Wednesday, January 30

Emotions in the markets and workplace

Our modern way of thinking appeals primarily to management theories and a system of prudential regulation, which wax and wane in correlation with the bull and bear markets which bear their footprints.

When sudden large losses materialize, as they always will, such as what happened at the end of a period of reckless Asian bank lending in the late nineties, the accompanying credit crisis caused markets to go into a spin and for regulators and officials to intervene to tighten prudential standard in an attempt to avoid future occurrences.
Currently we have a capital crisis, caused primarily by sub prime lending in the USA and which has once again sent stocks into a sudden panicked tailspin all over the world.

Banks emotionally reacted, at times indiscriminately curtailing their lending to other banks because of lack of trust, concerned over non disclosure, fearful and hurt by what they thought was AAA rated securities backed up by real estate loans, but now realizing those borrowers were unable to repay the loans and unable to ascertain a clear picture as to the extent of the problem.
This was understandable as the securities were traded through many entities who all took varying percentage risks in the event of default. Regulators have reacted quickly by reducing rates and making available a larger borrowing pool of central bank credit to restore confidence.

China and the oil rich Middle East countries have also come to the rescue and injected large amounts of capital into the troubled financial institutions most effected in the USA and who have operations globally. Those investments are owned by the sovereign State, so we have an interesting cocktail of future investors. Will Governments intervene on the internal affairs of the company? probably not.

The sub prime housing foreclosures have also exasperated the bulging stock of homes for sale in the USA equivalent now to 10 months future supply.

The underlying theme is a lack of integrity, Securities were never AAA, Brokers were paid much greater commissions to influence borrowers to purchase sub prime mortgages over the more conventional lower cost type and Banks and regulators didn’t exercise any prudential standards. Those entering into the loans either did not know, or want to consider, the huge escalation of rates after the initial honeymoon rate period and in some instances it was fraudulent. In its earliest stages the idea had tacit support from the regulator. So what will the regulators do? Pass more prescriptive legislation about disclosure? They already have.

I prefer briefer broad descriptive type legislation that doesn’t need updating, as I think imagination is much more powerful and an effective means of communication and adapting to the spirit to the law is essential for to achieve the societal objectives to which the law aspires.( my submission is here to our own market authority )

I think we have entered into a phase of the current crisis which is purely emotional. Emotions tell us the truth about ourselves, if we dig down and find out what are all of these feelings about. I suggest in the current context there is a lack of trust? Fear? Anger? Even revenge? But it’s hard to put your figure on any one feeling. What do you think?

I think markets are always driven by emotion, it never been any different since their first inception. You will never rationally be able to define them in the short term. In the longer term however the fundamentals come into play just as I think organizations of integrity underpin the market longer term. The others are in danger of collapsing when the emotional temperature is turned up high.

This crisis I think may be over in year or so, nobody knows exactly? , maybe we will now become worried about what China will do, and then there will be further panic and so on.

Currently there are a small but growing number of organization leaders who are not afraid of their feelings and are confident enough to become vulnerable by talking about how they feel and how they are empowered by the trust they place in the integrity of others. You can always recover from genuine mistakes, they need not hold our fears, but you’re likely to become very emotional when faced with widespread mistrust and deception which leads to unintended consequences.

What’s your experience in the workplace and how important do you think are our emotions?


Dr. Nazli said...

Hi Lindsay - thanks for visiting my blog - recently more than me. In your current posting you have hit upon a number of topics and concerns about which I am most passionate. It's great to see people speaking out for humanity! Here's to fearlessness!

Best wishes,

susan said...

Interesting post, Lindsay, and I have to start by saying I'm generally in agreement with your theory with the possible exception in this country (usa) that outright greed has been a huge part of the housing debt crisis.

I work in a large med-school, multiple hospital where at last count there are about 14,000 employees which is indeed hard to imagine and I've certainly never seen all of us at once. Anyway, people I know with normal middle-class incomes, apart from doctors, professors and upper echelon administrators, have been buying houses and condominiums for their college student children to inhabit while they attend university.The not unreasonable theory, given the stratospherically rising prices, for the last few years has been that the resale of the property would cover the school expenses. Never once did I hear anyone other than myself express the concern that by playing this game people in those cities who really needed homes were being priced out of their local markets by these speculative aquisitions. Now these are ordinary people who consider themselves to be both good citizens as well as good Christians for the most part.

