Friday, September 18, 2009

Created Knowledge and Adopted Knowledge

I think that the financial turmoil of the previous year and the cyclical slump of the current is one of the best things it ever happened to Marco, Diego and I. We are fortunate not because we are wealthy (we aren’t), it is because we almost don’t have liabilities in our Balance Sheet and that gives us a huge power, the ability to use cash on hand in the most creative ways (or at least not in the most preposterous ones).

After some time of remorse I started to think in all the people that saw their homes in foreclosure, credit card debt, revolving credit lines closed, broken covenants, triggers deployed and any other financial disgrace that you could imagine that an individual, institution or government can suffer (they can’t? Ask Iceland).

Definitively I am not trying to attempt to conclude the whys and tell the hows, because I’m not that smart. Instead I try to wonder if all this financial turmoil and excessive leverage is a matter of Created Knowledge or Discovered Knowledge.

Capitalism and Communism are a created knowledge, the humanity did not rose and …….. and voilá! There is capitalism or communism to their status quo. This system was based in certain rules that by themselves were based in some knowledge, theory or some sort of hypothesis….. at the end knowledge.

Is the lack of knowing the human being the problem? Or it is that just that we need more delimited boundaries? And here we go again, is more regulation needed? Doing money is not that hard, just a little bit of common sense and work. During the past 35 years the world of finance and financial markets, products or anything that carries the word have been revolutionized amazingly.

Options, Forwards , ETFs, Derivatives and other kinds of financial products created for something are used in reality for another. Options , forwards and other products were created to hedge, in other terms to avoid “risk” (measured as the volatility in the price of something) and in reality are used in a leveraged basis which increases the risk versus having the underlying real asset.

Adopted Knowledge is something that it is as it is, described in other words is something discovered. What it seems to me is that there is a basic misunderstanding of the basic nature of human, thus adopted knowledge.

We clearly don’t know lots of things about humans, we won't know how we will react to different knew products, financial schemes and economic incentives with great precision. What we really know is that we cannot afford the social cost of this crisis that only benefit people that have some cash on hand. I don’t know if we need more rules, but for sure we need more watchdogs in the kid’s playground.