Economics is not so hard and if left to Economists alone the world would be in an even worst state because the UK had a water based economic-model in the 50's that work but showed their assumptions wrong because is was inelastic.

The combination of events that makes this mess even possible to solve is a series of accidental laws, driven by post criminal events, that were enacted in the late 70's and 80's and drove capital up first in the insurance industry and then the banks.

The failure of regulation was not to take the process one step further and demand all new financial products be vetted before being sold to the public whether so-called educated investor or joe.

The process that drove the reinsurance spiral of the late 70's and 80's was obvious to all but the DTI didn't stop it even when they could see the problem. Market forces drove capital up in the insurance industry and the rapid spread of globalisation also spread the processes of leverage within the reinsurance market into the capital markets: A CDO is a portfolio reinsurance similar to the LMX spiral that destroyed a lot of lives in Lloyd's. 

Indeed I warned them that risk must be supported with Liquidity in the early 90's but JPM first brought out RiskMetrics then CreditMetrics and everyone thought that the world was Normal (Binomial). It isn't. They were using models and pricing processes that didn't fit the risks because data wasn't pure (LTCM).

All businesses, and finance is the most critical for risk pricing, are dynamic; conditional; and therefore unknowable unless you have a map to see where the risks are being played out. Top-down and bottom-up.

The risk pricing and swapping processes that existed in reinsurance in the late 70's were far more sophisticated that any I've seen in finance to-date but failed ultimately because their universe of risk was bounded in economic premium size, and coupled to Nature and the US's legal structure, which as we know is out of control. A society that sues for the merest whiff of money and doesn't accept self-responsibility for anything has driven us to the brink.

Previous emails herein have considered Blame. No single individual was to blame, that would demand a planned approach to the current situation and something I don't care to think about. What was to blame is our continued blindness is regulating leveraged banking when common sense says the worlds economic situation shows single figure yields but bankers think they can get 30% returns for years.

What was synthesised in my mind the moment I saw the VSM was the possibility 

The Plumtree Insurance Company was Coopers & Lybrand's UK training model for insurance company audit, it had Expert Systems discretely placed at important parts of the processing of risk pricing and exposure monitoring. At the board reporting level the system had control over all the HP Mini's data, managing the DTI reporting function through another set of Rules. All the rules were self-similar because code was re-used over and over again to achieve simplicity and speed. The company could get its quarterly reports actuarially assessed and signed off within 2-weeks of close.

How do I know so much about this? Because I designed it using Lotus Symphony, a PICK-based HP software and an expert system shell called GURU using Compaq PC's in 1983, for a company called Bryanston Insurance Company (Robert Holmes a'Court Bell Group).

If you looked inside the company it had feed-forward parameters, networked audit, a board that didn't just sit monthly but daily and an online risk pricing system with one-day at best time-lags. As the business got more complex all we did was plug the new division into the system.

The company failed for two reasons. The DTI allowed the business to be bought but never asked the management what research they'd done on the acquirers for they had and the DTI had not. The second was human greed of a new group CEO who had no relative risk experience, again a DTI required monitoring process.

11-years later, after all, Black Monday, the 1992 debacle, LTCM, Big Bang etc I presented Synergy, a new insurance product, to the FSA whose initial response was 'why don't all financial products get looked at before they go on the market?' We agreed.

I'm reading Greenspan's autobiography for support in my PhD along with a book called 'A Devil of our own making' kindly sent to me by Angelo who you met last year. Greenspan could easily have spotted the problem if he'd got the right data for that was what he made his name in the first place. The problem is that they don't have the right data, don't vet products and their impact and have allowed common-sense to wither.

When Basle II was mooted, I presented products to adapt capital dynamically and look at operational risk through the eyes of the VSM, thereby forcing the regulators to search for boundaries and couplings across multiple domains. Everything you say in your reply to Barry is sound and economically good sense but when Harvard pumps out MBA's at the rate they have the re-education process is going to be horrid: The World had shown again fixed paradigms don't work but a good map will always guide you in principle.

In the capital markets volatility is where money is made and JPM are doing fabulously well today trading all sorts of stuff. So things aren't all what the papers/TV say they are.

For you, and those who had the staying power to get this far, there's more, thank you Allenna, you've made me sketch out the next 2-years of research work!

On 5 Dec 2008, at 21:19, allenna leonard wrote:

Dear Barry,

While I make no claim to understanding economics myself, it would seem that we are not alone given the mess we're in. Regardless, economists need to understand some basic ideas about systems.  Didn't Greenspan say his predictions were off because he hadn't accounted for the high degree of short term self interest that drive traders? Reward systems anyone?

Speculator expectations seems as good a place to start as any.  It might at least start the ball rolling.

When I did the work for the Canadian Institute of Chartered Accountants we were always concerned with how 'soft' the basis for determining the figures that went into the 'hard' balance sheet were.

