Monthly Archives: May 2017

Random thoughts – keeping you on your toes

Systemic Risk

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Yesterday I noted how Canadian mortgage company Home Capital ran into serious problems because of one of the more notable aspects of our financial system.

Fractional reserves or capital reserves let you lend money on deposit, keeping only a small amount of readily availabe cash to cover withdrawals.

This enables the lender to earn money on the deposits, pay the depositor an income and keep a profit for themselves. It also helps the economy grow more quickly by expanding the money supply.

So basically a good idea, but not without risks.  As long as depositors do not withdraw more money than is in reserve (say 10 %) or withdraw at a rate faster than the reserve can be replenished, the system chugs along happily.

Also of course if the loan default rate is high (say more than 2 to 3%) the ability to replenish and maintain the reserves is impacted and the house of cards can come tumbling down.

In the case of Home Capital, deposit holders began to panic.  The panic led to depositers making withdrawals.  A combination of factors created the perfect storm that led to this “run” on the Bank.

Home Capital focuses on higher risk mortgage borrowers and their executive were recently charged with a security violation and their stock is heavily shorted.  Short sellers were encouaging panic and the combination of factors made them successful.

In this case, the worst is over for the moment and we all can breathe a sigh of relief this did not turn into a systemic problem leading to contagion (i.e., a run on multiple banks).

The question for tomorrow’s post, since we fully aware of the potentially fatal and disastrous impacts that can arise from our fractional reserve/ fractional capital system,  why don’t we do something about it?

Random thoughts – keeping you on your toes

Fractional Reserves in Action

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In the past, I have done a few posts about the concept of  fractional reserves or closley related capital reserves.  Canadian company Home Capital is a recent shining example of what can happen when your monetary system is founded on the concept of reserves.

Simply put, in countries that allow fractional or capital reserves; as long as financial institutions retain a government/regulator specified reserve of capital or specified deposit holdings, they can lend the rest.

For Example -Home Capital

Home Capital gathers funding via savings accounts, gauranteed investment certificates and shareholder capital.  At the end of April they had about $15 billion on deposit and $17 billion in mortgages.

The deposits were used to fund the loans.  Under the capital reserve model (Canada’s model) Home Capital is able to lend more than they have on deposit as long as the capital reserves (readily available cash on hand) are enough to cover a reasonable rate of withdrawal.

The reserve amount is set by the government based on the risk weighting of capital employed.  The idea is the amount of liquid cash on hand will cover the normal volume of withdrawals.

This all goes to hell in a handbasket when there is a run of withdrawals.  Since the majority of the deposits have been lent out as mortgages, a high and rapid volume of withdrawals can cause Home Capital  to run out of cash and default on the depositors.

And this is what exactly happened – the running out of cash part, not the default part, at least not yet.

Stay Tuned

There is a lot more to tell about this story and the saga will continue tommorow with some analysis on the triggers, what’s been done about it so far and what it says about the fractional / capital reserve monetary model.

Random thoughts – keeping you on your toes

The peacemaker

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The colt single action army pistol first produced in 1871 was nicknamed the peacemaker.  The pistol’s prime purpose is to eject a sharp projectile at high speed intended to kill or maim.

Peacemaker seems a bit of an ironic nickname to me given killing or maiming other humans or even animals does not seem like a peaceful activity.

The gun was also known as the equalizer in some circles.  I guess if you were five and a half feet tall, weighing 180 pounds and were attacked by a 250 pound six footer, the gun could assist.

Strangley though, I would not classify this as equalizing the situation, seems to me the gun holder would be at an advantage.  If both had guns, that could be equal, but hard to visualize a peaceful outcome.

Rationalization

These characterizations (e.g., gun as peacemaker, armed forces depicted as peacekeepers) are really intended to hide the true purpose, that is to harm.

We are rationalizing the value of weaponary.  This justifies the use of daedly force.   If you invade my space, watch out. Sadly, there is a real cost to this thinking.

Why can’t we all be friends?

The root cause behind the need for weapons is peoplekinds inability practice collaberative enjoyment.  It’s okay for me to behave in a way that leads to happiness as long as it does not cause you unhappiness.

My friends and colleagues just look at me with that get real stare when I propose this solution.  Maybe someday, ah but someday never comes.

Random thoughts – keeping you on your toes

Everyone is from Somewhere

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If you want to travel outside of the place you are from a passport is required.  In this context, the place you are from refers to your country of citizenship.

Citizenship is granted if you are born in or move to a country and pass their requirements for citizenship (i.e., immigration).  Why is this?

