking group in the paid $US150 m in fines recently for money laundering something like 400 billion $ of drugs money. $150m is a large fine but compared to $400b & all of the other similar cases that didn’t get prosecuted – it is a slap on the hand with a wet bus ticket. ( My calculator can’t cope with that but as a percentage $150m/400b – its a rounding error!)

‘More shocking, and more important, the bank was sanctioned for failing to apply the proper anti-laundering strictures to the transfer of $378.4bn – a sum equivalent to one-third of Mexico’s gross national product – into dollar accounts from so-called casas de cambio (CDCs) in Mexico, currency exchange houses with which the bank did business.

“Wachovia’s blatant disregard for our banking laws gave international cocaine cartels a virtual carte blanche to finance their operations,” said Jeffrey Sloman, the federal prosecutor. Yet the total fine was less than 2% of the bank’s $12.3bn profit for 2009. On 24 March 2010, Wells Fargo stock traded at $30.86 – up 1% on the week of the court settlement.

The conclusion to the case was only the tip of an iceberg, demonstrating the role of the “legal” banking sector in swilling hundreds of billions of dollars – the blood money from the murderous drug trade in Mexico and other places in the world – around their global operations, now bailed out by the taxpayer.’

Another version of that story is over here – Cocaine smugglers laundered billions through Wachovia bank

Somehow, the major banks in the United States have gone from serving as the main bulwarks of credit and entrepreneurial pluck to the moral equivalent of a James Bond villain.”

Turns out the GFC was an opportunity for some big finance houses to rort the public finances as well as actively engaging in eye-popping financing of criminal activities. In little old New Zealand I don’t remember any of these stories even making the news.

I can remember the Savings & Loan crisis of the 80’s but these more recent stories are much more significantly disturbing. The finance system is completely broken and the sooner we change it the better.

Of course there is more to the story;

“By 2007 the trade in derivatives worldwide was one quadrillion (thousand million million) US dollars – this is 10 times the total production of goods on the planet over its entire history,” says Stewart. “OK, we’re talking about the totals in a two-way trade, people are buying and people are selling and you’re adding it all up as if it doesn’t cancel out, but it was a huge trade.”

The Black-Scholes formula had passed the market test. But as banks and hedge funds relied more and more on their equations, they became more and more vulnerable to mistakes or over-simplifications in the mathematics.”

Tim Harford writes Black-Scholes: The maths formula linked to the financial crash

“The equation is based on the idea that big movements are actually very, very rare. The problem is that real markets have these big changes much more often that this model predicts,” says Stewart.

And the other problem is that everyone’s following the same mathematical principles, so they’re all going to get the same answer.“*

….

“Not all of those subsequent technologies, says Scholes, were good enough. “[Some] had assumptions that were wrong, or they used data incorrectly to calibrate their models, or people who used [the] models didn’t know how to use them.”

Scholes argues there is no going back. “The fundamental issue is that quantitative technologies in finance will survive, and will grow, and will continue to evolve over time,” he says.

But for Ian Stewart, the story of Black-Scholes – and of Long-Term Capital Management – is a kind of morality tale.”

*According to a friend this idea about finance models being trapped in their thinking mode is a key one. ( Thanks to Raf Manji for comments below) Raf’s site is Sustento go there for more smart insights 

“The problem with all these models is they don’t price in liquidity (i.e.. the ability to shift volume at a certain price). When everyone wants to exit the building at the same time, there is a crush!

It’s very similar with financial policy making. They work from theoretical models, which might have some validity on paper or in small, closed situations but don’t hold up amidst the rampaging and unpredictable hordes of humanity.

This is what I meant by saying policymakers are operating out of the same toolbox and, therefore, can never find or consider solutions that might actually work.”