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Wednesday, April 01, 2009

On Alchemy And The Wall Street Quants

Reading Kevin Phillips' "Bad Money" -- new in paperback -- is like drinking good Scotch. It is intense, serious and slow going. If we have been going to more social events of late, it may be as a break from the weight of the gloom from this book's central thesis: that the American Empire may be bound to contract like all the previous global empires ("And this too shall pass away.."). From Bad Money, in which Phillips makes a particularly striking analogy between the quants of Wall Street and the alchemists of olde:

"The dollar value of asset backed securities issuance had jumped from $108 billion in 1995 to $1.07 trillion in 2000, then $1.1 trillion in 2005 and $1.23 trillion in 2006. In 1996, a much discussed article in Foreign Policy titled 'Securities: The New World Wealth Machine' had set out the ultimate paper entrepreneurial opportunity: high quality stocks and bonds could be issued against clusters and pools of existing loans and assets, an innovation that 'requires that a state find ways to increase the market value of its stocks of productive assets.' By such a strategy, 'an economic policy that aims to achieve growth by wealth creation therefore does not attempt to increase the production of goods and services, except as a secondary objective.' Alan Greenspan, too, had wondered whether wealth still required any kind of manufacturing.

"Ten years later, most of the other wealth strategies pursued in the financial sector also involved asset values and rearrangements: private equity and leveraged buyouts, corporate stock buybacks, and mergers and acquisitions. In contrast to the old corporate outlays that used to bestow major benefits on communities and workers, the new ones favored few but investors and shareholders. In addition to being major profit centers, these transactions also fed the upward momentum of the various national stock indexes, derivatives of which were another big business. As assets became the raison d'etre of economics, the barons, princes, and monarchs of finance turned to alchemists, this time advanced mathematicians and options theorists, just as the fifteenth and sixteenth century princes and monarchs seeking gold and silver had turned to the metallurgical alchemists, who boasted of what they could make out of mercury, lead, arsenic or antimony."

Please read this book.

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