You did a good overview of the better known side of the story - equity loans on paid up homes (let your house work for you, said the ads), poor people conned out of their small incomes with the promise of a house and those who bought up (why stay in that pokey old two bedroom dump when you can have five bedrooms, three full baths and a swimming pool?). Now the chickens are all well on their way back to the roost and there'll be a 'correction' but once again there's a big difference between having no money and being so deep in debt you'll never recover. They tightened the bankruptcy laws here a few years ago.

I'm sure a great number of people in this country are extremely emotional as well as logically paranoid at this point in time.

lindsaylobe said...

Thank you for your thoughts.
Susan !~ Thanks for your input, Greed is definitely a factor in all speculative bubbles that lead to unsustained prices and much heartache and fear afterwards when the bubble bursts.
I found it interesting to reflect on your workplace colleagues investing in additional homes to pay for their children’s College education; fuelling the demand driven price bubble to lock out many needy families for long periods of time. I think the subprime market was all predicated on greed, to charge a much higher interest rates( after the honeymoon period) , to make much bigger fees than was thought previously imaginable and to earn hugh commissions, all built on the impossibility of offering finance to people who could not afford the finance at lower rates in the first place. A large new kind of magical pudding manufactured to entice those involved to think they were becoming rich and contented as they eat it,( which they were ) but it contained some nasty ingredients which once fully digested through the body will make you sick. In what must have been an emotional moment, one sacked CEO and founder of one of the bigger lenders was reported as handing back the whole of his $42 Million severance pay. It was in the best interest of the company I think he said.
Best wishes

grannyfiddler said...

quite a can of worms you've offered up, Lindsay. during the course of my program in business, majoring in accounting and finance, one of the most indelibly learned things i came home with was the understanding that what i was being taught was quite contrary to my own personal beliefs. in finance, the bottom line is ALWAYS financial, and exponential growth is considered a sign of good health. in my real world (as opposed to the world i was being taught to inhabit) the bottom line is about people - relationships between them, and healthy ways of living, safe places for them to inhabit in ways that are sustainable over very long periods of time.

exponential growth in nature is often a sign of something out of balance or damaged. like the recovery of the land after a fire, or the growth of cancer or other diseases. and i think the same is true of exponential growth in business. like disease it often kills whatever it feeds on. eventually it runs out of food and must either find a new host and move on, or die itself.

i agree with Susan.... the US mortgage market crash is mostly about the greed of already wealthy people. the movers and shakers behind the whole thing weren't the low income folks trying to own their own homes; they were the money mongers slinging their lies to those low income folks, hoping to multiply their already obscene affluence.

another thing that struck me strongly during my time in business training was how abstract the whole system is. wealth in our society is based on intangibles. it's not about how much food or livestock, or productive land or respect from one's community one has. though these are the things that actually sustain life, it's the intangibles we use to gauge wealth. things like money and stocks and precious metals are more highly valued, though they have no intrinsic value. if they were all we had, we'd have nothing to eat or wear or keep us warm or comfort us. those things have only an artificial value, and they have that only so long as we all agree that we want them. if there was suddenly no food, those things would be worthless.

i can't bring his name to mind off the top of my head, but one of the chiefs of Canada's First Nations is quoted as saying to the encroaching Europeans, more than 150 years ago, "only when the last tree has been cut down, when the last river has been poisoned, and the last fish has died, will you understand that money cannot be eaten."

and i think he may have had it right.

arulba said...

Interesting. My husband and I have always been incredibly conservative as far as housing goes. We are careful. But we have friends who haven't been careful at all and have made a killing off of their willingness to take the risks that they have taken. Forever, my husband said that it would come back to bite them. But it never did and it was my alternative opinion then (and continues to be now) that our conservatism came back to bite us more than did their liberalism. They could afford the risk and they took it. We could afford it too, but we didn't.

On the other hand - I take major issue with the SubPrime lending practices in the U.S. - especially with the ARM Loans. This doesn't just help people own homes, it helps them own ridiculously large homes. And when these homes are bought in the exurbs with poor schools where the taxes are extremely low it's even more problematic. As soon as the area gets built out and citizens want better schools, etc., the taxes go way up. Eventually the ARM period ends, and the homeowner who has opted for this ARM starts incurring negative amortization on that stupid 3800 sq. foot home that they didn't need in the first place. That's not about risk taking. That's about greed. They wanted more than what they could afford so were easily deceived.

