Dr. Fund Crisis Analysis by Mahfi Eğilmez: Financial Risks from Icarus to the Cobra Effect

Economist Dr. In his article titled "From Icarus to Fund Crisis", Mahfi Eğilmez evaluated the recent fund crisis not only in terms of the developments, but also in terms of how the risks in the financial system have grown and where the controls may fail.

Eğilmez explained how risks in financial markets can become invisible over time, with examples ranging from Greek mythology to Pandora's box, from the Tower of Babel to the "cobra effect" and "ostrich effect". In his article, Eğilmez stated that all the reasons for the fund crisis have not been revealed yet, and particularly drew attention to the control mechanism.

'Was the inspection insufficient?'

Stating that the reasons for the fund crisis are not known in all its aspects, Eğilmez stated that auditing is one of the main topics that need to be investigated.

Eğilmez asked, "Was the audit inadequate? Or were the audit problems not addressed in a timely manner even though they revealed them?" asked questions.

IKARUS: RISK IS FORGOTTEN AS RETURNS INCREASE

Eğilmez's first stop was Icarus in Greek mythology. Stating that high returns in financial markets may change investors' perception of risk, Eğilmez pointed out that as the markets rise, taking more risks may become increasingly normal.

Stating that the trust in the control mechanism may also affect this process, Eğilmez stated that the investor may think that the risk he/she takes is under control. However, he emphasized that after a certain point, the real danger is not taking risks, but "the risk taken is no longer seen as a risk."

PANDORA'S BOX: THE COST OF THE CRISIS LOSS OF TRUST

Eğilmez, who referred to Pandora's box while explaining the effects of the fund crisis, drew attention to the interconnected structure of financial markets.

Eğilmez stated that the problem that arises in a fund may not be limited to that fund only, and the loss of confidence may spread to other funds and the market in general, and emphasized that it is not only money that is lost in financial crises.

Eğilmez said, "There was hope left in Pandora's box. However, hope alone is not a risk management strategy in financial markets."

TOWER OF BABEL: EVERYONE CAN LOOK AT THE SAME STRUCTURE AND SEE DIFFERENT RISKS

Evaluating the increasing complexity of the financial system through the example of the Tower of Babel, Eğilmez stated that as different funds, borrowings, derivative products and various financial instruments are added to the funds, it may become difficult to monitor the risks.

Noting that investors, auditors, rating agencies and fund managers may see different risks even though they examine the same structure, Eğilmez stated that the real danger is that everyone misses the risk of the whole while making a correct assessment from their own perspective.

COBRA EFFECT: RULES MAY CREATE NEW RISKS

Another example in Eğilmez's article was the "cobra effect". In order to reduce the number of cobras in Delhi, a reward was given to those who brought dead cobras, which caused people to start breeding cobras to earn rewards. The removal of the practice and the release of raised cobras into nature caused the initial problem to grow even further.

Eğilmez discussed this story from the perspective of financial regulations and stated that a rule should not only look at the behaviors it prohibits, but also the behaviors it encourages.

Eğilmez points out that a regulation introduced to reduce a risk may create a new risk area by encouraging another behavior, so the question "Is there a rule?" He argued that the question alone was not sufficient.

THE OSTRICH EFFECT: IT IS NOT ENOUGH TO SEE THE WARNING

In the article, Eğilmez evaluated the possibility of not taking the necessary steps despite realizing the risks in the financial system, using the "ostrich effect" and pointed out that ignoring negative or disturbing information can also occur at the corporate level.

Addressing the Icelandic example in this section, Eğilmez reminded that the country's three largest banks grew rapidly in the 2000s, and their total assets increased approximately nine times the country's GDP by the end of 2007. Eğilmez stated that despite warnings about the fragilities in the banking system, the necessary precautions could not be taken and that three major banks collapsed in a short time after the 2008 global financial crisis.

Based on this example, Eğilmez evaluated, "As the financial system grows, the audit and risk management capacity should also grow."

QUESTIONS WANTING ANSWERS AFTER THE FUNDING CRISIS

Eğilmez stated that after the fund crisis, it is necessary to look not only at how what happened, but also why the risks were not noticed before.

He stated that it should be questioned which risks were taken, why these risks were not seen in time, if they were seen, why they were not intervened, and whether the current control structure really limits the risks.