Auditors are supposed to verify three assumptions:
1. the completeness assumption - had all the assets and liabilities been included?
2. the going concern assumption - would the company still be in business in 12 months? (Plenty of people think 12 months is inadequate for complex organizations or ones like the auto industry that are supposed to be able to provide parts and services for much longer periods)
3. the management good faith assumption (our work said that wasn't taken seriously enough and didn't go far enough - without a mechanism to assure transparency and solicit multiple perspectives)

It was fun hearing the stories my deceased colleague Bill Bradshaw used to tell - like about how a whole audit unravelled when one of the auditors asked the simple question "And how many pensioners do you have?"

BTW, one of the things former banker Bernard Lietaer said was that debt driven expansion was inherently unstable.


--- On Fri, 12/5/08, BARRY A CLEMSON <[log in to unmask]> wrote:

From: BARRY A CLEMSON <[log in to unmask]>
Subject: Viable Economy #3
To: [log in to unmask]
Date: Friday, December 5, 2008, 10:55 AM
This is my third rant about developing a cybernetically
sound regulatory system for the global economy. For the sake
of brevity, I am going to make some straightforward
assertions, without much in the way of qualifying comments.
Please consider all of this as tentative and my challenge to
you to improve upon it.

1) Every national government in the world should have a
"Council of Systemic Advisors", similar to the
existing Council of Economic Advisors.

In the US we also have a Science Advisor to the President,
but there is no one charged with explicitly thinking about
systemic issues. A Council of Systemic Advisors would, in
the long run, have an enormous impact on government policies
and on the university and the roles of cybernetics/systems
within the university (which in turn would feed back for
more impact on government and corporations).

2) We need Obama and his team of economic advisors to be
aware of and receptive to the cybernetic community's
insights re. regulation in complex systems.

To achieve goal #2, we do not need a fully developed design
for regulating the global economy What we need to begin are
a few well chosen demonstrations of where cybernetics would
dramatically improve on the current economic thinking that
led to the current crisis. At the risk of revealing my
abysmal ignorance about economics and the stock market, i
will suggest that the current system is largely a positive
feedback loop with "speculator expectations" as
the  key level (to use Forrester's system dynamics
language). If this is even close to correct, then the system
is GUARANTEED  to engage in wild swings and ultimately
collapse. Regardless of the correctness of my example, I
think what we need to get our ideas on the table is a few
such examples of systemic alternatives to grossly inadequate

1) We need a group focused on developing the examples of
where cybernetic thinking would dramatically improve upon
current orthodoxy. Hopefully there are at least a few of our
number who understand a little about economics and maybe can
do this fairly quickly.

2) Obama is certainly the most important player right now,
but other nations should not be ignored. And getting to the
government of one country might well make it easier to get
to the government of other countries. Thus, we should all
work on our own national governments (and, where possible,
help each other). Thus we need a group focused on how to get
the attention of the national decision makers.

3) This is much bigger than just management cybernetics. We
need to enlist every system thinker in the world. (NOTE: I
am now really going to reveal the ignorance resulting from
spending most of the last ten years as a carpenter and
ignoring the academic world, but perhaps i can still make
the point). We need to enlist and ally with groups such as
System Dynamics, Society for General System Theory (I know,
it transmogrified into a different group but I don't
remember the new name), and the organizational learning
folks such as Peter Senge who emphasize systems thinking.
Undoubtedly there are many others I don't know about.

1) We need to know who is interested and willing to work on
this project. Step right up and volunteer. Indicate:
- your country
- sketch of your background, what you bring to the table,
how you see yourself helping.

2) A dedicated forum, listserve or some such. Some of you
are much more knowledgeable than I about what we need to
support the project.

3) Refinement of the goals and strategies. Clearly a
serious discussion has to refine these before we can do much

4) Think carefully about what other system scientists we
can drag into this project. Go ahead and recruit those you
can. Make lists of those you think might be useful but that
you don't have personal connections with.

I spent eight years teaching admin. in colleges of
education, then ten years in in  teaching engineering
management. I was then forced out of the university for
failing at TV teaching. I also had careers in software
development (mostly with very large systems) and community
development. The last ten years I mostly built additions to
homes and recently became a novelist (discovered fiction is
a hell of a lot harder than technical writing!). All this is
by way of saying that I will have zero credibility with
government decision makers and that quite obviously someone
else is going to have to be the public face for this
project. This might not be an issue, it might well be that
the best public face for the project will become obvious as
we proceed. On the other hand, I often think of Thomas
Jefferson's comment that any politician who wants the
job is thereby disqualified because he will then make
decisions our of a context of preserving his position
instead of a context of the common good. So this is
something to keep in the back of your mind as we proceed.

This obviously can only be done if a group of us step up to
do it. Now is the time! And you are the One! Take one step
forward if you are willing to help save the world ....

Grace and Peace,


What i have not yet seen is any large number of people
explicitly volunteering to do much about it.


[log in to unmask]


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