In the past century, affluence increased greatly, eager parents could send their future Newtons to big-name schools, which tried furthering education. Schools did a commendable job of schooling folks in tailoring individual actions to suit immediate self-interests but did not teach the art of contemplating the consequences of collective individual efforts. We began believing in the limitless powers of our knowledge. Soon Hubris came knocking and Prudence made a quiet exit.
Not content with building bridges and railroads, man extended ingenuity to other areas. Financial instruments were one such serendipitous invention. Real assets – land, gold, metals – were gradually superseded by paper assets. The benefits of this transition, while real, gradually fostered excesses which began ending disastrously. Attempts at plugging holes only led to creation of new ones. Nobody had/(s) solutions but that does not dissuade us from creating the illusion of finding one.
…and so it is fashionable today to vilify finance as the root cause of our woes. Given this, it is our humble duty to do our bit in furthering this notion. What better way to make a case than engender a crisis?
Yours truly offers a prospect that carries a high probability of culminating in a disaster of gargantuan proportions.
Since gadgets have come to be considered yardsticks of coolness today, we begin with Apple’s battery of products. The launch of the latest iPad was a widely watched event. Even as the price of the latest gizmo was announced, prices of earlier versions of the iPad dropped.
One of the near maxims in the technology world is that a launch of a newer version causes prices of older versions to drop, sometimes precipitously and permanently. The first step would involve creating instruments that derived values from the prices of various versions of the iPad. Once such derivative instruments come into existence, one would buy the instrument that mirrors the latest product (we’ll refer to the derivative instrument as IPD 3, for simplicity) and simultaneously sell the instrument that mirrors the older versions (IPD X).
Crowds, apart from mongrels, are among man’s best friends and should be tapped appropriately. Generally, anything new in the technology world evokes frenzied interest. As flashing the latest gadget seems to have a direct bearing on one’s societal and social media standing, demand for iPad3 would be immense; accompanied by a concomitant decline in demand for older versions. Prices of IPD 3 would increase, while IPD X would fall. The above suggested trade would yield juicy, almost-certain gains. Near risk-free arbitrage.
Fools do in the end what the wise do in the beginning. Once the earliest adopters of this trade make out with handsome gains, the crowd would, as they always do, latch on to the operation. Soon demand for IPD 3, the paper product, would outweigh demand for iPad3, the real product, leading to divergence in prices of the real and paper instruments. The seeds of disaster would begin to sprout…
Demand would then increase to a point where frenzied people would find it difficult to get in on the trade. The concept could then be extended to other competitors. Blackberry and Samsung, for instance. Keen technology watchers would have, no doubt, followed Blackberry’s recent tale of woe with alacrity. Instruments similar to IPD 3 that mirror prices of Blackberry’s slew of products would be created and pumped into the system to satiate demand. Smart folks would, for instance, buy Apple’s paper derivative instruments and simultaneously sell Blackberry’s.
We could utilise another fashion of the present day. Social media. Twitter and Facebook would be helpful in creating Like-able pages and spreading the word. Crowds would be useful here too. As most of us revel in indulging in you-lick-my-back-I-lick-yours activity in the social networking world, the above idea could go viral, till a great number of people joined the juggernaut. Gradually, so many would be dabbling in the trade that nobody would remember the original idea or the mode of execution.
Just to ensure that the crisis would be one of gargantuan proportions, we could introduce another instrument suggested by yours truly earlier. Fortune Default Swap: Hedge Your Misfortunes Away, that is designed to safeguard against attacks of misfortune.
Once enough people line up on one side of a boat, not much is needed to tip the boat over.
Crowds would serve as catalysts that would trigger the disaster. Prices of the real and paper instruments would get so far out of whack that a group of smart early bunnies would look to cash out. All at once. These would be the original boat rockers. Once enough folks rushed for the exit, all at once, the process of crisis creation would be complete. By then, the above instruments would have become so big that they would qualify for too-big-to-fail.
At this point, governments would get involved and orchestrate a bailout to save the crowds, so they could indulge in similar activities in the future.
Finance would be vilified.
…and the crowds would live (un)happily ever after.