Most people are so far out of their depth in this crisis one wonders whether this is more than just a failure of the financial system!

The bund that broke the Bundesbank is a post at FT’s Alphaville that offers one explanation for the apparently poor German bund auction today.  It states that the reason for the poor auction was the need for the Bundesbank to retain an increasing share of bonds at auction to suppress interest rates in the German repo market. 

The rate is important to suppress because almost all interbank funding is now done on a secured basis against the best quality collateral. Which implies two important points: 1) that the ECB itself has lost control and depends almost entirely on the Bundesbank to enforce its low rate policy target and 2) that the Bundesbank is having to retain more bunds from the market than ever before just to ensure the last functioning repo rate in Europe doesn’t spiral out of control.”

One of the important things about this crisis is the ever increasing amount of detail that is being delivered.   This type of detail would in normal times be far removed from most analysis, yet, in order to understand what is actually happening and to make sense of it, the financial community is having to dig deeper and deeper.  

The truth of the matter is that the world had started to become a much more complicated place towards the latter part of the 1990s and that simple rules of thumb, valuation and asset allocation benchmarks had ceased to have relevance to the increasing risks in the financial and economic universe. 

I had expressed these very same concerns during 1996 and 1997, when I was running money and developing systems.  Yet, from this point on, it only seemed to get worse with the investment world all to ready to accept simple mantras, systems and solutions for the management of money.  

One of my main themes is that we are taught to understand and deliver the solution, often without question.  Beneath the solution lies the theory and beneath the theory lies the problem.  Few venture beyond the need to understand the solution and fewer still go deep into the problem to question the theory upon which our financial edifices are built.  This is one of the reasons why we are in this mess: not just the central banks, the governments, the crooked banksters, but an educational system that rewards the correct, but not necessarily the right answer. 

What is the worth of an an educational system when there is only one predetermined “correct” answer and any attempt to think outside of the box is not rewarded? 

When we oversimplify we find not only that the world becomes too complex for us to manage, but that our model of what is, no longer represents reality!

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