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tsuomela : financial-engineering   48
"In the ruins of the 2007–2008 financial crisis, self-proclaimed progressives the world over clamoured to resurrect the economic theory of John Maynard Keynes. The crisis seemed to expose the disaster of small-state, free-market liberalization and deregulation. Keynesian political economy, in contrast, could put the state back at the heart of the economy and arm it with the knowledge needed to rescue us. But what it was supposed to rescue us from was not so clear. Was it the end of capitalism or the end of the world? For Keynesianism, the answer is both. Keynesians are not and never have been out to save capitalism, but rather to save civilization from itself. It is political economy, they promise, for the world in which we actually live: a world in which prices are “sticky,” information is “asymmetrical,” and uncertainty inescapable. In this world, things will definitely not take care of themselves in the long run. Poverty is ineradicable, markets fail, and revolutions lead to tyranny. Keynesianism is thus modern liberalism’s most persuasive internal critique, meeting two centuries of crisis with a proposal for capital without capitalism and revolution without revolutionaries. If our current crises have renewed Keynesianism for so many, it is less because the present is worth saving, than because the future seems out of control. In that situation, Keynesianism is a perfect fit: a faith for the faithless."
book  publisher  finance  financial-engineering  financial-services  economics  fiscal-policy 
february 2017 by tsuomela
"Financialization is one of the most innovative concepts to emerge in the field of political economy in the last three decades, although there is no agreement on what exactly it is. Profiting Without Producing defines financialization in terms of the fundamental conduct of non-financial enterprises, banks and households. Its most prominent feature is the rise of financial profit, in part extracted directly from households through financial expropriation. Financialized capitalism is prone to crises, none greater than the gigantic turmoil that began in 2007. Using abundant empirical data, the book establishes the causes of the crisis and discusses the options broadly available for controlling finance."
book  publisher  finance  financial-engineering  financial-services  economics 
february 2017 by tsuomela
Greed and Debt: The True Story of Mitt Romney and Bain Capital | Politics News | Rolling Stone
"Romney, on the other hand, is a perfect representative of one side of the ominous cultural divide that will define the next generation, not just here in America but all over the world. Forget about the Southern strategy, blue versus red, swing states and swing voters – all of those political clichés are quaint relics of a less threatening era that is now part of our past, or soon will be. The next conflict defining us all is much more unnerving.

That conflict will be between people who live somewhere, and people who live nowhere. It will be between people who consider themselves citizens of actual countries, to which they have patriotic allegiance, and people to whom nations are meaningless, who live in a stateless global archipelago of privilege – a collection of private schools, tax havens and gated residential communities with little or no connection to the outside world."
politics  financial-engineering  wall-street  markets  debt  leverage  glocalism 
september 2012 by tsuomela
Special report: What triggered oil's greatest rout | Reuters
"Oil just doesn't fall by 10 percent in the course of a normal day, though. In commodities markets, oil is king, and its daily contract turnover, typically around $200 billion, is usually able to absorb even large inflows or outflows of investment.

The rare moves of $10 a barrel usually are set off by dramatic events -- the outbreak of the first Gulf War in 1991, or the collapse in 2008 of Lehman Bros bank, which both led to recessions.

Of course, there was major news last week. But the daring Pakistan raid that killed Osama bin Laden had done little to shift the balance of oil markets on Monday.

