Sellers beat Buyers, 43-2

I just finished reading Niall Ferguson's "The Ascent of Money". Just before Christmas, I was reading his description of the buildup in sub-prime mortgage sales and thinking about the corresponding changes in the industry supply chain. Specifically, I mused on the development of the "originate to distribute" part of the banking system -- loan warehouses, etc. Sometime during that same night I was reviewing some discussions on Wikipedia about the use of the term "predatory lending" and how some people there seemed to feel that there is something wrong with the very term. That it is "anti-capitalist" to describe a "freely entered into contract" with a "pejorative term" such as "predatory". This strikes me as obviously silly -- if not somewhat Orwellian -- in that it's difficult to debate either the ethics or the results of business practices if you can't use words that convey values. Besides, the underlying assumption that "if it's capitalist, it is definitionally good" strikes me as one that embodies a fair amount of value assumptions in its own right.

But the Wikipedia discussion did bring into focus for me a rather portly Naked Emperor that I think has grown substantially portlier over the past 10-15 years. Trying to boil it down to an axiom of some type, I came up with the following: When a supply chain becomes big enough and commoditized enough, if the target purchasers are not experts, they're toast. I know, it needs work. But phrasing aside, the idea is pretty simple, and I think stands up as observable in modern societies - and is a great example of one of the fundamental flaws in modern economics that have played such a role in crashing our economies.

The key concepts that lead to the axiom:

• Rational actors:  The theory that a person reasons before taking an action and thereby acts rationally, seems destined to hit the garbage pail.? A good thing, since it's never been more than a simplification to permit thought experiments and mathematics -- it's simple to observe in our daily lives that people don't behave rationally from an economic perspective.

• Information Asymmetries: Asymmetry describes a situation in which one party to a transaction has more complete or accurate information about the value of the transaction components and/or downstream implications than the other party.? Although commonly described as undesirable or unfair in economic analysis, it is a staple of many market situations and these unequal bargaining positions are directly exacerbated by complexity.

• Product complexity: As products (especially financial ones) get increasingly sophisticated, the level of expertise required to understand and evaluate them goes up -- significantly.

• Market and supply chain complexity: As the number of components/relationships in a given product go up, understanding the value of that product becomes increasingly dependent upon understanding the complexities of the supply chains and their related distribution channels, along with comprehending the resultant pricing issues (if they're not hidden, see information asymmetries above).

There are other factors involved, but these are the primary reasons behind a simple fact: if you are purchasing something, especially in an area like financial services where there is nothing tangible to get your hands on, examine, and measure, the people selling it to you generally know more about it.  If you're a retail investor, the odds are you will get lost within minutes of having the "explanation" of why you want the product.  Even the high powered "Buy Side" professionals are generally over-matched when it comes to evaluating complex strategies and products.  (Hence all the stories about investment bankers "ripping the face" off of their clients).

This is by no means limited to financial markets, though the effect is possibly easier to identify there.  But take a look at insurance offerings, health care plans, or cell phone contracts -- these all require significant time and effort to understand, more than most people can afford to invest in what are essentially required purchases.  Probably the worst example of this situation can be found in the political arena, where the packaged views have little relation to reality and the candidates are entirely qualified only by fund raising  ability, but we'll leave that one to the paid pundits.