Living where you want to live

I wonder why I can’t just go and live anywhere on the earth, freely.  Just pick up stakes (a reference to nomads and tents) and go where it pleases me, whenever.

There was a time in the earths history when one could do this, but it was a good idea to take weapons with you in case the people already there were not friendly.

And this is the reason for the current need for passports to control travel or immigration applications to change where you live.  That is the people that were there first believe it is their place.

Of course, if you want to come to my place, you need to be invited or ask nicely.  Arrival by force, a home invasion, is an option but most defend against it, hence why countries have armies.

Don’t Poop in my House

Ownership is human nature.  Thiefs, uneducated and poor are not desirable in my home.  They could mess it up and ruin my orderly and pleasant life style.  And so, we define where your home is, and where mine is and we set immigration rules as to who can come and live in my house.

There are a lot of places on this earth I would like to live for a while but unfortunately I have to marry someone, be rich or smart or have desirable skills to do so.

I guess I could just sneak in and live there illegally but eventually someone would probably build a wall (yah Donald, I’m talking about you) and then maybe I couldn’t leave.  You can check out, but you can never leave (Hotel California).

Random thoughts – keeping you on your toes

Divide and Conquer

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There are some bad behaviours which managers and leaders leverage to retain their organizational power.    Growing your influence through positive leadership practices is not always easy.

Leadership styles focused on creating an environment where everyone is motivated, happy and most importantly understands thier role within the context of the organizations strategy and vision are obviously preferred.

Divide and Conquer

When a manager or leaders prime objective is to retain personal power, the managing style can be focused on creating chaos.  In this way others are too busy defending themselves and so are not able to create a united front to combat and ultimately displace the ineffective manager.

This is a pure power play usually employed by insecure mangers who have neither the time nor the willingness to excel.  Maintaining the status quo, that is their position and compensation level, is the primary goal.

Creating a Positive Perception

In effect by creating confusion and disharmony this leadership or management style enables the encumbent to be percieved in a positive light.

In essence, it is all smoke and mirrors.

And the Solution

If you are in this type of scenario you can either accept it, leave or influence change.  Each option has different levels of effort and associated impacts.

Influencing Change

The key is to first observe and gain an understanding of the most disruptive behaviors being used by the manager.  Then develop a plan to counter these behaviours.

For example the manager might ignore questions and requests for action.  Emails to them might seem to go into a giant void never to be  heard about again.

To counter this, your messages and communications could be crafted to carefully involve others (external or internal organizational stakeholders).

This approach would highlight the negative behaviours and bring along others to help in prompting the change.

There is no simple, absolutely certain approach to change or eliminate this management or leadership style, but being a successful change catalyst leads to personal satisfaction, a sense of accomplishment and is to the benefit of all.

Random thoughts – keeping you on your toes

Executing the Strategy

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To be an effective leader do you need to be able to define and execute a strategy?  Or is it enough to be a to just define or just execute?

My own research leads to the conclusion that it depends.  Ultimately what matters most is a leaders self awareness.  They know their own strengths and weaknesses intimently.

Strategy and execution are both required to succeed.  The leader needs to be able to assess gaps in strategy or execution, they do not have to personally resolve these gaps.

Work Smarter, not Harder

Achieving results through the path of least resistance is less effort.  Typically this means lower cost, faster turn around and often higher quality.

Strategies define what and how.  If the how is based on the underlying philosophy that easy is better, the strategy is better positioned to be implemented.

Innovation is a term widely used and often associated with a variety of interpretations.  To a large degree innovation relies on simplicity.   Why spend a lot of effort to achieve results if there is an easier way.

Of course the innovative approach can refer not only to the methodology but also to the result itself.  The key is that the innovative outcome, though possibly visually or tactically different, is functionally the same.

Outcomes

While strategy and execution are critical processes to enable the achievement of goals it is the actual outcome that gets measured and remembered.

The leaders focus is not on their ability to think strategically or act with a high level of operational effectiveness but rather to facilitate these practices in order to enable the achievement of the desired outcomes.

Random thoughts – keeping you on your toes

Defining Success

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Rene Descartes, a french philosopher published a phrase in Latin and French in 1647 that is commonly translated as “I think, therefore I am”.

Arguably, any intelligent being, artificial or otherwise can subjectively declare their existence using this statement.  The concept tweaked my interest the other day as I contemplated the meaning of success.

I think I am successful, therfore I am

Unfortunately, success requires validation and while self validation is satisfying, is it accurate?  If others don’t view me as successful, does it matter what I think?

