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Yeah, that's complete bullshit. The "smart guys" have been working on Wall St. for decades. Maybe there weren't as many high-profile funds, but they were there

by tansey 16y ago

Yeah, that's complete bullshit. The "smart guys" have been working on Wall St. for decades. Maybe there weren't as many high-profile funds, but they were there. They were there (and blamed) when LTCM collapsed, they were there (and blamed) when the dot-com bubble came, and it should be no surprise that they are still here and being blamed for the current crisis. The notion that smart people are to blame for the financial crisis is like saying tobacco farmers are to blame for lung cancer. The quants aren't the ones making the laws in congress that have torn down regulation for the last 30 years. They aren't the guys demanding huge increases in leverage (even in the case of LTCM, where a few of the high-profile quants did get excessive, it still wasn't their call). They aren't the guys who lowered interest rates or started the housing bubble. They're the guys who just see an opportunity to make money and they take it. If a guy cuts off your leg, throws you in the ocean, and you get eaten by sharks, are you really going to say that your death was the result of a vicious, man-eating shark? The people to blame are the usual bunch. It's congress, the white house, and the executives-- most of whom are not the "smart guys" that are being blamed. Quants are a scape goat for a bunch of people unwilling to accept that what happened is not easily traced back to a recent event, but rather requires a longer look back and a more nuanced answer. It's a lazy answer to effectively say, "Wall St. gave $70 trillion to a bunch of mathematicians who were just too darn smart for their own good, dontchaknow." Washington got hooked on Reagan-era deregulation, where each time they let the banks go a little further, they got a little more campaign funding, and around and around we go. There are tons of bubbles and crashes in the history of stock markets. Each time people think things are different, and they're always wrong. This is no different than every other time: greed and corruption. (Disclaimer: I work for a hedge fund.)

nostrademons 16y ago
If you read the article he linked, it seems like the author is talking about decades - he references his 25th college reunion and speaks as if it was several years ago. His point was that because the smart guys are on Wall St, they're not actually running the businesses and institutions that Wall St is investing in. So the companies that back all these financial assets are now being run by incompetent doofuses, while the people who used to make sure everything ran smoothly are now shuffling money from one dysfunctional company to another. There's a lot of truth to this - Warren Buffett has been saying the same thing for about 15 years. It used to be that the top grads in each class would become professors, or entrepreneurs, or public servants, and would use their intelligence to invent tangible things that make people's lives better. Now the top grads usually go into finance, and they still invent things, but the things they invent are increasingly opaque ways to slice up a declining pool of real assets. Assuming that you're a reasonably intelligent guy, you're actually good evidence for the point the article is making. If you didn't work at a hedge fund, perhaps you'd be working for Google, or performing basic research, or founding the companies of tomorrow. He's talking entirely about opportunity cost: the opportunity cost of having the smart people in the world allocating capital is that they aren't out in the world producing capital.
- tansey 16y ago
  I think that's a separate argument from the one the OP is making, based on his selected quotes. I've read the article before, but I just re-read it to refresh myself. The issue I take with it is that the story pitched to the reader is: 1) Life gets expensive and Wall st. produces tons of millionaires. 2) Smart guys go to Wall St. with dreams of making enough money to become leisurely professors. 3) Extra derivatives are created by smart guys which then destroy the world. This seems ridiculous on several levels. First, virtually no one goes into massive debt by getting a PhD in the sciences; scholarships, grants, and stipends are always there to support bright students. Second, people have been doing sophisticated derivatives for a very long time; most people have no idea what an option is, much less how to price one, and that dates back to the days of Ed Thorpe. Third, I really just cannot believe that having a system where idiots manage money with the help of other idiots is less prone to disaster than idiots managing money with the help of smart guys. The one thing that the author does have right is that the financial incentives are out of whack. That comes back to the deregulation issue which I consider the cause. As for myself, I am also doing a startup and a couple research projects in my spare time, as well as going back to get my PhD starting 2011, so I guess Warren can sleep a little better knowing I'm not going to be "wasting" my life forever. ;)
vessenes 16y ago
I agree with most of what you say; Reagan, smart hedge fund guys, unwinding our old banking system, etc. etc. I agree that it's a lazy answer to blame mathematicians. Hedge fund folks can be lazy, too. Morally lazy. Many are unwilling to employ intellectual rigor evaluating the morality of their own actions, or the actions of their industry en-masse -- inellectual rigor that they so effectively employ looking for trading opportunities. The "I'm acting in an economically rational fashion with an invisible group of trading partners losing on the backend of my trade; this is capitalism, what's your beef?" attitude combined with willful ignorance when it comes to industry-wide ethics or morality actually does have a lot to do with what's happening in the market. The CFA Level 1 exam doesn't even have a "Duties to society/the market" concept in it. It's just not part of the industry. Compare how hedge funds today act to JP Morgan in the early 20th century. Hedge Funds: "We have billions of other people's money, and no market responsibility whatsoever. None. That's not what we do. What we do is arbitrage and thereby create goodness. Why do you not see the goodness we create by moving this money around in a way that makes us rich?" JP Morgan: "Oh, shit, the economy is going down. I am sitting these MoFo head bankers down in a room until we get this fixed. And, I'll do it again in a few years if it happens again. DO NOT LEAVE THE ROOM. WE ALL MUST FIX THE MARKETS." Being able to move the market just because 'someone else gave us leverage' does NOT remove one's own responsibility. Spreading out blame among industry partners for market crashes does not absolve one's own responsibility for participating in actions that might have made the crashes worse.* Anyway, I encourage you to think more broadly and consider societal outcomes in your (possibly) high influence job. You mention nuance -- a more nuanced approach to your own industry's role might do you good, both career-wise and personally. As an example, your tobacco farmer analogy is specious: a poorish Virginia family weighing public health against survival is one thing, but the analogy would have us imagine these poor quant fund managers will be starving if they aren't allowed to play with their computer models and deploy billions using them -- this is the only skill they have! Society weeps. (And covets their jobs..) Perhaps the best thing to do would be to imagine you'll have to answer to JPM in heaven someday for every trade; I wonder what complaints he might have for each of us. I may announce my WWJPMD bracelets on Zero Hedge soon; I'll keep you posted. * I don't particularly blame hedge funds for the last few years -- that would be silly -- although it's also pretty hard to say that HFT had nothing to do with those little 'hiccups' a few weeks ago, just like it's pretty hard to say that unwinding debt leverage issues had nothing to do with the commodities death spiral in 2008.

