Sunday, April 12, 2009

Where is the money gone?

We have an economic crisis. Nobody has money, many starve, lost their homes etc. But where did the money go? On the blog the question was raised and some partial answers given. I will try here an explanation:

There is some confusion on terminology: By money I mean the abstract rights which are described with amounts of a currency (Dollar, Euro). By value, I will describe real things which can be used and produce benefits (e.g. my home, my car, a company with its tangible and intangible assets).

The real confusion starts when newspapers report 'today x billions were lost on the stock exchange' (or even worse 'x billions were destroyed'). Who did destroy the money? Where did it go when it was lost? - The answer is simply 'the illusion of value went away'. Here is why:

In the morning I hold 1000 shares of, say Ford Motor company; this means I own a (small piece) of the company with all its assets. They were traded for $16 the evening before and my banker things my net value is 16,000. In the evening I still have the same 1000 shares of the same company, but they are traded now for only $12. What have I lost? Obviously no value was lost, but in the view of my banker, my net value is reduced by $4000. When the stock prices came down, the stock was not representing less real value in terms of assets behind it. What came down was the market value of the stocks.

Before I look why people really lost money, let me discuss what happened when the stock prices were rising:

I bought recently 1000 shares of a company owning large buildings in Vienna for Euro 0.70. These shares are now traded for 1.30. Have I earned now 600 Eros? Not yet. If I sell the stock then I have earned 600, which I can use to invite my friends to a sumptuous dinner. Likewise, I would have realized my loss of holding Ford stock only if I sell it. A gain or a loss in money terms is associated with an action, converting money to an other asset and then back. The same is true for buying a home – there is no gain or loss as long as I hold on to it. The transactions produce a gain or loss, or better an increase or decrease in my net value as seen by my banker.

So – where is the money gone?

If I buy stock or a home but do not pay all with my own money, but ask the bank for a loan, guaranteed by the stock or a mortgage on the home, I can buy more than I could pay cash for. If the stock is traded later higher, I sell it, pay back the loan and pocket the difference. The percentage I can earn in this form is higher than if I buy with cash. Consider the above example: instead of using my 700 Euro to pay for 1000 shares, I buy 4000 and ask the bank to loan me 2100 Euro which together with my 700 pay for the 2800 total (I disregard fees etc.). If I sell at 1.30 I get 5200, pay back the 2800 and get 2400; my net value has increased by 1700 in a few weeks. My gain, expressed in percentage per annum is perhaps 250%. This is aptly called 'leverage'.

Where is the catch?

If the stock trades now lower, say 60 cents, then the bank fears for its loan and ask me to reduce the loan by giving them cash – and if I do not send it promptly, they will sell the stock for whatever price, say 55 cents. This gives 2200 of which the bank takes 2100 to pay back the loan and 100 remains for me – that is what I have left from my 700 Europa I had initially! Now I have really lost 600 Euro (compared to not having bought and sold the stock).

If many buy stock or homes paid partly by loans and market prices are sliding down such that banks see their loans not covered anymore and force the owners to sell, then prices will go further down and more owners may be forced by their banks to sell and thus pushing the market prices further down, as happened last year.

Reading Galbraith' [The Great Crash of 1929] and Krugman's [The Return of Depression Economics and the Crisis of 2008] accounts of the economic crisis indicate that the economic downturn – which is an event happening regularly every 7-15 years – started in every crisis before the crisis broke out (e.g. fall 2007) – but the crisis itself is the product of leveraged buying, which is multiplying the effects of normal economic ups and downs. We had many years of ups and some people benefited from leveraged buying, now we had the downturn and many got caught.

Still, where is the money gone?

When the market values of homes, stocks, companies etc. all increased regularly and leveraged buying of these valuable things was a good deal. People were able to sell and realize the gains in money (or were just increasing their net value in money). They used the money appearing in their bank accounts to buy real value things – like cars, dinners, massages, ships, companies – keeping the real economy going.

