Global Crisis/Innovation Blog

 Understanding How the 1% Duped the 99%:

Why Russian Roulette Does Not Enhance Wellbeing

by Shlomo Maital


   Thick fog covers the current reportage on the global crisis.  Here is my brief attempt to slash through it, in 197 words.

   Commercial banks, investment banks, hedge funds and other financial firms deceived themselves and duped the world. They believed they were making high financial returns, justifying bloated compensation for themselves and their shareholders.  But it was a fake.  There was no real value. Financial returns must be adjusted for risk.  When you subtract risk from return, their investments were massively in the red. Why? They failed to take into account systemic risk – collapse of asset prices when the bubble they created bursts.  None of the risk assessment models sufficiently accounted for systemic risk.  If there were real economic value in this deception, then everyone in the world could grow wealthy by playing Russian Roulette, as one wag observed.   There is inherent built-in deception in financial services.  Investment firms trumpet their historical rates of return. But they never advertise or quantify their risks.  No investment can be evaluated, without knowing those two key numbers: return and risk.  Never invest  when you are told only the historical return.  The entire world did.  And look where it got us.  And guess what – we are doing it again.   This is how some (not all) of the 1% in finance duped the 99% who do real work.   

   It now looks like the intransigent European Central Bank, which insists on fighting phantom inflation during a terrible deflation, will utterly fail (or not even try) in rescuing the euro.  Look for a ‘haircut’ in the Euro nations, down from 17 to about 8, mainly the northern high-saving countries, and a prolonged period of recession as Europe reorganizes its Single Market into North and South segments.  Belgium’s sovereign debt has now been down-graded and it looks like Spain, too, needs a bail-out.   America, too, continues to drown in debt, and personal saving, which rose to 5 per cent, is now down to only 4.  Black Friday (the day after Thanksgiving, when mobs storm the shopping malls to waste money on useless trinkets) is indeed Black, for America and the world.