by tansey 16y ago

nostrademons 16y ago

If you read the article he linked, it seems like the author is talking about decades - he references his 25th college reunion and speaks as if it was several years ago. His point was that because the smart guys are on Wall St, they're not actually running the businesses and institutions that Wall St is investing in. So the companies that back all these financial assets are now being run by incompetent doofuses, while the people who used to make sure everything ran smoothly are now shuffling money from one dysfunctional company to another. There's a lot of truth to this - Warren Buffett has been saying the same thing for about 15 years. It used to be that the top grads in each class would become professors, or entrepreneurs, or public servants, and would use their intelligence to invent tangible things that make people's lives better. Now the top grads usually go into finance, and they still invent things, but the things they invent are increasingly opaque ways to slice up a declining pool of real assets. Assuming that you're a reasonably intelligent guy, you're actually good evidence for the point the article is making. If you didn't work at a hedge fund, perhaps you'd be working for Google, or performing basic research, or founding the companies of tomorrow. He's talking entirely about opportunity cost: the opportunity cost of having the smart people in the world allocating capital is that they aren't out in the world producing capital.

tansey 16y ago
I think that's a separate argument from the one the OP is making, based on his selected quotes. I've read the article before, but I just re-read it to refresh myself. The issue I take with it is that the story pitched to the reader is: 1) Life gets expensive and Wall st. produces tons of millionaires. 2) Smart guys go to Wall St. with dreams of making enough money to become leisurely professors. 3) Extra derivatives are created by smart guys which then destroy the world. This seems ridiculous on several levels. First, virtually no one goes into massive debt by getting a PhD in the sciences; scholarships, grants, and stipends are always there to support bright students. Second, people have been doing sophisticated derivatives for a very long time; most people have no idea what an option is, much less how to price one, and that dates back to the days of Ed Thorpe. Third, I really just cannot believe that having a system where idiots manage money with the help of other idiots is less prone to disaster than idiots managing money with the help of smart guys. The one thing that the author does have right is that the financial incentives are out of whack. That comes back to the deregulation issue which I consider the cause. As for myself, I am also doing a startup and a couple research projects in my spare time, as well as going back to get my PhD starting 2011, so I guess Warren can sleep a little better knowing I'm not going to be "wasting" my life forever. ;)

vessenes 16y ago

I agree with most of what you say; Reagan, smart hedge fund guys, unwinding our old banking system, etc. etc. I agree that it's a lazy answer to blame mathematicians. Hedge fund folks can be lazy, too. Morally lazy. Many are unwilling to employ intellectual rigor evaluating the morality of their own actions, or the actions of their industry en-masse -- inellectual rigor that they so effectively employ looking for trading opportunities. The "I'm acting in an economically rational fashion with an invisible group of trading partners losing on the backend of my trade; this is capitalism, what's your beef?" attitude combined with willful ignorance when it comes to industry-wide ethics or morality actually does have a lot to do with what's happening in the market. The CFA Level 1 exam doesn't even have a "Duties to society/the market" concept in it. It's just not part of the industry. Compare how hedge funds today act to JP Morgan in the early 20th century. Hedge Funds: "We have billions of other people's money, and no market responsibility whatsoever. None. That's not what we do. What we do is arbitrage and thereby create goodness. Why do you not see the goodness we create by moving this money around in a way that makes us rich?" JP Morgan: "Oh, shit, the economy is going down. I am sitting these MoFo head bankers down in a room until we get this fixed. And, I'll do it again in a few years if it happens again. DO NOT LEAVE THE ROOM. WE ALL MUST FIX THE MARKETS." Being able to move the market just because 'someone else gave us leverage' does NOT remove one's own responsibility. Spreading out blame among industry partners for market crashes does not absolve one's own responsibility for participating in actions that might have made the crashes worse.* Anyway, I encourage you to think more broadly and consider societal outcomes in your (possibly) high influence job. You mention nuance -- a more nuanced approach to your own industry's role might do you good, both career-wise and personally. As an example, your tobacco farmer analogy is specious: a poorish Virginia family weighing public health against survival is one thing, but the analogy would have us imagine these poor quant fund managers will be starving if they aren't allowed to play with their computer models and deploy billions using them -- this is the only skill they have! Society weeps. (And covets their jobs..) Perhaps the best thing to do would be to imagine you'll have to answer to JPM in heaven someday for every trade; I wonder what complaints he might have for each of us. I may announce my WWJPMD bracelets on Zero Hedge soon; I'll keep you posted. * I don't particularly blame hedge funds for the last few years -- that would be silly -- although it's also pretty hard to say that HFT had nothing to do with those little 'hiccups' a few weeks ago, just like it's pretty hard to say that unwinding debt leverage issues had nothing to do with the commodities death spiral in 2008.