Two markets

I’ve just finished reading Michael Lewis’ The Big Short.  I’m a big Michael Lewis fan so I’m not surprised at how much I enjoyed it (though Lewis’ Moneyball is still at the top of the list for me, especially for anyone who’s interested in using data to make high-stakes decisions – I know you’re out there!!).  If you care about markets and the workings of the global economy, I’d say you should run out and read both The Big Short and Too Big to Fail by Andrew Ross Sorkin.  Yes, both tell like soap operas, but I know I wouldn’t have slogged through all the subprime bond arcana without a good story and a healthy crop of heroes and villains.

The dispiriting picture Lewis paints is one of huge firms who make the rules by which they make money, and nearly impotent oversight bodies (the ratings agencies) who abdicated responsibility.  So, for example, in the run-up to the subprime mortgage crisis, the ratings agencies knew much less than Wall Street (whose main players, in turn, knew much less than they should have) when rating subprime paper; Wall Street firms primed the pump with stories of “low-risk” and “uncorrelated” assets (CDOs) that, as we all now know, were incredibly risky and incredibly correlated; and for many years, Wall Street firms seemed to have enough power over information and prices to create fictitious profits that led to real bonuses the likes of which we’ve never seen.

And of course I’m reading this all a week after the initial public offering by  SKS, the first IPO for a microfinance organization in India, about which debate raged online last week.

What has struck me as I follow the SKS debate and then end my days reading about synthetic subprime mortgage bond-backed CDOs, is this: if we are going to forge a new kind of capitalism, one that helps create a world beyond poverty and one that leverages markets but is not beholden to them, the we are going to have to become exceptionally adept at understanding two highly sophisticated, often opaque markets:

  1. The economy of the poor (rural and urban both), who manage money and risk and make sophisticated tradeoffs every day about the simple act of survival (for which Portfolios of the Poor is in my mind the right starting point, but then we need to spend real time in these markets to really understand much of anything);
  2. The economy of the rich, not just to understand how capital moves (though that’s important), but also to understand what “real markets”, the most sophisticated markets in the world, really look like.

More often than not, I think we fall into the trap of grossly oversimplifying both of these markets – we paint the same pictures that were drawn for us in Microeconomic textbooks and imagine stylized, efficient markets with the greater good, magically and invisibly, created for all.  Yet the more I understand how the most sophisticated markets function, the less convinced I am by stories that end with “and then market actors will come in and scale and efficiency will follow.”

I don’t know what the SKS IPO means.  No doubt it is an important and potentially very positive step.  We want people to be competing for the business of poor borrowers (and, hopefully, eventually savers).  We want competition to bring prices down and we want the best organizations to have the capital on hand to scale.  But it also could be that microfinance is the next subprime mortgage crisis, an edifice built on the backs of a different set of poor people (this time in the developing world).  If that is the case then one possible outcome is that some people will get very rich and others – the most vulnerable – will end up holding the bag.  Most likely the answer is somewhere in between, and I believe to steer us towards the most positive outcomes we need to sharpen our pencils and bring more sophistication to how we characterize markets for the very rich and the very poor, since increasingly these two will intersect in the coming years and become increasingly interconnected.

My ultimate dream is that, armed with a clear-eyed, sophisticated understanding of how both of these markets really work, we will find a way to bring in capital with a purpose from a class of investors that sees economic return as part of a larger set of returns that they create with their capital.  (This may and probably will involve lower economic return that incorporates higher social return).  It’s going to need to be both/and (social/economic), not either/or.

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Matt Harding’s caveman brain

You’re probably one of the 20 million people who have seen Matt Harding’s video online.  You know, the one with the guy doing a goofy dance all over the world…

Sure, it’s silly.  But it’s also hopeful and inspirational, transcendence masquerading as simplicity.

Matt was recently featured on NPR’s This I Believe.  Here’s how he described the project:

I made a video of myself dancing terribly in exotic locations. I put it on my web site. Some friends started passing it around, and soon millions of people had watched it. I was offered sponsorship to continue my accidental vocation, and since then I’ve made two more videos that include 70 countries on all seven continents. A lot of people wanted to dance along with me, so I started inviting them to join in everywhere I went, from Toronto to Tokyo to Timbuktu.

Something about what Matt did captured people’s imaginations, made them laugh and smile and think.

