Sunday, 27 December 2009

A Decade Trip from Y2K to why it Cracked

A Decade Trip from Y2K to why it Cracked

27th December 2009

The Malta Independent on Sunday

Alfred Mifsud

 At this time 10 years ago, we were holding our breath as if the world could end at the turn of the millennium. Not only was it an event no living creature had experienced before, but we were petrified by the risk that computers and IT systems would crash through their inability to handle the millennium date change

Remember the Y2k scare? When everything went smoothly, the simple truth emerged over the course of the decade about to end: we should be much more scared about the risks we do not see than the risks we can see and prepare for. In Donald Rumsfeld terms: we should beware known unknowns and unknown unknowns rather than the known knowns.

This time a decade ago, the Y2k risk everybody was seeing proved unreal, but the risk from international terrorism that very few were observing proved very real indeed. Today we know that Al Qaeda, a largely unknown organisation 10 years ago, was seriously preparing for a major international terrorism event to hit at the turn of the century. This did not happen, as the plan had to be postponed for better preparation, but when it happened on 9/11 in 2001, the world could not believe how the nerve centres of US capitalism and political system were being attacked by a shadow enemy and broadcast live on prime TV.

9/11 was the event that defined this first decade of the third millennium. It was the cause of two international wars, which brought untold hardship and turmoil that is still rumbling on. The Iraq war is winding down, but the new unstable reality it brought is still evident. The war in Afghanistan is still to be won or lost and, as did 9/11, is showing the severe limitations of the military might of a superpower against insurrection forces that seemingly have limitless resources of suicide terrorists. How can one fight a suicide terrorist with a billion dollar nuclear arms programme?

This time a decade ago, the financial markets were blowing up the technology bubble that eventually peaked in March 2000 and blew up soon after. Again, this was a case of beware the risks hidden by the irrational exuberance or the misplaced euphoria. Internet was the new thing and any company that could put ‘dot com’ behind its name started commanding crazy premiums from investors misguidedly supposing that, at the flick of a switch, we would all change our habits and start procuring our needs over the web.

Ten years later we know that shopping over the web has been popularised and is increasing in volume, as most offices and residences are now wired with generous bandwidth. But old habits die hard, and the new habits sit alongside the traditional experience of shopping from the mall. It is true that virtual vendors like Amazon and Ebay are now household names, but it is not as if malls have closed down.

Over the last decade, new brands have been created that are now integral parts of our everyday parlance. You would have understood nothing 10 years ago if I asked you to Google in search of some information you need. Google, Facebook, Youtube and a multitude of social networking sites are now an integral part of the way we live. My 11-year-old daughter thinks that they have been here since the Ice Age.

At the end of the decade, rather than at Y2k, we are scratching our heads asking how and why it cracked, “it” being the international financial system. Who would have believed, 10 years ago, that we could see financial giants like Citigroup, Bank of America, Royal Bank of Scotland, Lloyds Bank, Hypo Real Estate, Fortis, Commerzbank and others humbled and needing government-sponsored rescue packages to stay afloat, while traditional investment banking names such as Bear Stearns and Lehman Brothers would be wiped out by the turbulence?

Again, this was a case of beware the risks that you do not see. All these banks employed armies of risk managers who should have been on their guard to scan the horizon against all sort of risks. As one internal bank report said, these risk managers were counting the grains of sand on the beach but totally blind to the tsunami that was coming in.

It cracked because it was built on the false premise that the spread of risk from the primary originators of mortgages to several layers of secondary investors who bought the sliced and diced risk relying solely on irresponsible credit rating certificates, without any real checks on the true underlying, would make the system shock proof to the failure of any single institution. This proved painfully false. The failure of a single institution would have brought down the whole system, were it not for strong and unprecedented government intervention. Economists had, misguidedly, developed blind faith in the power of the market to take care of itself as much as in the power of their complicated mathematical models. They ignored the simple humanities on the grounds that if consumers take on more debt than they can handle, those mathematical models would be blown into irrelevance.

For the next decade it would help to restore a semblance of stability if technological advances and innovation move alongside the ability of people to adopt them for their long-term betterment.

I take this opportunity to wish you all a peaceful finale to the decade and a prosperous 2010.

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