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2009-03-03 Home Front Economy

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Posted by tipper 2009-03-03 00:00|| || Front Page|| [11130 views ] Top

#1 Very interesting article.
Thanks for posting it.

Posted by Chuck 2009-03-03 06:13|| 2009-03-03 06:13|| Front Page Top

#2 I stumbled across an old Powerpoint show I got in an e-mail months ago that told a similar stor with stick figures and bad words.

The conclusion also applies to Global Warming™:In the world of finance, too many quants see only the numbers before them and forget about the concrete reality the figures are supposed to represent. They think they can model just a few years' worth of data and come up with probabilities for things that may happen only once every 10,000 years. Then people invest on the basis of those probabilities, without stopping to wonder whether the numbers make any sense at all.

Posted by Bobby 2009-03-03 06:48|| 2009-03-03 06:48|| Front Page Top

#3 well said, Bobby.

Those who banked on a loser like Al Gore becoming a winner were the same kind of people who banked on Wall Street profiting from the sub prime craze.

The moral here is that a Nobel Prize is as worthless as AIG stock.

Posted by Gluting Fillmore6653 2009-03-03 07:39|| 2009-03-03 07:39|| Front Page Top

#4 Excellent - Chinese tires, pet food, milk, and now Chinese math. Of course, for Wall Street to have been hurt, they had to have bought what was being sold. And they did - hook, line and sinker. Guess what? The same short cuts the Chinese have taken in making tires, pet food and milk were present in this guy's math. And the smartest guys in the room bought it anyway - it would be have been politically-incorrect to do otherwise.

It's the same mistake made by cost-cutting American vendors with dollar signs in their eyes who decided to outsource manufacturing to China without carefully inspecting each shipment received from their Chinese suppliers. They brought it on themselves. Actually, given that Uncle Sam is on the hook for bailout expenses, they brought it on our heads.

The story has a happy ending - he's back in China working for the government. Here's to hoping that this math whiz will do for the Chinese all the good things he's been doing for our capital markets.

Posted by Zhang Fei 2009-03-03 07:44|| http://timurileng.blogspot.com]">[http://timurileng.blogspot.com] 2009-03-03 07:44|| Front Page Top

#5 Happy? Happy, if you are not paranoid and say, taiwanese.

Posted by JFM">JFM 2009-03-03 10:48|| 2009-03-03 10:48|| Front Page Top

#6 Impressive title, but this was only one of many models used in the financial markets, and the models aren't the cause.

The primary cause of the financial breakdown is too much debt, private and public, domestic and worldwide.

The secondary causes are 1)the intertwining of assets and liabilities between financial institutions, which makes it difficult to allow the weak to fail without dragging down others, 2)public policy initiatives to push credit to weak borrowers (both domestic households and emerging economies), and 3)keeping interest rates too low for too long.

Wall Street was the (willing) facilitator, the models were tools. There weren't any models in 1929, but the world ended up in much the same place.

Posted by DoDo 2009-03-03 10:53|| 2009-03-03 10:53|| Front Page Top

#7 warnings about its limitations were largely ignored
When engineers do this, buildings collapse. But we don't blame the formula, we blame the engineers. Like the government that pushed mortgages for uncreditworthy people and now blames deregulation, the financial community would like to blame a formula. The truth is incompetence and greed, not a formula.

Posted by Darrell 2009-03-03 11:04|| 2009-03-03 11:04|| Front Page Top

#8 The story has a happy ending - he's back in China working for the government

He is back in China working for the government after having done more damage to the United States than any spetznatz could have dreamed to.

Posted by JFM">JFM 2009-03-03 11:18|| 2009-03-03 11:18|| Front Page Top

#9 The problem with this model is the same problem with ALL models of complex systems.

There is a need to simplify the equations or it makes no sense and is worthless. See his use of gamma as a constant. This is the same kind of crap that the AGW people try and pull off with their idea that the effect of the Sun is a minor (constant) factor.

Mass human psychology cannot be successfully modeled such that individual behavior is understandable. Just as with climate there are too many variables that are not quantifiable for a model to work reliably for all cases.

If this was deliberate on Li's part (which I doubt) he would be the perfect con-man. Cause, remember, you can't con an honest man. The people conned, seduced and bamboozled were so because they were in the market for cheap riches and heard what they wanted to hear.

Posted by AlanC 2009-03-03 11:19|| 2009-03-03 11:19|| Front Page Top

#10 The crucial part of the article is where it points out that everyone who understood the limitations of the formula were not authorized to make investment decisions, and everyone who was authorized to make investment decisions didn't understand the formula.

This is a perscription for disaster.

Posted by Frozen Al 2009-03-03 11:33|| 2009-03-03 11:33|| Front Page Top

#11 No, the perfect formula for disaster was the fact CEOs were not playing with their own money and that there were no provisions about losses and ticking time bombs.

