Nowadays, a large number of various financial institutions constantly elaborate sophisticated financial techniques and brand new banking methods which in accordance with their design shall lead to the simplification and improvements of the global financial process. In fact, the new methods of the shares and derivatives emission have been elaborated during the latest several years. Moreover, the paper shuffling process is no longer operable, as due to the advanced computer technology the majority of the operations are being conducted electronically via the computers. However, the practice very often seems to be diametrically opposed to the theory. In particular , the improvements in the financial engineering of the markets do not seem to have harvested the reductions of the financial risks in the financial area of our lives as it did happen in other areas. Besides, there is a convergent scholarly assumption that a result of this financial advancements and the over-complexity of the financial instruments, the markets ultimately become considerably more vulnerable to the crisis shocks.
One of the most productive writers of this field is Bookstaber, who in his book “Build To Crash” A Demon of Our Own Design” closely and attentively examines the issues pertaining the issues relating to this issue. In particular, this indeed revolutionary and outstanding professional tries to ascertain why the apart benefiting the global financial community, the financial and technological innovations exercise diametrically opposite effect on the global financial markets. Besides, the author advocates the assumption that the technological evolution of the financial instruments lead to the overcomplicated and excessively sophisticated connections among the adjacent financial structures.
The aim of this essay is to evaluate the assumptions and the ideas advocated and supported by Mr. Bookstaber and to find out whether they indeed are truthful.
The Connection Between the Financial Innovations and Financial Safety of the Community
The author coherently supports the stipulation that the sophisticated methods of the financial control and governance are merely the means of mechanical control of the financial environments. The obvious benefits of the policy of the continuous and uninterrupted advancements are highlighted by him. In particular, it is stressed that the interchange of information has been considerably simplified (Bookstaber, 2007). Besides, it is highlighted that the majority of the transactions worldwide are conducted electronically and the costs of transactions themselves are lower than the used to be a few decades ago. In particular, in order to conclude an international contract, it is no longer needed to come to Tokyo from Berlin to find the partner, everything can be done quickly and efficiently by means of internet connection. The majority of the payments are exercised the same way. In other words, it has become sufficient for those, who exercise payments to press a button and the consideration of the specific bargain will be immediately transmitted to other contracting parties, wherever they are located.
Another peculiarity which is purposefully accentuated by the author of the book is the fact, that the banking institutions are no longer needed to exercise the electronic international transaction. Indeed, they are implicated to the process, but their implication is not so evident as it used to be several decades ago. The main disadvantage is that the financial nature of the payment has become non-linear. To be more exact, it has led to the tougher coupling of the financial instruments and method of electronic commerce. The banks are deeply connected with the methods of electronic payments and those methods are directly depending on the sane financial existence of the banks (Bookstaber, 2007). Considering the fact, that for some banks the core activity is servicing the electronic transactions of the giants of e-commerce the vacillations in the banking sector affects the healthy process of e-commerce, whilst the crisis in the e-commerce market undoubtedly has a negative impact on the healthy financial activity of the banks, which serve the transactions in question. Just several decades ago the crisis in the specific field of the economy was hardly believed to affect the financial well-being and sometime even the existence of the banking institutions, whilst nowadays this inter-causation has become tangible, evident and indispensable. The majority of the contemporary scholars and leading business authorities have a common opinion that the simultaneous utilization of coupling and complexity is the shortest way to the financial distress and instability.
The author depicts the widely reported pecuniary calamities of the 20th century. In particular, he accentuates the situations which took place with the crush of the ValuJet airplane and the power plants Mile Island and Chernobyl. The author of the book makes an accent on the fact that in all three instances the calamities and the disasters were caused by the humane factor. He speculates that the personal blunder of an isolated man led to the detrimental consequences of such gravity. Not only the human being perished and not only the property of the company was damaged and not only the natural environment suffered an irreparable poisoning blow. The repercussions have gone far beyond. The financial systems of the companies which owned the destroyed manufacturing objects was substantially shattered . The firms which provided insurance services for those wounded giants have been wounded in their turn too as huge amounts of compensatory payments were to be immediately or in installments exercised to the benefits of the aggrieved parties. The counteragents and especially the debtors of the financial institutions immediately experienced all vigor of the debt collection process as in order to cope with the rightful claims of the companies aggrieved by the nature or by the blunder of the human being, the firms immediately started to collect as many payments which were due as they reasonably could. The result of the policy was immediate as the entire financial chain of the contracting parties, some of them happened to be governmental institutions occurred to be very vulnerable to meet the rightful and well-substantiated demands and claims of the damaged companies. In other words trying to sanitize their own financial environment, those companies have shattered the global financial atmosphere and ultimately the policy of the deep connections among the themselves and the financially dependent institutions backfired on them as due to the distressed financial situations of the country, partially generated by their own actions, the solvency of their debtors have become considerably questioned (Drazen, 2000(. This opinion is supported by the majority of the contemporary business and scientific authorities who consider that the policy of the deep and profound interconnections between the companies, the state agencies and the financial institutions shall be abandoned as soon as possible.
In fact, this assertion does seem to be too overestimated. To be more exact, if the connections and relations between the companies and the financial establishments will be severed and isolated, the economy will be affected as well, this time because of the impossibility to counteract accordingly. To illustrate, several automotive manufactures of Japan (Honda concern) in particular have entered into the set of agreements with the Bank of Japan, providing that internal financial activity of the Honda concern will be processed by this banking institution. Whilst previously everything had been normal and the firm minimized its costs, because an army of accountants could have been dismissed, the 2008 financial crisis fundamentally affected the purchasing power of the consumers’ of the firm. Ultimately, the financial turnover was diminished. The result was financially catastrophic – the Bank of Japan was on the verge of the filing for bankruptcy and the managers did a great job to secure the solvency of this institution.
The Feasibility of the Proposed Remedy
The author of the book outlines his personal remedy for the revolutionizing technological and financial advancements. He strongly admonishes that is integrally required to implement these achievement and to sophisticate the connections between the banks and other financial institutions gradually, no harsh actions are to be taken (Drazen, 2000). The humankind, especially those who operate in the financial sphere shall accumulate the sufficient experience to meet the growing needs. The fine art of finance and its most recent accomplishments undoubtedly shall be utilized , but the financial authorities are to be aware how to utilize them (Kennen, 1994). In other words, before a specific financial initiative is launched, the prospective outcomes of this project is to analyzed and well-researched by the mixed teams of lawyers, financial experts and others who can contribute to the resolution of the problem. The author of the book has drawn skillfully a parallel between the implementation of the new fiscal policies and procedures and the mastering of the most advanced martial art ju jutsu. Even if you now the motions, the punches and the rest of the techniques, it is highly advisable not to use it until the perfection is achieved.
Having summarized the main points of the book, it can be concluded that the author is indeed a very attentive financial expert, who managed to notice the trends which remained unnoticeable by the majority of the global leading financial experts. Considering that these actions will be followed by the financial experts globally and that the evolutionary process will substitute a revolutionary one it is natural to assume that the financial distresses are not likely to happen in the upcoming future.