Post by jeffolie on Aug 13, 2007 12:59:50 GMT -6
Inquiring minds might be asking "What's behind the explosive use of derivatives, CDOs, LBO, computer trading, massive leverage, and enormous faith in poor models including implicit trust in automated scoring algorithms that supposedly could measure risk of default but obviously failed to deliver. The answer is simple: the Fed. Central banks are enablers of risk. Greenspan himself had high praise for derivatives and encouraged massive use of derivatives, adjustable rate mortgages at the bottom in interest rates, computer modeling and other such nonsense. And when anything has gone wrong the Fed has always been there to provide liquidity
The Same Mistakes Only Bigger
The losses at LTCM are trivial compared to today. The Fed would not bat an eye over a $4 billion hedge fund failure today. In Who's Holding The Bag? I reported "Notional amounts of interest rate derivatives outstanding grew almost 14 percent to $285.7 trillion in the second half of 2006." Look closely at that figure. Yes, that is trillion not billion. And that numbers was from 2006. It is higher today. Is it any wonder the Fed is spooked?
Not only have we made the same mistakes but we have made them in orders of magnitude greater size. And look at the buzzwords. They are exactly the same:
-massive leverage
-lack of liquidity
-quantitative funds
-derivatives
-credit default swaps
-hedge fund blowups
One has to laugh about this: "According to media reports, [Goldman Sachs's Global Alpha fund's traders] have been cleaning up certain positions." Fancy that. Computer modeling has failed yet again and humans are cleaning up after them.
More Computer Models Fail
And speaking of computer models, what about those computer models of Moody's, Fitch, and the S&P. Those models are horrendously flawed...
globaleconomicanalysis.blogspot.com/2007/08/genius-fails-again.html