This leads to the potential statement ” Others think I am successful, therefore I am”.   This also is largely a subjective assessment.  The true measure  is probably more likely founded in objectivity.

So how do I know if I am Successful?

Success is associated with achievement.  If the goal is clearly defined with associated measures to indicate when it has been achieved, measuring success can be very objective.

This applies to very specific activities (i.e., the goal) and can very greatly depending on your personal goal.

For one person, a goal could be to have accumulated one million dollars by age fifty while for another the accumulational of money might not even be on their list of goals at all.

One, rich at fifty, could claim success, while the other, potentially poor at fifty could also claim success.

And so success is very individual.  Arguably if your goal was to feel  successful, then stating (with conviction) “I think I am successful”, would become an objective measure of success.

That is, the statement would indicate you feel successful and since that was your goal, then you are successful.

Random thoughts – keeping you on your toes

Search or Navigate

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Finding information involves two activities, and only two.  Both techniques could be used, or just one but you either search or navigate.

These approaches apply to all information gathering in general, however the internet (basically an enormous data store) can serve as a good example of applying these two techniques.

Searching

An extremely popular way of finding information on the internet is through search.  Many different search engines have been built for this purpose (e.g., google, yahoo)

The specific methods used vary by search appliance (i.e., how it works to find what you are looking for.)  In general though, you enter what you are searching for and the search engine trolls the internet data sources and provides a list that matches your query.

The way these search applications interpret your search terms varies, also how deeply they troll the data. Some times you need to try various terms before the results map to what you were actually seeking.

Navigating

Navigation starts on a web page.  The information on the page provides links to other pages or data sources which may in turn have other links.

You navigate through the links to find the information you seek.  There are various techniques for describing the information the link will take you to.  These techniques help the navigator determine which links to follow.

Helping people find the information they seek

Recognizing information is retrieved through search, navigation or a combination of these two methods is key to being able to help data/information providers optimize the ability for their data to be found.

Simply put, design your data retrieval capabilities with both search and navigation in mind.

Random thoughts – keeping you on your toes

Arguing

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A very cool aspect of post secondary environments is the propensity to argue.  This is done in a respectful manner with a prime goal of learning.

The discussions give reasons in support of an idea, action, or theory, typically with the aim of persuading others to share one’s view.  This results, whether the argument is resolved or not, in the acquiring of new, or modifying and reinforcing of existing, knowledge (i.e., learning).

Enlightenment versus Action

The key attribute of these discussions is the intended result.  That is the creation of knowledge.   These arguments are not focused on changing behaviour or proving superiority, rather to create or expand u derstanding.

For me, as I move into the twightlight of life (there are more seniors in Canada than children under 14) it offers the opportunity to exercise my intelligence in ways I have not done heretofore.

The focus is not based on a tangible business case.  The purpose is not to improve profit, satisfy shareholders or customers but rather  for the good of everyone.

Ultimately that is what knowledge does, it improves the whole human race.  Whether philosophical, medical or scientific; understanding might or might not have real economic or other measurable benefits but it does have value.

On the whole it results in the betterment of the human condition.  So kudos to the human race for recognizing this and  supporting and promoting higher education.

Random thoughts – keeping you on your toes

Everyone is Important

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Our worlds, specifically the people we are surrounded by, consist of many different personalities and perspectives.  Thriving on the differences, that is  embracing them, is more likely to lead to success, than otherwise.

The first step is to accept as a personal mantra, “everyone is important”.  Not lip service but a fully embedded personal belief that guides your behaviour.

Behaviour sets the tone

How you interract with others, from body language to verbal communication, sets the tone for receptivity.  If you broadcast the message that you believe everyone is important, it will be picked up.

People are sensitve and the underlying emotional tone is communicated whether intended or not.  This unspoken messaging can drive the entire tone of a collaberative interraction (or maybe it’s not collaborative, you could be sending the wrong vibe).

The Value Equation

Whats in it for me?  Believing, really believing, that everyone is important leads to powerful collaboration without even trying.  Everyone has a desire to be be recognized.

Treating others with respect requires recognition of their value.  Everyone brings something of use to any collaboration.  This acknowledgement works in all ways, i.e., you send the message and typically others respond in kind.

Everyone contributes to the end result and everyone succeeds. Everyone enjoys, everyone’s realizes pleasure.  It is easy to create this productive and effective environment.

Its all about me

Most importantly, you still are the most important.  Your life is all about you after all.  Focusing soley on yourself though is a big mistake.  The power of the human race as a whole far exceeds that of an individual.