Friday, 31 December 2010

New Year's Message – Individualism – The Real Path to Building the Future

The causes of the financial crash, which created such privation in the western world, have been given a very general, popularly accepted notion - the avarice of bankers and incompetence of regulators.

Whether this stereotype avails because it is infallibly true, or a simplification of reality remains to be seen, the numerous central threads of the crisis documented thus far by willing authors and publishers to hopefully be woven together to form a truly reflective picture at some future point. Yet, today that is how popular perception views the situation.

Undoubtedly, the financial bubble was created and sustained by an intertwined co-dependency on financial leverage, a dualistic – inevitably parasitic – relationship between the financier, the asset class and the market. In this case mortgage companies' desire for growth, the availability of residential and commercial housing stock, and the public's expectation to exercise the right to own in a seeming golden age.

This made for perhaps the most heady financial mix ever seen given the number of banks operating, the size of the western world's housing stock and the appetite by the common (wo)man to enjoy not just a home of his/her own, but the fruits of an ever upward price spiral.

But as the asset class grew in value so the stakes grew higher, and so more nefarious activities emerged. Beyond the questionable use of 'self-cert' mortgages – which itself highlighted the extremities of 'strained credit' at the time – additional self-serving desires played a role.

The equally ever-stretched credibility of the CDO (and CDO2) package [reportedly] invented by Soloman Brothers in the mid 1990s) had engulfed Wall Street, its own already squeezed credit-rating credibility additionally brought into disrepute by the use of 'phantom signers' within finance houses to create a perpetual motion of supply and demand. Indeed it may also be the case that the 'phantom signer' may also have been 'invoked' beyond even this at the demand end: possibly used to help finance companies assist developer-type clients, who in turn tend to hold those larger commercial / semi-private loans which were of greater importance to a lender's balance sheet.

[The very appearance of the 'phantom signer' has created perhaps the largest legal tangle in the US, creating a situation wherein defaulted borrowers are able to stay in situ within their premisis since the long paper-chain of mortgage documentation and ultimate ownership rights has been lost. This largely affecting the bottom end of the housing chain, that could feasibly create a grid-lock in portions of the housing market for years to come. Which could itself act as a negative force regards the necessary de-leveraging of this asset class vis a vis the commercial de-leveraging of the both nations' cost-bases. This creating a pricing vacuum between buyers and sellers].

Many have said that this latest event was a story as old as the hills, and regale tales of the the South-Sea Bubble, the Tulip Bubble, the 1862 London stock crash, and of course the 1907 and 1929 Wall St crashes. But this latest episode was not restricted to pure stock speculation, as were its forebears. It went further into the very heart of what should be responsible capitalism, which itself is born from the very notion of inalienable private property rights.

Thus beyond PIMCO's mention of a 'new norm' (with which investment-auto-motives agrees), the very cornerstone of western capitalism could still potentially find itself at a philosophical cross-roads. This due to what may be a crumbling belief-system amongst the masses and national populace, from Athens, Georgia in the 'battling' USA to Athens in a very 'disheartened' Greece. Whilst the capital markets appear to be functioning, albeit with event driven volatility, the real question pertains to exactly what the new norm ultimately looks like; even if possibly disguised by the recent bounce back.

It is at this time, here in the west, that the 'healing rhetoric' is being offered, where a less believing public are being 'nudged' by ever more tentative political bodies of whichever persuasion and the idea of 'society at large' is being resounded. Yet the masses will take much convincing, if at all. We do not live in a bygone age where the individual is connected to society through a series of irrefutable relationships: family members are spread, community links and spirit largely inconspicuous in metropolitan areas, the church with far less influence etc etc.

In short, as the 1960s post-modernists would have it, the turn of the century saw the end of the 'Grand Narrative' that had been the social glue, whether through State, or Church or National Ideology.

