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MikeL
Social climber
Seattle, WA
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Dec 17, 2014 - 10:04am PT
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Splater: . . . multitrillion-dollar derivatives market. . . .
This statistic needs to be put into context. When I worked in the primary government securities market in the mid-1980s, “overnights” and “repos” among banks NIGHTLY were trading that amount. Money is like water: there is a lot of it, it finds (the opportunistic) low points in economies, and encouraging open markets simply promotes greater efficiencies (assuming a strong form market hypothesis) through greater liquidities.
Of course, one may not care for efficiencies, but rather effectiveness. Effectiveness calls far messier issues into question (interests, values, intentions, community, etc.). Economics has chosen to deal pretty darned well with issues of efficiencies because that’s a far more tractable set of problems. They can be solved rather mechanically.
One issue IMO is the complexity and multiplicity of the issues at-hand in the situation.
(i) Look how many interpretations there are of the situation here in this thread. Too many. Which are right, and how come we can’t figure out which one is right? Analytically, the problem appears to be beyond our intellectual capabilities.
(ii) Changing any system—especially complex systems—seems to lead to more grievous problems than they solve. Unintended consequences.
(iii) In my experience, anyone who approaches a change program with a solution without full stakeholder analysis and involvement is doomed to failure. How does one get all those different people participating in a republic? Representation does not seem to be working. We may need to reconsider democracy (see de Toqueville).
(iv) Real change always seems to come from within people, through a change in their consciousness (new views, new values, new beliefs, new norms).
(v) I’m not sure where it initially turned up, but people in this country (and Canada) have come to the belief (and are sold on the idea) that everyone should be able to own their own home. Politically, it’s almost become a right.
Markets are mechanisms that foster efficiencies. The alternative to mindless mechanisms is intervention, and interventions are invariably political. Although hybrids are theoretically possible, for reasons of stability and predictability, choices basically need to come down on one side or another. No one wants rules and procedures in financial markets to exhibit regular flip-flops. All decisions imply difficult trade-offs.
Personally, I haven’t met a person (academically or professionally) who could predict how options on options, options on futures, futures on future, and futures on options—packaged and sold in poorly standardized pools of securities and sold through syndicates—would perform under varying economic conditions. Understanding Black-Schoales options pricing models is not too difficult for basic configurations (straddles, puts, calls; longs and shorts), but when they are hybridized and compounded upon each other, I doubt that there were 10 people on the planet who could say what their performance characteristics would be. The things are just too complex—even with gaggles of firms running program-trading operations. (Just about everything in the universe looks like this.)
BTW, early on there was compelling research that has showed options pricing models did not mimic actual market activity; the models were too theoretical. Yet after a couple of years of use, actual pricing in the markets became aligned with the models. The models changed the markets; mind over matter.
Things are where they are because this is who we are and where we are at. Things are as they cannot help to be. The situation is evolutionarily perfect. Want a change in the world? Change your mind, and your world will change.
Not that any of this matters.
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JEleazarian
Trad climber
Fresno CA
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Dec 17, 2014 - 11:17am PT
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(ii) Changing any system—especially complex systems—seems to lead to more grievous problems than they solve. Unintended consequences.
Excellent points, Mike L. The point I quote, above, seems to elude many theoreticians, but it has a corollary in taxation policy: "Old taxes are good taxes." In general, I seldom see proposals for change that compute the marginal cost of executing the change itself.
John
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