Tuesday, January 5, 2010
Tall Paul Speaks
"I can tell you of two--credit-default swaps and collateralized debt obligations--which took us right to the brink of disaster. Were they wonderful innovations that we want to create more of? ... I have been on boards of directors, and the chance that they are going to understand these products that you are dishing out, or that you are going to want to explain it to them, quite frankly, is nil. ... A few years ago I happened to be at a conference of business people, not financial people, and I was making a presentation. The conference was being addressed by a very vigorous young investment banker from London who was explaining to all these older executives how their companies would be dust if they did not realize the joys of financial innovation and financial engineering [FE], and that they had better get on with it. I was listening to this, and I found myself sitting next to one of the inventors of [FE]. I didn't know him, but I knew who he was and that he had won a Nobel Prize, and I nuged him aside and asked what all the [FE] does for the economy and what it does for productivity. Much to my surprise, he leaned over and whispered in my ear that it does nothing--and this was from a leader in the world of [FE]. I asked him what it did do, and he said it moves around the rents in the financial system--and besides, it's a lot of intellectual fun", my emphasis, Paul Volcker interview at the WSJ, 14 December 2009, link: http://online.wsj.com/article/SB10001424052748704825504574586330960597134.html.
I have long been suspicious of FE. As for 1997's Nobel Prize, see my 30 October 2008 post: http://skepticaltexascpa.blogspot.com/2008/10/book-review-walter-wristons-bits-bytes.html.