What They Miss out on in Davos

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by: Sigurd Rinde

Good thing about working from home is that I can watch webstreams from conferences – these days it’s the fun they’re having up in Davos.
Obviously much is about the crisis, what happened, how to fix it and how the heck did it happen. More and better regulation being one of the main themes of course, following the human inclination to grab more control when things goes… ehh…. out of control!

But one thing is missing from the discussion – finding the root cause for it all. Is there a single thing that lies behind it all? If found all would be much easier, at least the issue of how to avoid such calamities again.

Is there a root cause? And if so, why is it not discussed?

So why is it not discussed? Because sometimes we take some things for granted, we cannot imagine the world without that something, we in fact forget or even cannot answer this simple question:

What assumptions are we making that we do not know we’re making?

And the root cause could be what? Allow me to posit that it is:

Double Entry Book Keeping.

Not the accounting reports as such, I’m fine with those, it’s the method of capture and representation of facts that I see as the culprit.

That’s a method that we take for granted, that is never questioned, that we assume we need, an assumption we do not know we make every day.

Let me ask: Do you really think that a method created 515 years ago in Venice, based on a technology called "bound paper" as in ledgers, will stand a chance on Wall Street using fibre optics to disseminate information to all corners of the world?

I think a snowball in hell has a better chance to be of use.

At least question it. Challenge the unknown assumption.

Double Entry Book Keeping uses transaction representation to capture and store "what happened", the ubiquitous invoices, bank statements and many more types of paper based or electronic documents. When captured the representation is assigned as per accounting principles and rules to a single "account", or slot if you will. Those principles and rules are differing from place to place of course making it all so much easier (insert hollow laughter).

This how far that technology has come in 515 years.

With that in hand reports can be produced – cash flows, P&Ls, balance sheets and more. 

  • That is how the gentlemen at Parmalat could use Tipp-Ex on a piece of paper and suddenly show that they had in excess of € 4 Billion on some Cayman bank account. Except a few extra naughts on one piece of paper does not make much sense the day you need the cash.
  • That is how a few well placed misplacements or closed eyes at Satyam could make them pretend to be much richer than they were.
  • That is how reports has errors, always, and is delayed, always, making the whole thing a charade similar to driving a car by a dirty and cracked rear view mirror.
  • That is how layers of rubber stamping or at best, wild guessing using statistics, by rating agencies is needed to give a whiff of reality for the nifty Wall Street repackaged packages – the quality of which we now know too well.
  • That is why changes to a house owner’s economic status never have a chance to trickle through the layers of CDOs and whatnots all the way to the holder of the debt in some far away municipality on the other side of the world.
  • When you keep the same information in different places, in different formats, you will, and be in no doubt – you will have errors and doubt. To fight that queasiness we have the usual band aid mechanism named CPAs, reconciliation and regulation.
If we ever think we should be able to address the crisis and make this world a better place we have to throw that thinking and those methods out the window, and that asap.

Instead we need a direct and dynamic representation of the "transactions", something that is real time and where changes anywhere in the chain are precisely and immediately reflected everywhere independent on principles and rules.

Believe me, it’s doable now. It’s even simple.

Original Post: http://thingamy.typepad.com/sigs_blog/2009/01/what-they-miss-out-on-in-davos.html