Thus, in the real-world, the notion of 'society and the individual' is largely a fatuous one. The 'insularisation' of people over the last century or so has been a two-sided coin, offering people greater privacies, freedoms and self-governance, whilst also de-constructing the old ways that seemingly sustained mind and soul, even if it be naively so via largely institutional organisation.

So the 'new social norm' is not so recently emergent as the 'new economic norm', yet the two sit side by side at present. And this creates a very new socio-economic terrain for the west. Some will undoubtedly say we sit at the beginning of that much heard 'new world order', where the individual becomes a servant of commerce – possibly seeing facebook as the emergent broker; especially given its founder's aspirations to use it as global industry's interface.

Yet it is also one in which the masses of the west finally open their eyes to the very real physical connectivity to the world at large, one in which the populace and social competition of India or China becomes truly real, instead of some personally ascribed far off notion no matter how well conveyed by the pages of the FT, WSJ, Economist or more partisan tabloids.

[NB The fact that the Indian published 'The Economic Times' has as the world's 3rd largest circulation of an english read financial newspaper says much, albeit the title is an anathema to many in the west].

Thus whilst politicos convey the need to accord to social ideologies, people themselves consciously or sub-consciously will recognise the need to look harder than ever at the 'ideology of individualism'. For their own very real utilitarian and ultimately financial benefit given the reduced support of not only the state, but also the innate structure of corporations that see the human opportunity of the east, offering capabilities far beyond the low level call-centre.

Individualism – especially that of the high-minded - has of course always been with us, at the heart of all great empires, to maximise the willing productivity of its people and nationhood. It has generated new ventures of all kinds, ranging from the high-risk adventure efforts of Shackleton, Scott and latterly Feinnes, to the academic pioneers who saw commercialisation of their discoveries from Marie Curie to Tim Berners-Lee, to the less visible but purely commercial efforts of many entrepreneurs throughout the ages. Individuals who sought to do things their way and create new value for themselves, employees, latter-day stock-holders, and society at large.

For myself / investment-auto-motives, perhaps the greatest relative examples of this 'individualistic drive' being various names in the auto, investment and governmental realms.

In the auto-world the likes of Karl Freidrich Benz (as distinct from the Daimler-Maybach work) for fore-sightedness, of course Henry Ford for appreciation of the far bigger commercial picture, and the downright pluckiness (even if wholly mis-judged) of Preston Tucker who help blazed the path for vehicle development.

Whilst perhaps individualism is harder to identify within the financial field, the old banking names of say Peabody and Morgan(s) stand out for their personal conviction in creating a better world both commercially and socially.

From a governmental/regulatory perspective, individualism is almost an anathema given the innate consensus process, yet mention must go to those who might remain nameless but who 'cleared the way' for innovative an commercial progress. Perhaps the most pertinent here being the UK's 3 'Locomotive Acts' (inc the red Flag Act) between 1861 and 1878, which although initially physically encumbered the physical speed of those first cars, provided for their gradual public acceptance via the very 'checks and balances' imposed on those 'new fangled contraptions'. A later 1896 Act saw these restrictions removed and the 1898 Act formalised vehicle specifications by which a burgeoning British & foreign industry could abide. Whilst the 1903 Act saw vehicles registered to owners and so provided for public responsibility and equally responsibility toward the public. This then shows the progressive stance that late Victorian politicians took on such a breakthrough industry, itself set to propel affiliated full supply-chain industries, from raw materials to retail.

Yet as a singular archetype, the modest yet wholly focused aeronautical brave-heart and hero Charles Lindbergh, perhaps serves best as a near human-deity in our machine-enabled, commercialised age; advancing the belief in the mechanical capability to create a speedy global network of trans-ocean trade.

Thus whilst society is undoubtedly of great importance for the individual, so the progressive yet pragmatic individual has perhaps a greater proportionate (ie a dis-proportionate) influence on society. This so because individuals more instinctively recognise other individuals.