In interviews with more than two dozen fund managers, bankers and traders, no clear cause emerged for the plunge in price. Market players were unable to identify any single bank or fund orchestrating a massive sale to liquidate positions, not even an errant trade that triggered panic selling, as seen in the equities flash crash last May."
economics  markets  computer  financial-engineering  interview  business  trends 
may 2011 by tsuomela
Has finance gone too far? | vox - Research-based policy analysis and commentary from leading economists
"Our results show that the marginal effect of financial development on output growth becomes negative when credit to the private sector surpasses 110% of GDP. This result is surprisingly consistent across different types of estimators (simple regressions and semi-parametric estimations) and data (country-level and industry-level). The threshold at which we find that financial development starts having a negative effect on growth is similar to the threshold at which Easterly et al. 2000 find that financial development starts increasing volatility."
economics  econometrics  finance  financial-engineering  wall-street  markets 
april 2011 by tsuomela
Rick Bookstaber: Physics Envy in Finance
Andrew Lo and Mark Meuller have has a recent paper that addresses the issue of physics envy. They focus on the applicability of the tools of physics as the type of uncertainty becomes more profound, pointing out that while physics can generate useful models if there is well-parameterized uncertainty, where we know the distribution of the randomness, it becomes less useful if the uncertainty is fuzzy and ill-defined, what is called Knightian uncertainty.
I think it is useful to go one step further, and ask where this fuzzy, ill-defined uncertainty comes from. It is not all inevitable, it is not just that this is the way the world works. It is also the creation of those in the market, created because that is how those in the market make their money. That is, the markets are difficult to model, whether with the methods of physics or anything else, because those in the market make their money by having it difficult to model, or, more generally, difficult for others to anticipate and do as
econometrics  econophysics  envy  physics  finance  financial-engineering  determinism  risk  information-asymmetry  information 
august 2010 by tsuomela
Ezra Klein - How financial innovation causes financial crises
Links to paper on "Financial Innovation and Financial Fragility" by Nicola Gennaioli, Andrei Shleifer, and Robert Vishny
financial-engineering  finance  innovation  regulation 
april 2010 by tsuomela
Rick Bookstaber: Does Financial Innovation promote Economic Growth?
Do innovative products promote growth by increasing market efficiency?

If we were in an Arrow-Debreu world, the answer would be yes, since these products will help span that space of the states of nature. But the incentives behind innovation move in the other direction. The objective in the design and marketing of innovative products is not market efficiency, but profitability for the banks. And market efficiency is the bane of profitability.
economics  wall-street  markets  innovation  growth  information-asymmetry  banking  financial-engineering 
november 2009 by tsuomela
Stumbling and Mumbling: Finance & human capital
What I’m saying here is that there’s a problem for those who want to defend the financial sector. You can do one of two things:
1. You can defend bankers’ pay on the grounds that it’s a reward for high skills, in which case you shouldn’t worry much about the financial sector shrinking, as these skills would be useful elsewhere.
2. You can argue that shrinking finance would be expensive. But this requires you to ditch the Econ101 just-so stories about people being paid a return to human capital, and to recognize that salaries are a reward to power, not (just) to “skill.“
Is there really a plausible third possibility?
financial-engineering  finance  financial-services  money  power  economics  pay  rewards  incentives  talent 
september 2009 by tsuomela
The Limits of Arbitrage « The Baseline Scenario
...arbitrageurs, the very smart and talented traders at hedge funds who will take prices that are out of line and bring them back into line, making a good fee and making prices reflect all available information, the very building block necessary for EMH to work, can’t do their job if they are time or credit constrained. Specifically, if they are highly leveraged, and prices move against their position before they return to their fundamental value – if the market stays irrational longer than they can remain solvent – they’ll collapse before they can do their jo
finance  arbitrage  money  wall-street  banking  financial-engineering  limits  efficiency  markets  free-markets  debt  leverage 
august 2009 by tsuomela
Ah, Wall Street. Seeing the real you at last. » New Deal 2.0
Financial innovation was presented to us in a way that suggested that great things were happening for mankind. The presentations were usually vague. To understand them, we had only the power of our own imaginations, or perhaps, failing that, our awe in the face of this powerful expertise, confidently propelling us to a greater future....