The non-intuitive aspect is the account is that the gains were realized first and the losses were occurring later. The bubble economy was giving credits to the ones willing to run risks. When everybody else jumped on the band-wagon, it started sliding backwards. The clever ones had left (i. e. realized) the gains and moved it to other more stable form of assets, the late comers lost their investment.

Now: who benefited from the bubble? Certainly the ones that cashed the big bonus, realized the big gains, but also all the ones which bought and sold homes and used the money for this and that – meaning a little bit everybody (including state employees, benefiting from increased taxes used to pay salaries... me included).

The figures reported in the press are the figures describing Ponzi schemes built on top of the simple examples used above: one can leverage the leveraged investment in stocks, do leverage buy-outs and translate this in stocks; one can produce securities from risky mortgages – and then create leveraged investment in these securities. For example the loss in Madoff's investment vehicle – a classic Ponzi scheme – is reported in the 50 billions; actual investment of real (?) money from outside is closer to 15 – 20 billions – the rest are gains appearing in the books but never realized.

The billions necessary to keep the system relevant banks afloat – a classic scheme of privatizing gains and sharing publicly the losses as Stiglitz has pointed out – are inflated by the leverage schemes used to create the investment vehicles now appearing n their books as toxic assets. I see not enough analysis of the causes of the crisis to believe that the bailout is using the best (least public cost) medication to overcome the current illness of the finance system.

Friday, April 3, 2009

What can go wrong when using a web page for a service?

More and more transactions are moved from personal phone contacts or paper forms to web pages. Making me use a web page is clearly an advantage for the provider of the service, because data need not be entered manually in their system by his personnel and checks on consistency of my entry are forced on me when I enter the data.
The disadvantage is on my side: the services are not easy to use and hoist the providers view of he world on me. Here a reasoned list of issues:

Finding the web page
To remember the name of a web page is only feasible for the few services I use very often, for the other I have either a bookmark in my browser or use Google search. Relying on the browser bookmarks does not work when I am not on the computer I have produced the bookmark with.
Requirement: every web service must be easily found using Google search. Links to the service should be place on the appropriate home pages.

User name and password
Every service provider sends me happily a new user name and password, which I am supposed to learn by heart and not write on a post-it note pasted to the screen. I admit that more than knowing my name and perhaps 2 to 3 passwords and codes is difficult for me! I rely on my browser to remember user name and password – which does not work reliably if one uses more than one computer.
Requirement: I can select the same user name everywhere and set the password to the one I remember; I am willing to select one with 6 letter and non-letters – but no other requirements, please! The various requirements for length, to include numbers or other signs are forcing new passwords on me that I promptly forget.

We work in teams. Not everything a web services expect me to do I do myself, but often I can delegate some of the tasks to others. It must be possible for others to work on my behalf without me giving them my password. At least a full delegation to another user with another password to work on my behalf is necessary, for web pages which contain many actions, a divided delegation would be nice; for example, allowing others to enter data but not commit them.
Requirement: delegation to another user/password must be possible.
Screen size and browser type
I have computers with a browser – any request from a web service to change my computer or browser is inappropriate. It is the service's responsibility to adapt to my screen size. It is the most common size, sometimes a netbook, sometimes a portrait screen. I am not willing to install a new browser just to book an airline seat!
Requirement: construct web service to work on different screen sizes and with all regular browsers that support www standards.

Every web page communicates in its own terminology and often this is a quite strange jargon unintelligible or even misleading. Organizations and parts of organizations create quickly their own languages, completely obscure to outsiders. In a human communication the speaker and the listener can adapt and correct misunderstandings – on a web page, this is not possible.
Recommendation: check the clarity of the language with several outsiders; they must understand it without any help! Add help texts to every page where the same words are used in a context.

Web pages differ in how they expect inputs; problems are caused by numbers (decimal point or comma?), times and dates, but phone numbers can also cause trouble: are blanks allowed to group digits?
Requirement: Any input a human can interpret should be acceptable by the web page. If a specific format is expected, then the web page must show an example and not let the user guess, repeatedly, with increasing frustration.

