Paul Wilmott's Attempt To Save Wall Street & Frankenstein Finance
Let's get a post up while it is still relevant. Paul Wilmott, a very influential architect of quantitative finance, is the focus of a Newsweek article of some weeks ago. The topic of the story is Paul's belief that he can save Wall Street's Frankenstein finance.
Let's start this post with a remark I made on here when the world was in love with quantitative finance and the Frankenstein Wall Street had created around it. The remark is from April of 2007, a little more than two years ago.
....Frankly, because I don't believe anyone truly is a derivatives expert. ie, The system has not been tested through to every possible outcome. LTCM proved even simple messes can become exponentially large. ..... I've seen some minor "what if" analysis of a derivatives melt down. Nothing scientifically robust. The problem is I don't really think anyone can test every scenario and guarantee liquidity doesn't melt away if there is some type of derivatives mess. Maybe we won't get one. We have survived decades without much of a problem. ..... Everyone thinks the party on the other side of the trade will provide the liquidity in all scenarios and what if no one does? I am quite confident such an outcome exists. Then the only question is if that outcome will come to pass.
Well, the concern we highlighted on here this is exactly what came to pass. And it is going to happen again. At some point we are going to have to replenish Wall Street balance sheets. Again. Quantitative finance is simply one of many sources of depleted banking capital that will arise in the future. And, I seriously doubt it will take long for the next crisis to manifest itself. A year or less is surely a possibility. When we have a handful of financial institutions batting around these enormous sums of derivatives contracts, the largest risks are contained in the largest firms. There must be winners and losers in any contract. And a major flaw in the ointment is that these firms are so large and their risk profiles are so great that any substantial loser threatens all players in the derivatives game. In other words, any single firm being on the losing side of any large derivatives position will threaten all Wall Street firms. For goodness sake, how often do we as a society need to witness Wall Street gambling away our savings? Literally. In this scheme of pure gambling, if Wall Street wins, society loses by being the contract counterparty. If Wall Street loses, society loses by bailing out the counterparties. Where is any possible upside? What the hell are we doing? Derivatives should be banned or the risk profile involved in using them for specific risk management purposes only should be clearly quantified, clearly limited and highly regulated. Washington is still not serious about addressing these issues because Wall Street is oaying our government officials hundreds of billions of dollars to continue their insane gambling addiction.
Myron Scholes was a major proponent of derivatives. He received a Nobel Prize for his work on derivatives models. I believe he has now blown up three hedge funds employing derivatives. The hedge fund industry continues to lobby against regulation. Well, those that are remaining continue to lobby. In relatively recent remarks, he has said he (his work) was wrong and we need to wipe the financial slate clean and start over. A founder of Frankenstein finance principals has capitulated to the stupidity of his thinking. (I'm paraphrasing rather than spending time to dig up his specific quote.)
There is one thing I feel as though I do understand ad well as anyone. That is the limitations of our understanding and appreciation for unintended consequences and the avalanche effect of complex systems. We simply don't appreciate or seem to be able to quantify that the process is unmanageable when too many unexpected variables harmonically align. And because quantitative finance really doesn't understand the underlying factors or variables, (although they ignorantly believe they do or can manage the process.) they are blindly walking down the path of destruction.
We have railed on this deluded view of reality as it pertains to many topics on here. Three specific ones were futzing around with our food chain or attempting to bio-genetically alter nature without understanding the risks, another is Frankenstein finance which clearly cannot and has not quantified risks, and another is those misquoting of abstract economic theory with this radical notion that we just need to step back and let the world collapse. At that point the system will clean itself out and we will all live happily ever after. This last perspective concerns me more than any. And, it is the underlying economy that is the source of the most significant crisis here. Including for Frankenstein finance. This last position is a completely simpletonian view of the world. One that does not appreciate the scientific complexity of unscientific arguments better known as ignorance is bliss.
Wall Street's quantitative schemes are based on a completely false reality. And Paul Wilmott seemingly shows a lack of appreciation of the enormity of the false thinking associated with this Frankenstein because he believes he can save the monster by re-educating its architects?
There are many people who believe that Wall Street is going to return to the status quo now that it has received a bailout. Wilmott apparently is one of them. I am supremely confident these people are giving us the very argument as to why quantitative finance is going to see even greater crises. Because they clearly don't understand the enormity of the fallacy that their careers were built upon.
