Michael DC Bowen - I'm glad to see this discussion, but it's not specific enough. What I would like to impress upon people is that the business of finance is very important and very difficult, and unlike 'Trading Places', you cannot get away with murder 99% of the time. That is because people, markets and information are unpredictable. It's all about what you know, when you know it and how much confidence you have. Since human beings have certain cognitive limitations, there will always be errors, but they are not necessarily fraudulent. The problem with the majority of the criticism directed at the business of finance & investment (aka 'Wall Street') is the assumption that there is an inside game going on. If there is a confidence game, it is precisely the same game that blames 'Wall Street' without knowing how many people know the system. So let me try to explain this property.
First, understand that there are millions of people around the world who play in these global markets. All of them are pretty much equally smart, but only some of them are trusted. Lay people trust Goldman Sachs the way they trust Apple. There are plenty of engineers everywhere who can make computers that do the exact same thing as Apple computers but only Steve Jobs gets to be Steve Jobs (even beyond the grave like Elvis). This is called 'mindshare'. It means when you think of something that's actually common, you attribute it to a few specific actors. They 'own' your thinking. So 'Wall Street' owns the thinking about finance and investment and people are lumping them all together. If this reform movement wants to get traction, the first thing they have to do is disambiguate the actors. Just because there are hedge funds doesn't mean Wall Street only makes money from hedge funds. Hedge funds go broke all the time.
If you really want to understand what's wrong with the investment community you have to stop saying that it's evil and begin to understand that it's stupid. Which is to say, extending our analogy here, some people made stupid bets.
You should know, by the way, that I am a computer programmer who builds financial systems.
First, understand that there are millions of people around the world who play in these global markets. All of them are pretty much equally smart, but only some of them are trusted. Lay people trust Goldman Sachs the way they trust Apple. There are plenty of engineers everywhere who can make computers that do the exact same thing as Apple computers but only Steve Jobs gets to be Steve Jobs (even beyond the grave like Elvis). This is called 'mindshare'. It means when you think of something that's actually common, you attribute it to a few specific actors. They 'own' your thinking. So 'Wall Street' owns the thinking about finance and investment and people are lumping them all together. If this reform movement wants to get traction, the first thing they have to do is disambiguate the actors. Just because there are hedge funds doesn't mean Wall Street only makes money from hedge funds. Hedge funds go broke all the time.
If you really want to understand what's wrong with the investment community you have to stop saying that it's evil and begin to understand that it's stupid. Which is to say, extending our analogy here, some people made stupid bets.
You should know, by the way, that I am a computer programmer who builds financial systems.
Michael DC Bowen - The next thing I want to do is give people who are trying to learn some shortcuts. Cory Doctorow doesn't understand how economics actually works. His concept of 'Whuffie' is cute but laughable. Part of the problem with dot-commers and their universe is that they live in reality distortion fields. They fail much more often than they succeed with their economic theories. Even market professionals know that the best economists get it wrong, but there are some players you should be hearing out. So I'm going to give you three names of people who understand .
1. Nicholas Nassim Taleb
He, first and foremost understands how traders and investors mistake the map for the territory. That is to say, they mistake what their computer models tell them about risk from the actual reality of risk. He used to run a hedge fund, and coined the term 'Black Swan'.
2. Nouriel Roubini
Known as Dr. Doom. He is the guy who predicted most accurately the scale of the credit crisis. He is a super bear and believes everything will fail, but he's not stupid and he has been proven correct in many instances. He's not somebody whose solutions I particularly favor, but he is well informed.
3. David P. Goldman
This is the guy I listen to and trust. He used to be a very high level guy in the Street and got out when he saw people starting to do stupid things. I trust him implicitly and have been following him for about 3 years now (the other two slightly longer). Goldman writes as Spengler'
Look these three guys up and listen to what they talk about. This will take you a couple notches above the political BS that you can get Reich and Krugman to talk about.
I learned of all these guys through listening to Bloomberg Surveillance. If you want to get to know Wall Street at a serious level, that is the place to begin.
1. Nicholas Nassim Taleb
He, first and foremost understands how traders and investors mistake the map for the territory. That is to say, they mistake what their computer models tell them about risk from the actual reality of risk. He used to run a hedge fund, and coined the term 'Black Swan'.
2. Nouriel Roubini
Known as Dr. Doom. He is the guy who predicted most accurately the scale of the credit crisis. He is a super bear and believes everything will fail, but he's not stupid and he has been proven correct in many instances. He's not somebody whose solutions I particularly favor, but he is well informed.
3. David P. Goldman
This is the guy I listen to and trust. He used to be a very high level guy in the Street and got out when he saw people starting to do stupid things. I trust him implicitly and have been following him for about 3 years now (the other two slightly longer). Goldman writes as Spengler'
Look these three guys up and listen to what they talk about. This will take you a couple notches above the political BS that you can get Reich and Krugman to talk about.
I learned of all these guys through listening to Bloomberg Surveillance. If you want to get to know Wall Street at a serious level, that is the place to begin.
7:31 AM - Edit
Michael DC Bowen - Finally, I want to help you understand why there is no political solution, and it may sound biased but hear it out. One of the economists I've been paying attention to is Luigi Zingales. He came up with a solution to the mortgage crisis three years ago. It's called a debt-for-equity swap. It works like this.
The cost for your house was 300,000 when you bought it. It is now 200,000. Your mortgage was 275k. You are essentially 75k underwater. You have no incentive to pay off the mortgage. The bank has no incentive to forclose. That's because they have to then show that A) they had a non-performing loan and B) they take the hit on the asset that you now are taking. So.. what if you agree, you and the bank, to do a Debt-for-equity swap. The bank simply agrees to lower your mortgage size to 200k in exchange for your promise to give them the first 75k when you sell the house.
You now have a smaller mortgage and you are not underwater. You begin to get equity if/when the house goes to 275. Your monthly payment goes down. The bank now has less worry about you walking away from your mortgage, their loan performs, and they can book the 75K.
The problem is that no politician would get to take credit for saving the homeowners because the transaction is entirely between the books of the bank and the homeowners. There's no government program or government money involved. So even though this would solve the foreclosure crisis if it were legal, there's no political incentive to make it so in Washington.
The cost for your house was 300,000 when you bought it. It is now 200,000. Your mortgage was 275k. You are essentially 75k underwater. You have no incentive to pay off the mortgage. The bank has no incentive to forclose. That's because they have to then show that A) they had a non-performing loan and B) they take the hit on the asset that you now are taking. So.. what if you agree, you and the bank, to do a Debt-for-equity swap. The bank simply agrees to lower your mortgage size to 200k in exchange for your promise to give them the first 75k when you sell the house.
You now have a smaller mortgage and you are not underwater. You begin to get equity if/when the house goes to 275. Your monthly payment goes down. The bank now has less worry about you walking away from your mortgage, their loan performs, and they can book the 75K.
The problem is that no politician would get to take credit for saving the homeowners because the transaction is entirely between the books of the bank and the homeowners. There's no government program or government money involved. So even though this would solve the foreclosure crisis if it were legal, there's no political incentive to make it so in Washington.
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