Goldman’s Rules of Acquisition
calacanis.com
calacanis.com
An intelligent person willing to spend a few hours would have no trouble gaining a basic understanding of CDOs, credit default swaps, and the like.
There's no excuse for that kind of thing in mainstream journalism (where you often see it), and I'm kind of surprised that you hear it from Jason.
Telling people that they should try harder is unlikely to solve the problem in the future I think.
It's not like thousands of people woke up one morning and independently, by coincidence, decided to default on their homes.
It's a long complex causal chain, with snow-balling effects and the like, that very few people had an appreciation for because the instruments involved were very complex and there were too many layers involved.
This lead to a very non-linear system where it was impossible to have visibility over the whole thing.
You write that like it's unusual. It's not - it's how life works.
> This lead to a very non-linear system where it was impossible to have visibility over the whole thing.
Of course it's impossible. Complete visibility is the exception, not the rule.
If you want safe and visibility, buy T-bills.
If you want more return, you have to play against someone who thinks that you're incorrect and is willing to pay if they're wrong.
True. How about substantially more so than usual?
> If you want more return, you have to play against someone who thinks that you're incorrect and is willing to pay if they're wrong.
I suspect that doesn't describe what most of the participants in the game or those that were collateral damage thought they were doing.
If things were simpler, then perhaps the participants would actually understand what they are playing I guess.
Which means regulation, ratings and market forces that are intended to stop things getting out of hand might function somewhat better.
This case involves folks who wanted to make billion dollar bets on the housing market. It involves folks who had personal attention from Goldman Sachs. (In other words, we're not talking a Schwab IRA with a $10k balance.)
If these folks can't be held responsible for their investment decisions, who can?
> Which means regulation, ratings and market forces that are intended to stop things getting out of hand might function somewhat better.
You're assuming that complexity was relevant even though there wasn't even a correlation.
Note that no one is forcing folks to do complicated deals. Moreover, simple deals are available.
I trash Warren Buffet fairly often, but he's correct when he says that you shouldn't invest in something that you don't understand. Folks who violate that rule should lose their money.
Housing prices doubled in many areas, far outstripping any increase in the rent they could earn.
And, probably the most powerful indicator of all, people went out of their way to make sure others were holding the bag on a supposedly safe investment. They did not believe it was safe either.
These instruments were created to shift risk to those most naive about the housing bubble collapse.
Those who saw it coming knew there was great profit in getting others to take on that risk. Just pay them enough and they'll take it on.
Congress can't acknowledge its own role in creating the bubble so they're trying to regulate how people took advantage of it.
But its not the market's exploitation of our government's stupid actions that need to be fixed. They will always find a way. Our government needs to stop being stupid.
So, if you understand those operations, you understand everything about computing, right?
The problem with the financial world wasn't that they built on incomprehensible primitives. The problem was the incomprehensible structures they built with them. Just like programmers and programs. A basic understanding of the primitives is necessary but not sufficient in either case. And the programmers have an advantage that all the source code they are running is in one place; to understand the financial system technically would require access to the whole, which you can not have.
(If you want to quibble with that list of primitives: Fine, just pretend I used your list instead. It won't change my point.)
In particular, the hiding of risk removes a lot of the correcting mechanisms from the system.
Nassim Nicholas Taleb's argument that we should ban complex financial instruments and keep things very simple and close to those primitives makes a lot of sense to me.
Whether it's in anyway practical or not, I have no idea.
Buffet has also said that he doesn't understand tech companies or computers.
Buffet is always playing angles. When you can't spot the angle, he's probably playing you.
This is also what drives me nuts about, for example, NPR's coverage of the crisis. I love the Planet Money team for instance but they invariable do their "gosh can you believe how nuts this financial stuff is" schtick during each episode of what is otherwise a decent show.
I'm tired of hearing a procession of Ira-Glass-cadence-imitating NPR ingenues with gee-golly-wow attitudes interviewing financial pros.
Journalists serve as proxies for the reader/viewer/listener. When they do the "this finance stuff is just crazy" routine they imply that we shouldn't have been expected to understand and follow the finance industry in the first place. That implicit expectation of ignorance is the media equivalent of "math is hard".
We need to raise expectations of education and comprehension. It's entirely possible to understand this stuff in high school. We should be teaching it in every public school. Of course that would make it harder to get away with stuff. Not surprising then, that we don't teach it in schools today.
"These bastards are reveling in their financial mischievousness – they’re enjoying explaining exactly how they fucked us."
If you go up against people who are smarter than you, and greedier than you, and who know more than you, and you trust them not to fuck you, they will fuck you.
That's capitalism.
The folks who lost were planning to keep their profits. They thought that they knew better than the other side of the deal. (And yes, there's always another side.)
You can't con an honest man.
Well said.
Banks have an incentive to take on greater levels of risk in order to attract deposits (which are a highly liquid, short-term source of capital); hence, investors must find a way to out-do the bank returns in order to justify their existence.
People can point to specific flaws within the system (of which there are many), but we live in a global economy with many banks competing for profits. Given that the possibility of eliminating greed is near zero, this really is a catch-22.
Global regulation (see the Basel Accords) would result in significantly diminished economic growth, but is the only viable "solution" (you can begin to see how Marx justified communism).
Result: the global banking system tends not to incentivise long-term investment, which then leads to asset bubbles. While we can not prevent bubbles all together, regulatory regimes can help to make them less frequent.