Sunday, March 23, 2008

Clueless About the Unfolding Financial Market Mess? No Worries You are Not Alone

In an excellent NYT story here, former Fed Vice-chairman and currently professor of economics at Princeton Alan Blinder said;

Mr. Blinder, the former Fed vice chairman, holds a doctorate in economics from M.I.T. but says he has only a “modest understanding” of complex derivatives. “I know the basic understanding of how they work,” he said, “but if you presented me with one and asked me to put a market value on it, I’d be guessing.”

My responses:

1. If even sophisticated traders don't know what they are buying and selling, monitoring costs go up the roof and the monitors of these traders could do nothing even if they are well incentivized to do their job. The whole internal risk management function of the firm falls apart.

2. You see pages and pages of stock market recommendations or comments in the papers' financial section, are writers of those pieces smarter than Blinder and the traders and know exactly what's going on? If they are clueless, why readers would want to read junk stories then? Is it related to human nature, a relic of our tribal past, where one always look for wisdom from a wise-man in times of panic (even if the wiseman also has no clue on what's going on)?

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