The images are inane but beautiful:  Matt dancing on an sunset-tinged desert dune in Lancelin, Australia; on a desolate beach covered with busy red crabs on Christmas Island; in a sea of red tulips in Lisse in the Netherlands.  Through all the quick cuts, you have one constant: a young man who knows he’s doing something that is a little bit absurd, but at the same time joyous, exuberant and playful.

And then the story grows.  The crowds rush in.  In the Plaza Mayor in Madrid, exuberant Spaniards bound in and start to dance, fresh from a soccer game.  A gaggle of kids in Antseranana, Madagascar flash easy smiles while they dance.  More quick cuts of more people pouring in, from Brisbane to Dublin to Buenos Aires to Istanbul to Fiji…

You can say we are all one human race until you’re blue in the face.  Or you can see our common humanity all around the world in Matt’s Riverdance-meets-high-school-prom dance odyssey.

Reflecting on his world dancing tour, Matt observes that his (and everyone’s) “caveman” brain isn’t wired to handle all of this.  “My brain was designed to inhabit a fairly small social network of maybe a few dozen other primates-a tribe.”  He continues:

And yet here I am in a world of over six billion people, all of whom are now inextricably linked together. I don’t need to travel to influence lives on the other side of the globe. All I have to do is buy a cup of coffee or a tank of gas. My tribe has grown into a single, impossibly vast social network, whether I like it or not. The problem, I believe, isn’t that the world has changed, it’s that my primitive caveman brain hasn’t.

I am fantastic at seeing differences. Everybody is…. When I dance with people, it makes those differences seem smaller.

This is the modern-day challenge.  Whether it’s Al Gore on climate change; Tom Friedman on a world that is Hot, Flat and Crowded; China’s Premier Wen Jiabao on the safety of U.S. Treasury Bonds; or Jacqueline Novogratz telling her Blue Sweater story, we’re all saying the same thing:  that we have to rewire our brains to understand that our tribe has gone global.  That our actions and inaction truly do affect people we may never know or see, in a way they never have before.  And that we have an opportunity that we’ve never had before to make change on a global scale.

Our job is to keep on telling these stories, until our caveman (and cavewoman) brains catch up to this new reality.  Because I truly believe that we all would behave differently if we knew in every fiber of our being that we’re all, each and everyone of us, mostly the same.  And that there’s a lot we all can do to make the world better for all of us.

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What’s in Vogue in India

Thanks for everyone for staying tuned while I was out on vacation.  And now back to our regularly scheduled programing.

The New York Times ran a story on Sunday about an appalling decision by Vogue India to run a series of photos of poor people wearing high fashion items:

An old woman missing her upper front teeth holds a child in rumpled clothes — who is wearing a Fendi bib (retail price, about $100).

A family of three squeezes onto a motorbike for their daily commute, the mother riding without a helmet and sidesaddle in the traditional Indian way — except that she has a Hermès Birkin bag (usually more than $10,000, if you can find one) prominently displayed on her wrist.

Elsewhere, a toothless barefoot man holds a Burberry umbrella (about $200).

As if the photo shoot weren’t a bad enough idea, Vogue India editor Priya Tanna’s responded to criticism by saying, ‘“Lighten up.”  Vogue is about realizing the “power of fashion” she said, and the shoot was saying that “fashion is no longer a rich man’s privilege. Anyone can carry it off and make it look beautiful.”’

The problem is, treating people like props is a rich man’s privilege.  And it’s an ugly one.

I guess you have to admire Ms. Tanna for sticking to her guns on this one, instead of coming out and admitting that this was a gross error of judgement?  Vogue didn’t even bother to name the people in the shoot, though they did give details of each of the fashion accessories.

I’d venture to guess that Vogue India editor Priya Tanna has never sat down and talked to a person struggling to make ends meet, and I’d bet good money that none of her close friends face any real economic hardship.

The first step towards addressing the differences and inequality in the world is addressing the problem.  But real momentum will come when we break down the illusion of separateness and difference in the world.  This story is a reminder of how far we still have to go, and it’s especially worrysome coming out of  a country that is as well-positioned as any to bring hundreds of millions of people out of poverty.  The pace of change would quicken immeasurably if the new mega-rich in India took up the mantle of change en masse.