Positive Innovation or Creative Destruction

I took some units of MS Financial Engineering back in 2005. The Philippines back then has no derivatives market yet, unlike those of the already sophisticated ones in the US and Europe.

By December of the same year, I was hired by the Bank and because of the demanding schedule required by the management training program, I had to defer my post-graduate studies. The classes were held at the main Taft campus, unlike MBA which holds classes at RCBC Plaza. This meant an hour or so before I get to class which by then half of the lecture is through and I would be scratching my head clueless for the next hour and a half.

Had I continued my studies, I would be a Master now. I would have become one of what they call ‘quants’, math geniuses (or in my case, maybe just almost genius) that the Wall Street began hiring in the 1980s precisely to invent exotic new financial products like credit default swaps, collateralized debt obligations or mortgage backed securities.

If I took the program earlier hence finishing earlier, I would have been hired as a financial engineer, rose in ranks to have become perhaps a country manager of a local subsidiary of an investment bank here in Makati, only to resign later on precisely because the products we ‘quants’ would have engineered are the very same culprits of today’s financial turmoil, causing erosion of trillions of shareholders’ wealth across the globe.

In other words, I would have been jobless today. A bum genius, or genius bum or just a bum. Great.

The derivatives market is estimated to be roughly around $668 trillion dollars. That is approximately 12 times the entire planet’s GDP. However, only a fraction of that market involves the highly risky credit default swaps. And while its notional value is at $55 trillion, the real money involved is much less. Yet, the havoc it is wreaking across the globe’s financial system is tremendous.

If the bubble burst later, when the market is much larger considering it doubles every two years, then my BPI Equity Fund placement would be wiped out entirely. If that were possible…

This leads me to think if too much knowledge becomes dangerous at some point. Consequently, so could too much technology. The fluidity of today’s markets can be attributed mainly to the seamless interconnectivity of information across the world, the internet. In a click of a button, gigabytes of information can be downloaded onto your workstation, millions worth of stocks can be bought or sold, real-time movements of stock markets are tracked and billions of dollars can be wiped out in a few hours of trading.

That’s just what happened and what is happening. I posed a question in one of my recent articles and I’ll ask it again. Until what point will technology bring convenience to us? And when will it begin causing us more misery than good? I believe the backlash has already begun.

It must be qualified however that it is not knowledge per se that becomes dangerous. It is the absence of regulation of knowledge translated into practice. The derivatives market would not have imploded had it been regulated. In fact, it would continue to create wealth and my BPI Equity Fund placement would still be in the green and everyone would be happy. However, too much liberalization, compounded with knowledge and reckless innovation proved perilous for the likes of Lehman Brothers, Fannie Mae, Freddie Mac, AIG, Wachovia, and countries Iceland, Korea and Pakistan. This list may get longer in the days ahead.

Let’s make an analogy of what happened and what can further happen.

Greedy financial engineers +
Lack of regulation of a derivatives governing body +
Knowledge and technology =
Financial meltdown resulting to losses in the trillions.

Not so grim, yet. Then comes the next possibility.

Power hungry terrorist-funded nuclear physicists +
Weak IAEA (International Atomic Energy Agency) oversight powers +
Weapons-grade plutonium =
Nuclear fallout leading to lives lost in the millions.

So, when do we draw the line between positive innovation and creative destruction?




P.S.: I was going to write about the ill-effects of melamine. However, as I learned that even Chinese eggs, ridiculously as it may sound, were found to be tainted with the chemical, I realized that it could already be in any food we eat. After all, Chinese goods are practically everywhere. Maybe when I already have kidney stones I’d write about it. For the mean time, mooncakes anyone?