Blog Profile: Macroresilience, Common Sense Economic Thought
June 5, 2010 Leave a comment
A place of common sense and wisdom, Macroresilence helps to shed light and logic behind the problems of our financial system, and overview of significant market events and explaining its complexities. He was also cited by Rajiv Sethi as being an anonymous blogger that understood economics better than some professors.
Some of his suggestions for a better financial systems include paying off whistleblowers in order to uncover fraud:
The focus must be not to keep whistleblowers from losing their jobs but to compensate them sufficiently so that they never have to work again. As it happens, the scale of fraud in financial institutions means that this may even be achieved without spending taxpayer money. The whistleblower may be allowed to claim a small percentage of the monetary value of the fraud prevented from the institution itself, which should be more than sufficient for the purpose.
He also points out the problems with credit rating agencies and structured products:
The fatal flaw in our ratings regime is not the issuer-pays model but the fact that ratings agencies only get paid if the bond is issued. In the structured products space, the difference between a potential AAA rating and a AA rating is not just that a higher spread is paid to the investor on the bond. The lower rating usually means that the bond will not be issued at all, which means that the ratings agency will not earn any fees.
He also places the flash crash into perspective:
So what is the true underlying cause of the crash? In my opinion, the crash was the inevitable consequence of a progressive loss of system resilience. Why and how has the system become fragile? A static view of markets frequently attributes loss of resilience to the presence of positive feedback processes such as margin calls on levered bets, stop-loss orders, dynamic hedging of short-gamma positions and even just plain vanilla momentum trading strategies – Laura Kodres‘ paper here has an excellent discussion on “destabilizing” hedge fund strategies. However, in a dynamic conception of markets, a resilient market is characterised not by the absence of positive feedback processes but by the presence of a balanced and diverse mix of positive and negative feedback processes.
Policy measures that aim to stabilise the system by countering the impact of positive feedback processes select against and weed out negative feedback processes – Stabilisation reduces system resilience. The decision to cancel errant trades is an example of such a measure.
He also notes that although markets can be difficult to beat, they are not efficient. For instance in the case of Kodak, although Bill Gates knew that digital photography would takeover film based photography, it would not be so easy to short the stock, as it was only after 2-3 years of persistent upside movement due to the tech bubble, the stock finally gave way. However whoever that had shorted it too early would have had significant margin calls.