Let's see: as a CEO my ultimate goal is not having my company make money but myself making money. Ok? Now, consider this. I get my company grow on a solid basis and get paid 10 for two years that is I make twenty. Or, I go the glitz way manage to push the stock through the rood for one year, cash 100 and next year it is revaled that I invested on smoke and mirrors and company bankrupts. Total gain 100 instead of 20. This is not theoretical since a lot of the CEOs who were at the helm during the meltdown have retired with enough money to buy a small country. Had they faced the prospective of the 100 being taken way and they being liable for damages the bubble would have never taken these proportions.

Posted by JFM">JFM 2009-03-03 11:51|| 2009-03-03 11:51|| Front Page Top

#12 as a CEO my ultimate goal is not having my company make money but myself making money But, but, if people really understand that, they will never invest in the stock market. Maybe they are beginning to understand it now.

Posted by Anguper Hupomosing9418 2009-03-03 12:00|| 2009-03-03 12:00|| Front Page Top

#13 For many many years, financial CEOs were compensated mainly in salary with relatively small bonuses, a little stock and large pensions tied to the company's health. This rewarded longer term thinking and prudence.

Then in the early 90s there was a huge push to shift compensation to 'pay for performance'. This shift came as a result of ordinary people now owning stock in 401ks and hearing about skyrocketing valuations on tech IPOs.

Boards gave in under pressure from stockholders. Older style CEOs were eased out and risk takers deliberately hired.

That's the background to JFM's comment about ultimate goals. CEOs weren't the only or even the first ones to be greedy. The roots lie in shareholders who saw their new, self-traded or at least personally owned, stock accounts as get rich schemes in the Clinton go-go years.

Posted by lotp 2009-03-03 12:14|| 2009-03-03 12:14|| Front Page Top

#14 Then in the early 90s there was a huge push to shift compensation to 'pay for performance'. This shift came as a result of ordinary people now owning stock in 401ks and hearing about skyrocketing valuations on tech IPOs. Boards gave in under pressure from stockholders. Nope, ordinary stockholders did not push for this drastic revision of corporate incentives, that was a job for the insiders. Once upon a time, people pooled their resources in public corporations so as to all share in its profits and suffer its losses. It was like an economic democracy. Some of the gains were from stock appreciation, some from dividends. That basic function of stock ownership and corporate governance went by the boards a long, long time ago.

Posted by Anguper Hupomosing9418 2009-03-03 12:20|| 2009-03-03 12:20|| Front Page Top

#15 To sum up: In the immortal words of Mark Twain, "There are lies, damn lies and then there are statistics".

Posted by Jack is Back!">Jack is Back! 2009-03-03 13:21|| 2009-03-03 13:21|| Front Page Top

#16 Jack, let's not forget Will Rogers:

Figures don't lie; liars figure.

Posted by AlanC 2009-03-03 14:24|| 2009-03-03 14:24|| Front Page Top

#17 Lotp

A similar example (I will tell why at the end)
was Soviet Union. The more you produced the more you were paid but what you produced was evaluated in quantitative not economic terms. So a worker in a tire plant was paid ze big bucks if he produced three or four times what was assigned by the plan. How do you do it? By cutting on finishing and quality control. And the plant manager had no interest in exposing you because he too was paid according to plant's output. Also if he managed to double the production he was rewarded. It was not his fault if the production of cars had not raised in same proportion so zillions of tires were decaying in the warehouses. If he had managed to do it despite not getting a single additional ounce of rubber would not prevent him of being promoted and getting the Lenin order medal. Too bad for the (fortunataly rare) car owners. End result was that over a half of what the Soviet Union produced fell apart before leaving the factory.

So greed is the motor of economy and when you manage to tie it to economic performance (something that it is structurally impossible in socialim) it can produce capitalism's wonderful achievements. But when earnings are not linked to real economic performance it leads to disaster and the higher the incentives the earlier and graver the capsizing as economic agents push in the wrong direction in order to maximize their personal gains.

Posted by JFM">JFM 2009-03-03 14:51|| 2009-03-03 14:51|| Front Page Top

#18 I understand that, JFM. I have an MBA in finance and operations from a highly rated business school.

With the introduction of computer-traded derivatives, especially 2nd and 3rd order derivatives, however, 'real economic performance' became hard to measure for financial institutions in the short term. And it was in the short term that CEOs began to be compensated.

Yes, highly short-sighted (literally). Once I understood that I became very stodgy and conservative with my own savings at a time when a lot of people I knew were making profits by day trading over the Internet.

Posted by lotp 2009-03-03 16:12|| 2009-03-03 16:12|| Front Page Top

#19 A very thoughtful article, but let me bring it down to street level: this was a game of pass-the-trash driven by two bust-out banks.

Posted by regular joe 2009-03-03 17:42|| 2009-03-03 17:42|| Front Page Top

#20 ION RENSE > THE POST-AMERICA POWER VACUUM.

AKA WORLDWIDE US GEOPOL + ECON RETREAT???

Posted by JosephMendiola 2009-03-03 18:16|| 2009-03-03 18:16|| Front Page Top

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