Error tolerance
Errare humanum est – people make errors. A web application which assumes perfect inputs is not usable.
Requirement: The application must be tolerant for errors and give multiple ways for correcting them. It is required to be able to go back and change only one thing without entering everything again.

It is rare the moment I can work for a few minutes without interruption: the phone rings... Some web applications are set up to terminate a transaction if it is not completed quickly and after the interruption one has to start from scratch. If I come back after an interruption, or because I had to search for some detail to enter, it should be clear what is done and what needs to be done to progress.
Requirement: Save current state and allow interruptions.

Adherence to web interaction standards
Over the past years a set of rules has been established which are followed by nearly all applications: I can go back one page, pages open in a new browser window or in a tab, depending on my preferences. Requests for name, email etc. are marked such that the browser can fill them, etc. Many web services I have to use do not follow these standard ways of working and expect me to learn new tricks.
Requirement: adhere to the standards!

Post scriptum
I understand that programming a web page to follow these requirements may be more difficult; but why should (small) savings on the provider side justify large losses of time on my side?

Thursday, April 2, 2009

Why do I feel exhausted? - The change in the professional environment caused by technological change

I feel exhausted at the workplace and it is not the economic crisis that causes it. Universities in Europe are, at least for now, not greatly affected. Others I know feel the same – more the more they use computer in their work environment.

We all use the web for a large part of the daily transactions: banking, reserving airline tickets, dealing with purchase orders, billing and accounting, travel expenses etc. It is more convenient, as we can do ourselves what we had to go through staff and ask for assistance. A few clicks and the airline seat is reserved, the bill is paid – all done!

Is it really that easy? In theory: yes, but in practice many obstacles may be encountered on the way to perfect paperless web administration:

  • I do not remember the web address of the service I have to use, forgot my user name or password,

  • I do not understand the terminology used on the web form and there is nobody to help me with it,

  • the conventions for entering data are not the ones I am used to (e.g. 1.10 vs. 1,10)

  • I made an error and can correct only with starting all over or, worse, not at all,

  • I get interrupted and when I come back I do not see what is already done and what not; often I have to start from the beginning again.

The real problems start, if a case does not properly fit in the foreseen structure or an error is committed and must be corrected. Then I call a hot line, send email and explain the case and much time is lost before a solution is found – if ever.

I feel exhausted because the many small and easy tasks I plan to do are not completed at the end of the day. I leave some for tomorrow, and I expect tomorrow not to finish what tomorrow brings in in new tasks. The tasks should all be simple and quick, in practice the obstacles mentioned above drag many of them out to consume much more time than planned.

What was different before? I had the luxury to have worked with several wonderful personal assistants, who took care of a large part of the tasks of my job as manager in a research center and later as head of an university institute. Having an assistant allows to divide the tasks into those which require technical or scientific knowledge and those which require administrative knowledge. I could delegate the administrative tasks to a human being whom understood the my intentions and our environment and dealt with the obstacles intelligently. Now I have to cope with an artificially intelligent computer.

Even without the assistance, paper forms where easier: Filling in a paper form allowed more flexibility, was resilient to interruptions and allowed easy corrections. It is true that sometimes phone calls were necessary to understand the forms – either by myself or the assistant – but based on my observations more phone calls are (or would be) necessary with web forms.

The analysis indicates that the feeling of exhaustion is caused by the conflict between the expectation that all is “easy and quick” and the experience that I cannot do it as easily, as quickly and as effortlessly as I am told all others can. I feel dumb and inadequate. But when I ask others, then I see them suffer from mostly the same feelings – web forms do not work in most cases for most people who are not using the same form often. The management consultants who advocate the changes from paper to web forms must realize that they offload work from central administration to the users in a degree which is detrimental for the motivation of the people and detracts them from their productive tasks to learning how to cope with the ever changing web forms.