Six Nobel Prizes! Finance article from Vanity Fair magazine
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  1. #1

    Dec 2007
    Tierra del Fuego
    24 times

    Six Nobel Prizes! Finance article from Vanity Fair magazine

    I don't read Vanity Fair magazine very often... maybe I should!
    Seems to be a very good presentation.

    Inevitable and disgraceful, but still unpredictable

    Who’s to blame for the worldwide financial meltdown, a crisis that has so far wiped out a notional $30 trillion dollars...give or take a trillion or so? “Lax central bankers...reckless investment bankers...the hubristic quants,” says Niall Ferguson, writing in Vanity Fair. “Regulate them,” is the universal cry. “Tax them,” say the politicians. “Hang them,” say investors.

    First, let us look at the charges:
    They skinned millions of investors – with their outrageous bonuses, spreads, fees, incentive shares, performance charges, salaries, and “profits” – leaving the financial industry severely under-capitalized...and unprotected. Guilty as charged. They ginned up “securities” that no one really understood and sold them to unsuspecting investors, including widows, orphans, colleges, pension funds and municipal governments. Uh...guilty again. They put the whole financial world in a spin – churning positions back and forth between each other in order to collect commissions...leveraging...flipping...stripping assets...securitizing...derivatizing...making wild bets based on flim flam mathematics.... No point in going on about it...guilty.

    Yes, the financial hotshots did all these things. And more. They sold the world on ‘finance,’ rather than making and selling things. Then, it was off to the races. Everybody wanted to bet. Perfecta, place bets, odds-on...double or nothing. Of course, investors would have been better off at the race track. The track takes about 20%. In the financial races, Wall Street took 50% to 80% of all the profits.

    Before 1987, only about one of every 10 dollars of corporate profits made its way to the financial industry – in payment for arranging financing, banking and other services. By the end of the bubble years, the cost of ‘finance’ had grown to more than 3 out of every 10 dollars. Total profits in the United States reached about $6 trillion last year; about $2 trillion was Wall Street’s share. What happened to this money? Other industries use profits to build factors and create jobs. But the financial industry paid it out in salaries and bonuses – as much as $10 trillion during the whole Bubble Period. And now that the sector finds itself a few trillion short, it waits for the government to open its purse.

    But Wall Street’s critics have missed the point. Yes, the financial industry exaggerates. But so does the whole financial world. Both coming and going. It’s madness on the way up; madness on the way down. Investors pay too much for “finance” when the going is good. And then, when the going isn’t so good, they regret it. This regret doesn’t mean the system is in need of repair; instead, it means it is working.

    The financial industry was just doing what it always does – separating fools from their money. What was extraordinary about the Bubble Years was that there were so many of them. There is always smart money in a marketplace...and dumb money. But in 2007 there were trillions of dollars so ******ed they practically cried out for court-ordered sterilization. What other kind of money would pay Alan Fishman $19 million for 3 weeks work helping Washington Mutual go bust?

    Whence cometh this dumb money? And here we find more worthy villains. For here we find the theoreticians, the ideologues...and the regulators, themselves, who now offer to save capitalism from itself. Here is where we find the bogus statistics, the claptrap theories and the swindle science. Here is where we find the former head of the Princeton economics department, too, Ben Bernanke... and both Hank Paulson and his replacement, Tim Geithner. Here, we find the intellectuals and the regulators – notably, the SEC – who told the world that the playing field was level...when everyone could see that it was an uphill slog for the private investor.

    “Six Nobel prizes were handed out to people whose work was nothing but BS,” says Nassim Taleb, author of The Black Swan. “They convinced the financial world that it had nothing to fear.” All the BS followed from two frauds. First, that economic man had a brain but not a heart. He was supposed to always act logically and never emotionally. But there’s the rub, right there; they had the wrong guy. The second was that you could predict the future simply by looking at the recent past. If the geniuses had looked back to the fall of Rome, they would have seen property prices in decline for the next 1000 years. If they had looked back 700 or even 100 years...they would have seen wars, plagues, famines, bankruptcies, hyperinflation, crashes, and depressions galore. Instead, they looked back only a few years and found nothing not to like.

    If they had just looked back 10 years, says Taleb, they would have seen that their “value at risk” models didn’t work. The math was put to the test in the LongTerm Capital Management crisis...and failed. Their models went sour faster than milk. Things they said wouldn’t happen in a trillion years actually happened while Bill Clinton was in still in office.

    In the real world, Taleb explains, things are stable for a long time. Then, they blow up. Then, all the theories and regulators prove worthless. These blow ups are inevitable, but unpredictable...and too rare to be modeled or predicted statistically. “And they are almost always much worse than you expect.”
    I am a pathological liar and a functional illiterate.



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