Subba’s Serendipitous moments

June 21, 2009

Will Singapore learn the lessons from the financial crisis?

Just finished reading Daniel Gross’s book, Dumb Money: How Our Greatest Financial Minds Bankrupted the Nation. It is available as an e-book too. It is a book that I recommend to all executives and civil servants who are responsible for developing policy and strategy because it is important to place emphasis on perception tools as much as we do for analytical tools. There are similarities between the actors in the dumb money operation and in the Singapore civil service.

Dan writes:

“The Dumb Money creed rested on four pillars: perpetually low interest rates, perpetually rising asset prices (especially for housing), borrowers of all types remaining perpetually current, and perpetually strong markets for debt. The high priests of this cult were the nation’s central bankers.

In 2007 and 2008, each of the pillars of Dumb Money began to crumble. The rules of physics still applied to finance. Interest rates, it turned out, could rise. Asset prices could, indeed, fall. Borrowers, having seen no income growth in a decade, fell behind on their debts. All of which helped cause the markets for securitizing debt and derivatives to break down”

The people who blew up the system weren’t anarchists. They were members of the club: central bankers and private-equity honchos, hedge-fund geniuses and Ph.D. economists, CEOs and investment bankers. And the (overwhelmingly legal) con they perpetuated on themselves, their colleagues, their shareholders and creditors, and, ultimately, on us taxpayers makes Madoff’s sins look like child’s play.”

Looking back, the investors who believed the stories told by Madoff and Stanford—that they could deliver steady, positive, market-beating returns in any type of climate, despite the manifest failure of virtually every other money manager to do so—were obviously foolish. But our best financial minds also spun tales and theories with great assurance, making seemingly irrational and unprecedented activity seem completely sensible. And we bought them.”

So, Why do the best and brightest get it so wrong? One easy way to explain it is here.

The arrogance of power. Combine that with great wealth, quick progress, a group think syndrome, limited thinking style and big responsibility at a relatively immature age and you have a potent mix. It invariably leads to hubris. Hubris was typically responsible for the downfall of heroes in Greek tragedy.

In addition, people in positions of great power and/or wealth will often interact primarily with people like them, both at work and in their social life, most of whom share a similar world view. They start believing that they are the only ones who understand what is going on and what needs to be done. Everyone who disagrees with them is just plain wrong or worse downright stupid. When problems occur, they tend to circle the wagons and become even more isolated.

Now Singapore’s civil servants are intelligent people, but they have become ensconced in their ivory towers. There is too much group think and there is rarely a marketplace where ideas compete. Most Ministers and civil servants come from the same elitist institutions and often have a tendency to very much function like a club. I do not know how much debate happens during the cabinet meetings, but after observing Parliament proceedings closely I have rarely seen a good debate or alternate viewpoints being pursued.

More importantly, having seen civil servants and executives in Ministries and statutory boards interact, the “group think” syndrome just continues to strengthen because they don’t want to be left out of the club. Worse, any alternate view is interpreted as a challenge to the authority, not just to a point of view. Has kowtowing the superior become the SOP (standard operating procedure) or is it a “survive and grow” strategy or worse the natural default behavior? With so many Minsters and civil servants coming from the military side, I would not be surprised if compliance fetches a better premium than creativity.

The Singapore media has never had a track record of triggering new ideas or debating current ideas. It has always served to propagate official thinking and giving it a spin.

Now, can the top honcho always get it correct? And what’s the risk of his reading the situation wrong or coming up with the sub-optimal solution? I shudder to think.

If the financial crisis has one thing to teach the Singapore government and civil service, it is that systemic failures of massive proportions are possible. And the best and the brightest (in Singapore they are judged when they are 18 years old based predominantly by their school leaving scores) with their group think cannot be the fountainhead of wisdom.

Wisdom and government dominance have been strange bedfellows. And incompatible too.

Advertisements

3 Comments »

  1. The problem is due to clouding of thoughts due to ego with the individuals or groups of individuals and it is this ego that leads the fall.

    The problem of the financial systems has been perpetuated due to greed and attenuated due to fear, the life styles ensures that every one wants more with out doing much and once the bubble bursts as in case of Enron et all the same persons want to protect what ever they have.

    Now this is a natural human reaction.

    Coming to main point of “Why do the best and brightest get it so wrong?”, it shows that these are as human as you and me.

    Comment by Nikhil Gujar — June 24, 2009 @ 1:23 pm | Reply

  2. When success begets success. the self and community at large tend to believe that they are the best. Greed drives them… Actually, I will echo Nikhil’s point of view – we are all but just humans; fully capable of faltering and failing and mostly such downfalls are exteremly steep & deep. When there is sustained & repeated success the only way people will remain on their toes will be when a crisis strikes. Adversity is known to be the mother of inventions (read as innovations).

    Even in the financial and subsequent economic crisis we blame those handful of smart people who actually developed and sold products quite convincingly to the world population (where there are many more smart people); helped them live their dreams… Some succeeded and exited in good times and some others remained and perished. So do you believe that the Maddoff’s of the world brought hell on earth knowingly? If not, it just reflects the limitation of human comprehension in such thinkers & executioners and at the same time accentuates the theory of blind faith of the masses.

    What I liked in the Singapore episode of handling the crisis is that most people on the streets did not feel the impact of the crisis (check out the crowds at the technology shows and the expo sales!) although the country is in technical recession. Such an act can ben pulled off only by smart people. But I do tend to agree that we hardly see challenging of thoughts and ideas and when there are some occassions – they fizzle out pretty quickly…

    Comment by Santosh Nair — June 24, 2009 @ 11:52 pm | Reply

  3. Hello Santosh:

    Thank you very much for your comments. Madoff is a case of fraud. The intent and the way he carried out leaves one with no doubt.

    I drew a parallel with the Singapore system to just highlight that a certain set of factors can come together in a seemingly innocuous way and derail the system. Most people are of the impression that if the system is managed by smart people (be it the financial system or the government or for that matter any system) they will deliver. What the financial crisis has shown is that even the best amongst us and they being together can lead to dangerous groupthink which can be detrimental. So, just as we need a system with checks and balances, we also needs a marketplace for ideas and ideologues.

    My take is that Singapore has too much group think which worries me at times. I am not commenting on how they handled the downturn, though that’s a topic by itself.

    Comment by Subbaraman Iyer — June 25, 2009 @ 9:32 pm | Reply


RSS feed for comments on this post.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

%d bloggers like this: