Wednesday, November 19, 2008

Niall Ferguson on Wall Street

December 2008's Vanity Fair has a lengthy 17-page article by Harvard History professor Niall Ferguson (NF) about Wall Street. Some excerpts: "To understand the downfall of Planet Finance, you need to take several steps back and locate this crisis in the long run of financial history. ... If stock-market movements followed the normal-distribution, or bell, curve, like human heights, an annual drop of 10 percent or more would happen only once every 500 years, whereas in the case of the Dow Jones Industrial Average, it has happened in 20 of the last 100 years. ... Credit and money, in other words, have for decades been growing more rapidly than underlying economic activity. Is it any wonder, then, that money has ceased to hold its value the way it did in the era of the gold standard? ... Those few goldbugs who always doubted the soundness of fiat money--paper currency without a metal anchor--have in large measure been vindicated. But why were the rest of us so blinded by money illusion? ... Do you, however, know about the second-order effects of this crisis in the markets for derivatives? Do you in fact know what a derivative is? Once excoriated by Warren Buffett as 'financial weapons of mass destruction,' derivatives are what make this crisis both unique and unfathomable in its ramifications. ... But the events of the 1990s, as the rise of quantitative finance replaced preppies with quants (quantitative analysts) all along Wall Street, revealed a new truth: those whom the gods want to destroy they first teach math. ... The key point is to appreciate why the quants were so wrong. The problem lay with the assumptions that underlie so much of mathematical finance. The quants' Value at Risk models had implied that the loss the firm suffered in August 1998 was so unlikely that it ought never to have happened in the entire life of the universe. But that was because the models were working with just five years of data. If they had gone back even 11 years, they would have captured the 1987 stock-market crash. If they had gone back 80 years, they would have captured the last great Russian default, after the 1917 revolution. Meriwether himself, born in 1947, ruefully observed, 'If I had lived through the Depression, I would have been in a better position to understand events.' To put it bluntly, the Nobel Prize winners knew plenty of mathematics but not enough history. ... Planet Finance has now returned to Planet Earth with a bang. The key figures of the Age of Leverage--the lax central bankers, the reckless investment bankers, the hubristic quants--are now feeling the full force of this planet's gravity", my emphasis, the link:

I disagree with one thing NF wrote, the "key figures" are far from "feeling the full force of this planet's gravity". The Fed still exists, Lloyd Blankfein has not met his Robespierre yet nor has Henry Paulson followed Albert Fall to federal prison. These characters have a long way to fall. We must be in the last days. I find myself in substantial agreement with a Harvard professor. Worse, he said something nice about gold. Revoke his tenure, immediately.


Anonymous said...

hello i.a., u wrote:

We must be in the last days...

It feels kind of funky, to be sure. IMO we will go through a necessary cleansing. It won't be fun, but maybe some of the (paulson/bernanke type) scum will get washed off in the process.

Independent Accountant said...

Sooner or later the dollar and the entire dollar-based debt structure will collapse. Mish thinks through deflation, I think through inflation. Either way, bonds are a sell. Similarly, the purveyors of bonds like GSG, MS and such are in for a very rough time over the next few years. If they survive at all. Unlike say, John Deere, which makes tractors, what does GSG make aside from paper you can choke on?
Keep your head down, your spending modest and relax. There's nothing you can do to prevent the great denouement. It's sad, but a few tens of thousands of high class "highwaymen" have highjacked an entire country. Jefferson warned us of this about 200 years ago!

Anonymous said...

"I have sworn upon the altar of God eternal hostility against every form of tyranny over the mind of man."

Some bonds will be a buy... maybe like John Deere bonds.

Some bonds will be a sell like GS.

Very cool schwag update to the site.