Mish's Global Economic Trend Analysis Message Board

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Strategies & Market Trends : Mish's Global Economic Trend Analysis

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To: ajtj99 who wrote (95360)	3/16/2009 11:16:10 AM
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Agree that they need to be treated like insurance, but still question whether they're needed at all. Financial markets used to place the risk premium in interest rates. That didn't stop defaults, but they didn't imperil the global financial system, either. More important, there was no money in it for the banks: only for the lender. The lender got the premium. This whole mess is an outgrowth of ART - Alternative Risk Transfer. Evaluating risk, as insurance companies do, is a time-consuming process. The idea that some fuzzy-haired quant can reduce risk to a one-line equation is ludicrous - yet the same quant techniques are still being used: the same ones that crashed LTCM, and that got us into this mess. Understood that many people think derivative transactions can be controlled, but the underlying logic of these transactions is flawed. They're black boxes consisting of a mixture of time-variant assumptions and probabilities. They work until they don't, then all hell breaks lose. Jim

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