Frankenstein lives. We continue to witness a deluded and completely false reality.
Let's start this post with a remark I made on here when the world was in love with quantitative finance and the Frankenstein Wall Street had created around it. The remark is from April of 2007, a little more than two years ago.
....Frankly, because I don't believe anyone truly is a derivatives expert. ie, The system has not been tested through to every possible outcome. LTCM proved even simple messes can become exponentially large. ..... I've seen some minor "what if" analysis of a derivatives melt down. Nothing scientifically robust. The problem is I don't really think anyone can test every scenario and guarantee liquidity doesn't melt away if there is some type of derivatives mess. Maybe we won't get one. We have survived decades without much of a problem. ..... Everyone thinks the party on the other side of the trade will provide the liquidity in all scenarios and what if no one does? I am quite confident such an outcome exists. Then the only question is if that outcome will come to pass.
Well, the concern we highlighted on here this is exactly what came to pass. And it is going to happen again. At some point we are going to have to replenish Wall Street balance sheets. Again. Quantitative finance is simply one of many sources of depleted banking capital that will arise in the future. And, I seriously doubt it will take long for the next crisis to manifest itself. A year or less is surely a possibility. When we have a handful of financial institutions batting around these enormous sums of derivatives contracts, the largest risks are contained in the largest firms. There must be winners and losers in any contract. And a major flaw in the ointment is that these firms are so large and their risk profiles are so great that any substantial loser threatens all players in the derivatives game. In other words, any single firm being on the losing side of any large derivatives position will threaten all Wall Street firms. For goodness sake, how often do we as a society need to witness Wall Street gambling away our savings? Literally. In this scheme of pure gambling, if Wall Street wins, society loses by being the contract counterparty. If Wall Street loses, society loses by bailing out the counterparties. Where is any possible upside? What the hell are we doing? Derivatives should be banned or the risk profile involved in using them for specific risk management purposes only should be clearly quantified, clearly limited and highly regulated. Washington is still not serious about addressing these issues because Wall Street is oaying our government officials hundreds of billions of dollars to continue their insane gambling addiction.
Myron Scholes was a major proponent of derivatives. He received a Nobel Prize for his work on derivatives models. I believe he has now blown up three hedge funds employing derivatives. The hedge fund industry continues to lobby against regulation. Well, those that are remaining continue to lobby. In relatively recent remarks, he has said he (his work) was wrong and we need to wipe the financial slate clean and start over. A founder of Frankenstein finance principals has capitulated to the stupidity of his thinking. (I'm paraphrasing rather than spending time to dig up his specific quote.)
There is one thing I feel as though I do understand ad well as anyone. That is the limitations of our understanding and appreciation for unintended consequences and the avalanche effect of complex systems. We simply don't appreciate or seem to be able to quantify that the process is unmanageable when too many unexpected variables harmonically align. And because quantitative finance really doesn't understand the underlying factors or variables, (although they ignorantly believe they do or can manage the process.) they are blindly walking down the path of destruction.
We have railed on this deluded view of reality as it pertains to many topics on here. Three specific ones were futzing around with our food chain or attempting to bio-genetically alter nature without understanding the risks, another is Frankenstein finance which clearly cannot and has not quantified risks, and another is those misquoting of abstract economic theory with this radical notion that we just need to step back and let the world collapse. At that point the system will clean itself out and we will all live happily ever after. This last perspective concerns me more than any. And, it is the underlying economy that is the source of the most significant crisis here. Including for Frankenstein finance. This last position is a completely simpletonian view of the world. One that does not appreciate the scientific complexity of unscientific arguments better known as ignorance is bliss.
Wall Street's quantitative schemes are based on a completely false reality. And Paul Wilmott seemingly shows a lack of appreciation of the enormity of the false thinking associated with this Frankenstein because he believes he can save the monster by re-educating its architects?
There are many people who believe that Wall Street is going to return to the status quo now that it has received a bailout. Wilmott apparently is one of them. I am supremely confident these people are giving us the very argument as to why quantitative finance is going to see even greater crises. Because they clearly don't understand the enormity of the fallacy that their careers were built upon.
Frankenstein lives. We continue to witness a deluded and completely false reality.
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