Thursday, November 13, 2008

Academics "shine": The Lessons of LTCM, revisited

An "act of God"?

Financial crises may be an unavoidable aspect of modern capitalism, a consequence of the interactions between hardwired human behavior and the unfettered ability to innovate, compete, and evolve.

-MIT Professor, Andrew Lo. (rest is worth the read)
The quote is a little unfair, he went on to talk about limiting those risks in important ways. Still there are other gems, like government should subsidize geekiness/greekiness (we need to subsidize people who rush out to make, maybe, $220K on Wall Street in their first year?):

"In the same way that government grants currently support the majority of Ph.D. programs in science and engineering, new funding should be allocated to major universities to greatly expand degree programs in financial technology."
The good guys in the zero-sum game of trading:

Based upon my research on the activities of hedge funds, there are three important findings I would like to share with the Committee. First, hedge funds did not cause the financial crisis and are in fact helping to mitigate its damage and save taxpayers money. This may seem surprising, but in fact hedge funds have historically made markets more stable [!!!] and helped their investors conserve wealth in times of economic stress. Second, hedge funds’ short-selling activities have helped draw attention to the poor management and investment decisions of financial companies in recent years. Indeed, when hedge funds short-sell the stocks of unhealthy companies, they help to divert capital from companies that are fundamentally unstable. This not only prevents stock market bubbles from becoming much worse, but it helps to ensure that companies that make sound decisions are rewarded and are able to provide stable jobs for their employees. Finally, existing laws and regulations should be strictly enforced against hedge funds and their managers, but changing how hedge funds are regulated could actually undermine the interests of investors and increase economic instability.

-Houman Shadab
, Senior Research Fellow, Mercatus Center, George Mason University

Of course there were those reported strategies of gaming the (partly) market-driven models that the ratings agencies had adopted...

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