Malarky. This is all code for defer to the wishes of those who make money from these techniques.
finance  financial-engineering  financial-services  banking  money  mythology  religion  capitalism  innovation  gloom-and-doom  regulation 
august 2009 by tsuomela
Michael Lewis on A.I.G. |
profile of AIG FP and speculations on why it failed, especially the personality of Joe Cassano.
economics  wall-street  crisis  banking  financial-engineering  finance  aig 
july 2009 by tsuomela
Interfluidity :: Contracts are not bilateral
Binding contracts involve an implicit third party, the state which (through its courts system) stands ready to enforce the terms of private arrangements. The state is not, and cannot be totally neutral in its role as contract enforcer: Communication between contracting parties is always imperfect
economics  contracts  law  enforcement  capitalism  markets  financial-engineering  derivatives  libertarian 
april 2009 by tsuomela
AIG: Before CDS, There Was Reinsurance | The Big Picture
Some inflammatory suggestions about fraudulent use of "side letters" in the re-insurance industry. Where there's a will to bend the rules there is a way to make money.
accounting  aig  bailout  cds  fraud  business  insurance  banking  financial-engineering  gloom-and-doom  wheels-within-wheels  rotten-to-the-core 
april 2009 by tsuomela
US CDS above 100bps: it’s a MAD MAD MAD MAD World! « A Credit Trader
I think the confusion largely stems from people viewing CDS akin to insurance. Though this is an easy analogy to make, it is, in fact, wrong.
cds  finance  financial-engineering  economics  wall-street 
march 2009 by tsuomela
Regulate financial markets while we still can | vox - Research-based policy analysis and commentary from leading economists
by Willem Buiter. "It is better to over-regulate now and subsequently correct the mistakes than to risk another era of self-regulation and soft-touch under-regulation of financial markets, instruments and institutions."
regulation  finance  financial-engineering  financial-services  banking  government 
march 2009 by tsuomela
Derivatives Echo Chamber : CJR
Long summary of media reports about 1996 GAO report on regulation of derivatives. Conclusion: the media took the anti-regulation argument at its face, even before the report was released.
media  journalism  derivatives  financial-engineering  finance  1990s  regulation  government  history  crisis 
march 2009 by tsuomela
[0810.4844] Predator-Prey Model for Stock Market Fluctuations
We present a dynamical model that describes the evolution of offer and demand in a financial market. The model considers a fully connected network of interacting agents that may be willing to operate in the market, either by selling the stock or by buying it, or that are not interested in operating at that moment. The agents change their mind through self- or mutual influence, and the decision is adopted on a random basis, like in a predator-prey model.
financial-engineering  market-failure  agent-based-model  predator-or-prey  arxiv 
february 2009 by tsuomela
The Beautiful Machine -
1st of 3 part series on the history of AIG Financial Products division.
history  crisis  economics  financial-services  wall-street  money  financial-engineering 
december 2008 by tsuomela
Ahi quanto a dir qual era è cosa dura / esta selva selvaggia e aspra e forte / che nel pensier rinova la paura! | Economics | The American Scene
Given my eye-of-the-storm view of the matter, I thought it would be of interest to relate two stories from my long career in structured finance, one that may help explain why, if you asked me in 2004 or 2005, I would have staunchly defended structured finance technology as having real social benefit and why, by a couple of years later, it was clear to anyone looking honestly at the business that something had gone very wrong.
financial-engineering  finance  crisis  2008  banking  fraud 
december 2008 by tsuomela
THE CRASH -- What Went Wrong
Depressing, but relatively clear, narrative of how the CDO machine worked on Wall Street.
crisis  2008  financial-engineering  cdo  finance  wall-street 
december 2008 by tsuomela
Interfluidity :: Should "bad" financial contracts be banned?
Flawed financial instruments only become policy issues when people responsible for investment on a significant scale decide that what they don't know won't hurt them. This can happen by virtue of fads and fashion, the madness of crowds: consider internet stocks, or blind faith in diversification and "stocks for the long run". But most poor investment, in dollar-weighted terms, is not taken by foolish individuals placing their own money. Bankers and institutional investors are on the one hand granted the power to control investment on a very large scale, and on the other hand make consistently awful choices. Delegated money, rather than trading off return and safety, often trades return for safe-harbor. Absurd contracts that appear to offer high returns are very attractive to money managers of all stripes, if they offer a veneer of safety and "prudence", or better yet, if they become conventional.
financial-engineering  crisis  2008  credit  business  investing  regulation 
december 2008 by tsuomela
The Spectrum: The State of Financial Engineering
Unfortunately, FE programs are also drifting farther and farther away from their purported subject matter. In effect, quantitative finance has entered the scholastic stage whereby numerical techniques are taught completely out of context as if a deal were somehow a differential equation that could be solved for the right solution. In fact, there is no solution to a deal as there is to a differential equation. At this point, analysts are talking about investing angels dancing on financial pins. Even worse, professional societies devoted to financial engineering are in reality pressure groups acting on behalf of various financial constituencies, like hedge fund managers seeking to get the regulators off their proverbial backs.
financial-engineering  academic-programs  academia  wall-street 
december 2008 by tsuomela
Accrued Interest: How does a Credit Default Swap (CDS) Work?
Credit Default Swaps (CDS) are fast becoming the dominant vehicle for trading credit risk. In this piece, I'll go over the basic features of a standard CDS contract and why they are easier for many traders to utilize over cash bonds.
cds  financial-engineering  risk  capitalism  market-failure 
october 2008 by tsuomela
Boom goes the CDS | Free exchange |
Fact one—there are several dozen trillion dollars of these things out there—an amount that makes Paulson’s $700 billion look like a rounding error.

