Wednesday, February 27, 2013

Leverage this

The Epicurean Dealmaker

Finance has always been complex. More precisely it has always been opaque, and complexity is a means of rationalizing opacity in societies that pretend to transparency. Opacity is absolutely essential to modern finance. It is a feature not a bug until we radically change the way we mobilize economic risk-bearing. The core purpose of status quo finance is to coax people into accepting risks that they would not, if fully informed, consent to bear.

This is the nature of an Iv-B economy where Iv agents use deception to lure in B clients and each other. it causes false optimism and growth towards a ceiling and eventual collapse. Weak I-O regulatiors and markets prevent transparency moderating this momentum and deception.

Financial systems help us overcome a collective action problem. In a world of investment projects whose costs and risks are perfectly transparent, most individuals would be frightened. 

This causes V-Bi stagnation, Iv-B bluffing about results often leads to more innovation.

Real enterprise is very risky. Further, the probability of success of any one project depends upon the degree to which other projects are simultaneously underway. 

Like growing seedlings where only one might grow into a tree and overshadow the others.

A budding industrialist in an agrarian society who tries to build a car factory will fail. Her peers will be unable to supply the inputs required to make the thing work. If by some miracle she gets the factory up and running, her customer-base of low capital, low productivity farm workers will be unable to afford the end product. Successful real investment does not occur via isolated projects, but in waves, forward thrusts by cohorts of optimists, most of whom crash and burn, some of whom do great things for the world and make their investors wealthy. 

These are Iv-B waves of momentum that crash and burn when they hit the ceiling like ocean waves hitting a beach.

But the winners depend upon the existence of the losers: In a world where there was no Qwest overbuilding fiber, there would have been no Amazon losing a nickel on every sale and making it up on volume. Even in the context of an astonishing tech boom, Amazon was a pretty iffy investment in 1997. It would have been an absurd investment without the growth and momentum generated by thousands of peers, some of whom fared well but most of whom did not.

The losers become like humus for the newer Iv-B seedlings.

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