This was undoubtedly the case for Henry Ford, who himself, like so many of his countrymen, grew from a 'simple' farming family. His experiences resonated with the words, essays and general philosophy of Ralph Waldo Emerson (1803-1872). In particularly the essay 'Self-Reliance' of 1841.

This renowned piece starts with a prologue from elsewhere that reads: "Man is his own star; and the soul that can render an honest and a perfect man..” And very early within the text the nub of the essay is scribed with the words: “To believe your own thought, to believe that what is true for you in your private heart is true for all men, — that is genius”. Although not the most high-brow of Emerson's work, this positive diatribe had a massive effect on the new industrialists in the mid-late 1800s and served Henry Ford as an ideological template in his determination to follow his path forward.

In the UK the American's contemporary was Samuel Smiles, a Scottish-born Reformer who saw the ills of his countrymen, their circumstances and what could be done to improve their lives, both intellectually and so physically; acting as an admittedly somewhat middle-class bell-ringer for social improvement for those at the bottom of the social tree.

Likewise, he quoted from other useful sources, and from JS Mill gleans “The worth of a State, in the long run, is the worth of the individuals composing it”. This strikes the central chord of his attitude, much like Confucian thought thousands of years earlier, in that it is down to the individual to improve themselves, which then in turn improves their family's circumstances, then affecting the community, and so en mass affects the all the nationwide. But he was also a staunch reproacher, who cited bad habits – especially that of personal financial imprudence – as being the undoing of many men and women:

To quote: “Times of great prosperity, in which wages are highest and mills running full time are not times in which Mechanics' Institutes and Schools flourish, but times in which publicans and beer sellers prosper and grow rich...A workman earning 50s. to 60s. a week (above the average pay of bankers' clerks) was content to inhabit a miserable one-roomed dwelling in a bad neighbourhood, the one room serving as parlour, kitchen and sleeping-room for the whole family, which consisted of husband, wife, four sons, two cats and a dog. The witness was asked: Do you think this family was unable to get better lodgings, or were they careless? They were careless, was the reply.

Aswell as seeking the best from men, to build a better world, Smiles also undertook biographies of those he esteemed. Many of them were those who had been central to the British civil engineering boom which gave commercial prosperity and so economic growth to Britain's Industrial Revolution; the likes of Matthew Boulton, his affiliate James Watt in steam engine development, and George Stephenson's application of the device as the railway locomotive (beyond Trevethick's earlier work).

Samuel Smiles's philosophy of thriftiness has historically drawn scorn from Keynesian-leaning economists who view such behavior as limiting the availability of private capital for commercial use, as was largely the case by those in mid-Victorian Britain who had long memories of the past and saw the 1862 stock collapse.

Yet today, the west's modern banking system has evolved since the 2008 debacle, albeit slowly and begrudgingly, with higher capital reserve ratios set in place to provide greater public confidence. Regulations are being rewritten with previous debate about re-enactment of a Glass-Steagall type Act in the USA, the recent stability of capital markets undermining the doom-mongers.

So whilst the west continues its 'de-leveraging diet' formed from previous credit spurge, so the shock of the last 3 years has generated a new outlook amongst many to become far more responsible about their financial affairs, and to return to their grandparent's philosophy that was to 'save and prosper'.

It will be this allocation of publicly sourced private funds, along with FDI from the EM regions, that will help to re-buoy the west. It will take many years to recapture the 'good old days' but at least the financial world and consumers themselves will be on a sounder footing.

And as part of this process will come an understanding that much responsibility lies with the individual, not just the reneged responsibilities of the supposedly 'sleeping state' or the 'greedy banks'. We unfortunately don't live in a perfect world, the worst excesses of a base human nature often in the financial press and the cause for widespread social consequences.

Yet, more than ever now, it will be down to the individual to find their own way in creating their future; their own path.

As the adage goes: “The future starts here”,and it is a fact not lost on billions of people elsewhere on the planet. So there is perhaps no better attitude and way to enter 2011.