Rolfe Winkler
Option ARMageddon
Bookstaber, hater of CDS, to advise SEC
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Rick Bookstaber announced on his blog yesterday that he will joining the SEC’s “Division of Risk, Strategy and Financial Innovation.”
This is a welcome development. Bookstaber is the author of A Demon of Our Own Design: Markets, Hedge Funds and the Perils of Financial Innovation.
He was part of an Oxford-style debate on that very subject at the Economist’s Buttonwood Gathering last month. I was lucky to be in the audience. Below is the video. (Here’s a link too…..go to “debate on financial innovation.”)
Watch it through just to see Jeremy Grantham. He was on fire. (His first comments being a third of the way in.) His rhetoric successfully flipped the audience from being 80:20 in favor of the proposition that “financial innovation boosts global growth” to a similar margin against.
It’s highly ironic that Myron Scholes was chosen to argue for the proposition. An inventor of the Black-Scholes options pricing model, he was also a partner at LTCM, the famous hedge fund firm that blew itself up mixing mathematical hubris with leverage.
Scholes’s life story should be a cautionary tale AGAINST the idea that financial innovation creates great wealth. Yet here he is, having learned nothing.
Not that it’s unexpected. Nothing encourages cognitive dissonance quite like the absence of consequences. Bailed out bankers on Wall Street who feel they’ve “earned” the bonuses they plan to pay themselves this year are just the latest example…
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Wisdom always wins in the long run, and Jeremy Grantham is wisdom and character personified.But, as we have seen, sometimes the long run can be very, very long, making the eventual adjustment that much worse.
The important stories are often those that escape attention. Let’s stop the proliferation of these novel financial instruments before they destroy us all.
Alan Greenspan admited that he was wrong about the ability of those running the markets to contain behaviors that are destructive – to police themselves.
Actually, he was right all along. In the end the people will curb those behaviors when the markets force them to. The problem is not that the destructive behaviors will not be corrected – we are in that very correction right now. No the problem is the COST of that correction – a cost that is born more by others than by those whose foolishness was the cause.