Of course, this changes completely when you introduce the agent-principal problem. Suddenly it might be a good idea for you to do or buy stuff, even if it's bad for your employer or employers (such as the people who's money you are managing). This means extremely tough regulation is required to deal with this problem.

But regulations are communism, dontcherknow?

Peak oil is not an energy crisis. It is a liquid fuel crisis.

...a professional credit rater has told his superiors that he needs to examine the mortgage loan files to evaluate the risk of a complex financial derivative whose risk and market value depend on the credit quality of the nonprime mortgages "underlying" the derivative. A senior manager sends a blistering reply with this forceful punctuation:

   Any request for loan level tapes is TOTALLY UNREASONABLE!!! Most investors don't have it and can't provide it. [W]e MUST produce a credit estimate. It is your responsibility to provide those credit estimates and your responsibility to devise some method for doing so.

When the economy is in an overall Ponzi Finance position, faith is required to make it keep going a little bit longer before the bubble bursts.

I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.

The financial sector was itching to securitise its mortgages to evade capital adecuacy requirements, but there was not a liquid market for the securitised assets because they could not be priced. Li's formula, by enabling pricing, made the market possible.

Not entirely. Lots of houses, machines, installations and so on were actually created. Not in the most optimal way perhaps, but they were created. The problem now is that we for some reason feel we must punish ourselves for the previous madness by idling a considerable fraction of our productive capacity, possibly to make people feel  better, or something.

Peak oil is not an energy crisis. It is a liquid fuel crisis.

useful to the bookmaker, and/or those who are in a position to fix the outcome.

"It's a joke that we're in markets like this," said [Saint Etienne municipal finance director Cedric] Grail, 38, from the 19th-century city hall fronted by an arched facade and the words Liberte, Egalite, Fraternite. "We're playing the dollar against the Swiss franc until 2042."

...

"This is speculating in the hopes of gain," said Peter Shapiro, managing director at Swap Financial Group LLC, in South Orange, New Jersey, an adviser to companies and governments. "The investor is taking a chance in hopes of a high return. It has nothing to do with hedging."

...

"These municipal swaps are the same thing as Greece," said [Saint-Germain-en-Laye city council member Emmanuel] Fruchard, a former banker at Credit Lyonnais, now a unit of Credit Agricole SA, who designed swaps in the early 1990s. "It's all trying to dress up your accounts."

...

"It's like Easter eggs," said [Pforzheim's former budget director] Weishaar, 45, who holds a degree in math and economics from the University of Ulm. "You want to buy one and somebody sells you a painted hand grenade instead."

nsofar as insurance is a matter of paying a more or less arbitrary price to hedge a specific risk, complex derivatives are not insurance, but a form of gambling : about as economically useful as Chinese people gambling on the outcome of third-division European football matches. i.e. useful to the bookmaker, and/or those who are in a position to fix the outcome.

This seems a very good way of looking at it to me. As Migeru has noted, the big impetus for a lot of this was to get around capital adequacy requirements. i.e. The bookmaker (bank) gained from having the bets occur - the outcome was almost irrelevant - except that things in the economy reached the point where the "book" blew up and what was a "house wins either way as well as doing business" turned into a "house loss."

And, as we know from historical experience with the imaginative ways to evade usury bans, just making these things illegal doesn't mean they will go away. That's, after all, what the shadow banking system is. And it hasn't gone away.

If you are not convinced, try it on someone who has not been entirely debauched by economics. — Piero Sraffa

You can securitize all you want, but if the result is not a security grade asset, and insurance companies and pension funds cannot by them, why bother?

The defense from smoke and mirrors and "the smartest men in the room" effect is simple rules. Simple rules like, no CDO based on derivatives can be rated as better than junk, and for CDO's composed entirely of original assets, the weighted average of the rating of the tiers of the CDO cannot be greater than the weighted average of the rating of the original assets generating its income.


I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.

Simple=good, complex=bad.

Why not ban money management? Because of specialisation. Not everyone saver can or want to spend the time to manage her savings. If she wants to pay someone else to do it for her, fine. But strict regulation is needed, far stricter than we have today. The fraud that is "actively" managed mutual or pension funds must be banned for example. If they look like index funds, smell like index funds and behave like index funds, they should not be allowed to trick people into paying higher fees than what index funds usually demand (max 0.5% per annum).  

Peak oil is not an energy crisis. It is a liquid fuel crisis.

The only thing the pre-2008 derivatives pricing revealed is that a lot of people expected to keep making money on bonds. That turned out to be not very useful information, because they were wrong.

_{It is rightly acknowledged that people of faith have no monopoly of virtue - Queen Elizabeth II}

Though I don't understand these arcane theories about probability

To Keynes, probability is a branch of logic: the theory of rational thought under uncertainty. Ordinary logic is just the subset of rational thought dealing with certain (or certainly false) propositions. I think this is a really interesting approach. Probability to Keynes is relative but not subjective. That is, probability is always relative to some data (or hypotheses), and so it is in a way subjective since each of us has different data/knowledge/experience, even different mental acuity. However, Keynes' probability is not subjective in the sense that a correctly formed probabilistic reasoning, being enunciated relative to explicit hypotheses, should be valid independently. Keynes writes at length about the problem of induction (reasoning from particular, though possibly numerous, observations to general statements) and he stresses that, contrary to what has been asseted by philosophers in the past, the fact that an inductive conclusion turns out to be false does not invalidate the inductive reasoning relative to the information available at the time the conclusion was formulated.

Kupiec points out that, in sum,

There is no qualitative difference between determinism and probabilism.  (P. 36)

Or, an event with a probabilty of "1" is qualitatively a probabilistic event in exactly the same sense as an event with a probabilty of greater than zero but less than one.

As to the rest, extraordinary claims require extraordinary evidence

I think he's on his way to becoming as famous and important for his work as is Charles Darwin for his and is perhaps rightly to be seen as the contemporary who has best understood (and restored) a proper grasp of Darwin's place and importance.