• Home
  • Articles
  • Planet Finance Crashes to Earth - Anatomy of the Destruction of a Financial System

Planet Finance Crashes to Earth - Anatomy of the Destruction of a Financial System

Author :


Vanity Fair published in December an excellent article by Niall Ferguson that provided an in-depth look at the causes of the financial crisis/recession/depression we are now in. Mr. Ferguson is a Harvard historian and takes a historical view of the crisis and its implications. Here's how the in-depth article starts:

Comments: 1

Vanity Fair published an excellent article in December by Niall Ferguson entitled, Wall Street Lays Another Egg.  It provides an in-depth look at the causes of the financial crisis/recession/depression we are now in. Mr. Ferguson is a Harvard historian and takes a historical view of the crisis and its implications. Here's how the in-depth article starts:

"This year we have lived through something more than a financial crisis. We have witnessed the death of a planet. Call it Planet Finance. Two years ago, in 2006, the measured economic output of the entire world was worth around $48.6 trillion. The total market capitalization of the world’s stock markets was $50.6 trillion, 4 percent larger. The total value of domestic and international bonds was $67.9 trillion, 40 percent larger. Planet Finance was beginning to dwarf Planet Earth."

The article is long,8 pages of text and takes the reader through the creation of the subprime mess, the engineering of CDOs, CDSs, and other esoteric instruments that magnified the impact of a wave of mortgage defaults.  His analysis shows how many were complicit in the creation of a credit and real estate bubble the likes of which have not been seen before.

If there's any consolation to the grim view of the the article, it is the fact that financial bubbles are nothing new.  They have existed since the dawn of capitalism, stock markets, and banking.  They are, in a sense a price to pay for the overall growth in the world economy and reflect the whims, vagaries, hopes, and fears of human nature.

The other point that I think comes out in the article, is that as much as investors will always try to use quantitative tools to minimize risk and project returns, they are only as good as the tools used to predict human decision making.  Economic theories are good, but they pretend that people always make rational decisions.  We do not.  That, combined with the comflict of interest and greed in the system make it very difficult for a quantitative model to accurately make predictions.

The fall of Planet Finance is the fall of the quant gods, who once thought they could model our behavior.  Turns out they were wrong.

Comments


ktexas, January 15, 2009


I saw this on PBS last night. It was very interesting. Looks like you can watch it via this PBS link
http://www.pbs.org/wnet/ascentofmoney/about/about-niall-ferguson/12/

Helpful? Yes:0 / No:0
Is this review helpful? Yes No

Related Articles

Add your Comments

 

Find the best Savings or CD Rate

Financial products of all nature bear inherent risks and this website is not a financial advisory service. BestCashCow.com provides information related to rates on US-based savings accounts, CD (certificate of deposit) rates, money market accounts, money market funds, government bonds, other bonds and income producing securities, commodities, equity securities, mortgage rates, home equity rates and auto loans rates, free of charge to internet users for their independent use. The accuracy of information on the website is not guaranteed, and no financial product of any sort is endorsed. On certain web pages, BestCashCow.com may contain discussion and analysis of the risks and rewards associated with certain financial instruments, including equity instruments, or may link to other pages with such discussions. The information should not be construed to provide investment advice. In fact, users are specifically warned against following any advice related to specific instruments, including advice that may be on other web pages linked from BestCashCow.com. Please seek personalized advice on the risks and applicability to your own circumstances of any financial product from a qualified professional. © BestCashCow.com, LLC, 2014.