How much is that the fault of lending institutions and just the idiocy of the American Public? I'm not particularly sympathetic toward the two income earners with no kids who buy a 3800 sq. foot home on an ARM and then find out, after the adjustable mortgage period is over, that they can't afford it.

It's not that I'm against ARMs. My husband and I had an ARM on our first home. But it was a little 1300 square foot house and we could have easily afforded the cap on the ARM. We sold the house before the adjustable mortgage period was over which had been our plan all along and is why my husband had opted for the ARM in the first place.

I think Susan's comment is interesting. It is not uncommon at all for people in our neighborhood to buy condos in the Austin area for their kids when they go to school. There are a lot of musicians here in Austin that complain that they can no longer afford to live here because the taxes have become so high. We're considered to be the music capital of the U.S. and the fear is that Austin will lose that status if musicians can no longer afford to live here.

But I guess that doesn't really answer the emotional value of the marketplace. Or does it? Fear, Greed, Adventure. I guess it does.

Interesting post, Lindsay.

lindsaylobe said...

Hi Granny F & Arulba
Thank you both for your interesting input to the post and subsequent discussions.
Granny F~ I have an interest in triple bottom line reporting; shareholders, community and long term sustainability of operations within the environment in which it operates. Many larger organizations attempt to give some weight to all aspects in their reporting and governance principles. All of your well considered points hopefully will have become much more relevant in financial thinking and how it is taught, to broaden what was previously conceived within its limited knowledge constraint as we appreciate in all disciplines much more of the actual fragility of the earth and its finite resources.
I think your comment does link to the emotional value of the marketplace (fear, greed, adventure) by showing how that these emotions affect decisions of those in society. Incidentally I don’t like the idea local taxes on property determine what’s available in taxes to fund local schooling, as I think this model further exasperates inequalities compared to more affluent neighborhoods? . Rather I prefer schooling costs be recouped through a general income tax base where education is based on national or State standards so that all communities theoretically enjoy the same standards in Education.
I also feel the supply side of the equation in housing in Australia and elsewhere have largely been neglected by successive Governments. In outlying planned areas, complete with good rail and infrastructure facilities you could ease the supply shortage by releasing large parcels of land acquired under a public utility and spreading the infrastructures costs to the house owners maybe over a 15 year period. Our first house in Sydney was under a similar type scheme, as it cost us nothing for the land but the improvements were amortized over the next 15 years. We were able to have built a small but nice house. Later we were able to purchase the land for its original cost to the government although you had the option of a lease in perpetuity on what was known as crown land.
It gave young people a great start, but did not ultimately cost the Government other than interest forgone on the land purchases and improvements.

Theses days we have first home owner’s grants and assistance, to assist young couples to make a start, but nowhere near the generoroisty provided by governments long ago. We simply don’t need to live in the cities which have become over populated, rather to develope regional centers supported by infrastructure, with good rail links.
Best wishes

Cart said...

"I think markets are always driven by emotion" That is an undeniable truth and the reason a sound economic base is essential.
My concern, and I echo Susan though I'm not sure we mean the same thing, greed is one of the key issues.
That is why I am firming on the side of the old Keynesian intervention - market regulation.
I recall when employment was an unwritten contract based on loyalty - both ways. I recall a time when we had 'blue chip' investments.
Now everything is like a gamble at the local pub. I win, you lose... That's fine for get rich quick dreamers, but society will suffer all the way.
Thanks for raising these vital issues.

Gina E. said...

Hi Lindsay,
I am woefully ignorant when it comes to matters of high finance, and I get very upset and angry when my hard worked for superannuation fund loses $3000 in one fell swoop due to forces out of my control. I could understand if my fund all of a sudden wasn't earning any interest, but I will never understand how money can be taken from my existing fund???? Where has it gone? In whose pockets? SOMEBODY is benefitting, don't tell me otherwise.

Gina E. said...

Don't worry about your kookaburra. We are looking after him! I'm putting pieces of fresh meat out and keeping the cat inside!