What’s Wrong and How to Fix It, Part 5: The Financial System
Published on: December 17, 2012
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  • Tom

    You mentioned empaneling a group of genuinely disinterested wise men to look over the finincial system.

    Where are you going to find these unicorns?

    • Adam Garfinkle

      They aren’t unicorns, Tom. I’d start with George Shultz, add Paul Volcker, Simon Johnson, Robert Shiller, Sheila Bair, Jessica Einhorn, Fred Bergsten, Brooksley Born, John Taylor, John Snow perhaps, and a few others. I’d also add a small committee of international advisers, one each I can think of from Britain, Australia, Canada, Israel and Japan (and maybe SIngapore) What all these folks have in common is experience and a track record of being basically right, combined with a profound lack of interest in future government service. Some are Democrats and some are Republicans, and some are independents. If you don’t recognize most of these names, you have some remedial research to do on this subject. Unicorns, indeed…..

  • Anthony

    New challenges recommend something more than a “general theory” and, in addition to wise men, recommend perhaps engaged citizens. So, Part 5: The Financial System implies that we risk severe societal damage by allowing our financial establishment to degenerate into a field of careerists seeking success and affluence; the present American position. As Jeffrey Sachs writes, “our world is not amenable to mechanistic rules.”

  • dan berg

    I would add Gary Gorton and recommend any of his papers or recent e book.

  • Matthew Brotchie

    I want to thank you for these series of posts. I have learned so much from these, now the dysfunction and corruption of our government is less abstract and more tangible. This is the best college course I never had. I would suggest that you, Walter Russell Mead, and Francis Fukuyama do an informal round table podcast on this dysfunction so we can hear were you disagree and agree on he nature of our plutocracy, the cultural shifts Charles Murray wrote about this year, and how dire the consequences might be for our country. I would gladly buy it if you put it up for sale. You might be surprised to how powerful a medium podcasts have become. Thank you again and happy holidays.

  • Elf

    I’m glad you acknowledge the pervasive corruption, however you should consider that these people have thought of that and aren’t likely to empower some panel of old wise men to dismantle their Empire. They’ve also thought of what to do when the music stops. They have the best chairs. You don’t need a panel of old men for..anything. You need a body of honest young men, this panel would be along the lines of the Committee for Public Safety. Please note I am a free market Libertarian. Normally the correct object of public policy is to mediate evil not eradicate it. Normally. In this case nothing less will do.

  • Jim.

    Chris Taylor did a workmanlike job, recently, of saying what went wrong with the Options side of our financial system.

    The problem is, I haven’t yet seen a critique of the Black-Scholes formula that notes that it has a Great Big Gaping Hole in it, which anyone who’s worked in stochastic modeling should be able to spot immediately…

    … it never takes into account that prices are affected by underlying reality: it only measures the “noise” of those measurements.

    According to everything I’ve read about it, it looks like Black-Scholes breaks if a price actually moves in anything other than a random (Gaussian) manner. If there’s a real downward or upward trend, or if there’s an underlying risk trend that historical data doesn’t adequately cover, B-S isn’t going to save your bacon.

    In fact, by giving investors confidence where it’s not warranted, it amplifies the effects of crises when they happen.

    Picture someone who’s invested in Buggy Whip futures, at the beginning of this century. Black-Scholes would tell them they’re adequately hedged against a collapse if they simply look at where prices are versus past volatility.

    Or, to bring things up to the more recent day, run Black-Scholes (or similar model) against a market that with very low-frequency fluctuations, like California real estate. Would Black-Scholes have allowed anyone to adequately hedge against the early 90’s crash? How about the late 00’s crash?

    Would Black-Scholes have saved any oil purchasers hit by the ’73 embargo? How about someone trying to protect themselves against the steady rise in the price of steel and copper during the 00’s Chinese building boom? Nope, not at all.

    Ignoring these realities does not provide any kind of beneficial, providential “Hiding hand”. It’s reckless, willful ignorance, plain and simple.

  • Yisroel Markov

    “It still amazes me that after what happened in the autumn of 2008 (and since) no such commission was impaneled…”

    So what about the Angelides Commission:

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