- Myron Scholes, the creator of the infamous Black-Scholes
model for pricing derivatives which won the Nobel Prize and then almost
destroyed the world banking system with the Long Term Capital Management
bankruptcy of 1998, has now partially understood that his derivative creations
are a Frankenstein monster. He recommends wiping out the current crop of
toxic cds derivatives. The only hope of world economic recovery is indeed
by wiping out, freezing, deleting, shredding, and otherwise destroying
ALL of the $1.5 quadrillion derivatives bubble. Otherwise, the London G-20
will repeat the failure of the Juny 1932 Lausanne conference, which needed
to wipe out reparations and war debts left over from World War I in order
to end the First World Depression. To end the Second World Depression,
wipe out and permanently ban derivatives now! - Webster Tarpley
-
- ________
-
- Curious Capitalist Blogs.com
-
- Myron Scholes, whose Black-Scholes option pricing model
provided the intellectual underpinning for modern derivatives markets,
thinks one particular derivatives market-that for credit default swaps-is
due for a Red Adair style rescue. Or a Fred Adair style rescue.
-
- Red Adair put out oil well fires by setting off gigantic
explosions at the wellhead. "My belief is that the Fred Adair solution
is to blow up or burn the OTC market in credit default swaps," Scholes
said this morning. What that means, he elaborated, is that regulators should
"try to close all contracts at mid-market prices" and then start
up the market anew with clearer rules and shorter-duration contracts.
-
- This was at a conference at New York University occasioned
by a new collection of papers on how to fix the financial system, authored
by a bunch of NYU Stern School faculty. Scholes kept saying Fred Adair.
Sometimes he'd notice and correct himself, sometimes he wouldn't. The FT's
John Gapper, who was on a panel with Scholes, finally speculated that this
was because the government response to the financial crisis has been such
an unwieldy mix of Fred Astaire (dancing around the problems) and Red Adair
(doing something to fix them). Scholes did not disagree.
-
- The blow-up-the-CDSes option is intriguing, and I'm going
to check in with Scholes later to see if he wishes to elaborate. But for
now, a few more notes from the panel, which was moderated by Paul Volcker
and also featured NYU finance professor Matt Richardson:
- Some would say Scholes is partly to blame for this whole
mess, and Volcker dropped a couple of hints in that direction. Scholes
didn't exactly accept responsibility, but neither did he give a blindered,
Chicago-style defense. (http://curiouscapitalist.blogs.time.com/2009/01/15/gimme-
some-of-that-old-time-chicago-insularity-or-not/)
-
- For one thing, he cited John Maynard Keynes-still a nonperson
to many of Scholes's fellow Chicago Ph.Ds-arguing that we're currently
stuck in a situation where the financial system needs to deleverage, but
its current deleveraging is causing asset values to plummet, meaning that
it's not succeeding in deleveraging at all (that is, debt is down, but
so is the value of everybody's capital, so leverage ratios aren't declining).
For another, he seemed to agree with one of the main criticisms of the
Wall Street risk models that evolved in part from Black-Scholes-that they
have some ability to capture the risks faced by one investor operating
in a financial market that the investor is too small to influence, but
aren't much good at capturing the risks faced by the entire market. "Risk
aggregation is not linear," he said. "It's nonlinear." (This
is what Chapter 13 of The Myth of the Rational Market is about. Doesn't
that sound exciting?)
http://www.amazon.com/Myth-Rational-Market-History-Delusion/dp/0060598999
-
- As the moderator, Volcker didn't say all that much. He
did talk for a bit, though, about how "maybe we ought to have a two-tier
financial system," with a heavily regulated "core part that I
will for purposes of simplicity call commercial banking" and a less-regulated
outer realm of hedge funds, proprietary trading desks, and such. Hmmm,
said Gapper, that "reminds me of something I once heard of called
the Glass-Steagall Act." This Glass-Steagall revivalism is happening
all over. I'm even beginning to feel the spirit. But Gapper had an interesting
question: "If you wanted to set up a new Glass-Steagall, where would
you draw the line?"
-
- Scholes finally got his free-market Chicago dander up
over the possibility of synchronized global financial regulation-something
that Volcker has been advocating as chairman of the Group of Thirty(http://www.group30.org/index.htm)
project on financial reform-sparking this entertaining exchange:
- Scholes: If we internationalize everything, we end up
with rules that stifle freedom and innovation. Mr. Sarkozy and others say
our system has failed and we should adopt theirs. Do we want to become
French?
-
- Volcker: I'm not an acolyte of Mr. Sarkozy.
-
- Gapper: Actually, the French banks are big derivatives
users.
-
- Volcker: The U.S. is no longer in a position to dictate
to the rest of the world.
- http://curiouscapitalist.blogs.time.com/2009/03/06/myron-scholes-intellectual-
- godfather-of-the-credit-default-swap-says-blow-em-all-up/
|