Fact two—they are basically insurance policies on bond defaults that are written without regulation, so the usual insurance-industry practice of setting aside reserves does not apply. Oh, and while the premia enter as bank income the pay-out obligations are not on their balance sheets.

Fact three—the large banks think they are hedged since they have "insurance policies" on both sides of the default events. Hedged? In normal times, perhaps. But imagine if one big issuer of these insurance policies went broke at roughly the same time that one of the insured bonds went bad—say, for instance, Ford bonds and a major Wall Street bank headquartered in Europe.
cds  failure  gloom-and-doom  financial-engineering  market-failure 
october 2008 by tsuomela
A Look At Wall Street's Shadow Market, 60 Minutes: How Some Arcane Wall Street Financial Instruments Magnified Economic Crisis - CBS News
"You got Wall Street firms, Bear Stearns, Lehman Brothers. You got insurance companies like AIG. Merrill lost a ton of money on this," Kroft says. "Everybody's lost a ton of money. They're supposed to be the smartest investors in the world. And they did it themselves."

"They did it all on their own," Partnoy agrees. "That's the most incredible thing about this crisis is that they pushed the button themselves. They blew themselves up."
cds  financial-engineering  gloom-and-doom  economics  market-failure  crisis 
october 2008 by tsuomela
The Reckoning - Agency’s ’04 Rule Let Banks Pile Up New Debt - Series -
Many events in Washington, on Wall Street and elsewhere around the country have led to what has been called the most serious financial crisis since the 1930s. But decisions made at a brief meeting on April 28, 2004, explain why the problems could spin out of control. The agency’s failure to follow through on those decisions also explains why Washington regulators did not see what was coming.

On that bright spring afternoon, the five members of the Securities and Exchange Commission met in a basement hearing room to consider an urgent plea by the big investment banks.

They wanted an exemption for their brokerage units from an old regulation that limited the amount of debt they could take on.
economics  regulation  market-failure  government  oversight  leverage  debt  financial-engineering  sec 
october 2008 by tsuomela
Collateralized Debt Obligation
Collateralized debt obligations are securitized interests in pools of—generally non-mortgage—assets. Assets—called collateral—usually comprise loans or debt instruments. A CDO may be called a collateralized loan obligation (CLO) or collateralized bond obligation (CBO) if it holds only loans or bonds, respectively. Investors bear the credit risk of the collateral. Multiple tranches of securities are issued by the CDO, offering investors various maturity and credit risk characteristics. Tranches are categorized as senior, mezzanine, and subordinated/equity, according to their degree of credit risk. If there are defaults or the CDO's collateral otherwise underperforms, scheduled payments to senior tranches take precedence over those of mezzanine tranches, and scheduled payments to mezzanine tranches take precedence over those to subordinated/equity tranches.
money  finance  financial-engineering  financial-services  definition  debt  cdo 
september 2008 by tsuomela
Financial Risk Management
Welcome to the Contingency Analysis family of websites, a comprehensive resource for trading, financial engineering and financial risk management. Here you will find a glossary linked to detailed articles, an active discussion forum, book reviews, research and much more.
risk  finance  money  capitalism  management  debt  financial-services  financial-engineering 
september 2008 by tsuomela

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