Where is the next technological bubble? The flow of investment funding has always sought traditional opportunities to buy low and sell high. This is the pattern hinted at by NY Times technology blogger, Saul Hansell:
‘ In 1995, people woke up, saw the Netscape browser, said, “ This is going to change everything,” and started the world’s biggest land grab. They raised billions of dollars for grand schemes to reinvent entire industries — Webvan, VerticalNet, Homestore, and so on. Meanwhile, hoping to cash in on the revolution, investors bid up the prices of the flimsiest shells of companies to astronomical levels. The greed bubble collapsed like a Ponzi scheme. It turned out that these companies had spent all the money they raised on Super Bowl ads, robotic warehouses, and gleaming offices to hold hundreds of people. Yet there just wasn’t enough money to pay the bills, especially since the biggest source of revenue for many Internet companies was advertising from dot-coms that had just raised a round of venture capital or gone public. Most of these companies were so overextended they couldn’t adjust to the new reality: The Internet may change everything, but it takes a while. ’
From 1970 to 2000 the Financial Services provided thousands of jobs in computer technology with an IBM mainframe running the data center. I think consolidation among banks that began before the 1990s had an effect on the IT job market that is analogous to the global warming effect melting the polar ice caps and glaciers. A few hundred middle management and IT professional layoffs per merger here and a few more hundred layoffs for data center personnel with every merger for a decade or more around the country compounded the problem.
JP Morgan Chase and Citigroup are examples of this trend. These are two of the largest banks in the country. They are at the heart of the global financial services industry.
Citigroup played a major role in financing trans-Atlantic cable, Civil War, railroad construction in US, Japan , Europe in the 19th century. It expanded its financial services from merchant banking to national banking to international banking. It evolved technologies to provide these services. It began merging with other financial institutions and therein began complicated management requirements. How is it possible to manage risk across a diverse conglomerate?
What school of management could have provided guidance to financial conglomerate executives to calculate and manage risk? Financial Engineering is a relatively new discipline. It has components of artificial intelligence, advanced data models and computer simulated agents. A full scale market simulation isn’t possible. I developed what could be called computer simulated agents for Sears Roebuck Credit Division in 2001-2002. The theory and potential application is safe in academic settings, but very risky when real money is involved. It had reached a level of maturity by 2004.
Due to the sensitivity of trade secrets, the sheer volume of transactions and confidentiality no one really knows the magnitude of the meltdown, because loan defaults are still occurring as an effect of rising unemployment rates. Some estimates say the unemployment rate has reached higher than 10%, even close to 20%.
In the 1980s there was another meltdown that drew worldwide attention. No, it wasn't junk bonds. The Chernobyl disaster was a nuclear reactor accident at the Chernobyl Nuclear Power Plant in Ukraine , then part of the Soviet Union . It is considered to be the worst nuclear power plant disaster in history and the only level 7 instance on the International Nuclear Event Scale. It resulted in a severe release of radioactivity following a massive power excursion which destroyed the reactor. Two people died in the initial steam explosion, but most deaths from the accident were attributed to radiation.
The Chernobyl accident in 1986 was the result of a flawed reactor design that was operated with inadequately trained personnel and without proper regard for safety. The resulting steam explosion and fire released at least five percent of the radioactive reactor core into the atmosphere and downwind. The current financal meltdown has had a similar effect on global finance. It is an explosion that scattered toxic assets debris and financial fallout to every financial market on the planet. The meltdown containment procedure was to use US tax payers as the firewall.
I don't believe the financial meltdown was a design problem. It may be that the SEC personnel were inadequately trained. Questions raised by the mysterious Bernie Madoff case showed that befuddled SEC investigations struck out at least 3 times. Madoff was easily able to fool the SEC, which subsequently took responsibility for its failure.
"We apologize to the Madoff investors and to the American public for not fulfilling our mission," SEC Enforcement Director Robert Khuzami said. The SEC inspector general found that Madoff could have – and should have – been stopped 16 years and billions of dollars ago, blaming his ability to slip through the cracks on inexperience, ineptitude and bureaucratic laziness.
It would be necessary to build into financial engineering projects insulation, isolation and containment procedures to protect the public from system failures. This is an afterthought and possibly isn’t as profitable. Banks have been failing in record numbers since 2005. Without Federal Deposit Insurance Corporation (FDIC), billions of dollars in those bank accounts would be lost. How did the nation’s largest banks become too big too fail? They are getting even bigger with Bank of America merging with Merrill Lynch, JP Morgan Chase inhaling Bear Stearns and Washington Mutual, and Wells Fargo swallowing Wachovia. The IT positions in the financial services sector are disappearing like radioactive decay.
Senator Joeseph Lieberman writes in 2004:
“Since November 2000 , close to three million Americans have lost their jobs. While higher productivity and a weakened economy have largely been responsible for this loss, a growing trend of jobs moving overseas has further exacerbated our nation’s jobless economic recovery. Once limited to manufacturing, the globalization of information technology (IT) has given rise to a new offshoring phenomenon. Forced to lower costs in the face of fierce global competition, a growing number of U.S. firms are now moving services work abroad. This trend threatens Americans working in a wide array of industries that use IT in their business functions, ranging from data entry to aeronautical design. Many of these are the high skill jobs that Americans assumed would always remain in the United States . This shift from manufacturing to high-end services and R&D jobs going overseas is critical and presents a potential threat to U.S. long-term competitiveness and to our national security.”
My career covers financial services, real estate and health care/insurance. All three of these areas are experiencing effects of the recession. Millions of jobs lost through company mergers, company failures and outsourcing. With the lost jobs also go lost medical benefits, financial stability and lower wages.
The Mortgage Crisis is far from being resolved. No one is saying how big the problem is. It’s a political volleyball for Republicans and Democrats. This has frozen financial services and real estate. The Bank Bailout and economic stimulus packages are costing over $1 trillion. Prevention of a repeat crisis in the foreseeable future would necessitate more government regulation. Republicans have been against more regulation. Does the government have the political will and the technology to manage this crisis?
Health Care reform will be on a faster track once the Congress has decided what it will be. It’s not clear how speculation could seize control of health care reform. The tide seems to be against health care for profit. That is where the battle lines will be drawn. Billions of dollars in profits are on the line. Billions of investment dollars are flooding in. This is fine with me as long as they don’t outsource the new IT requirements offshore. There are 50 million uninsured enrollees, which is comparable in size to the current Medicare enrollment. This represents a great expansion in health care services and administration.
