May 28, 2010
– Comments (4) |
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Excellent article on the Fed's role in the 'flash crash' by Mark Spitnagel, an associate of Nassim Taleb.
*** ERRATUM: The author's name is Mark Spitznagel. ***
Thanks best article Ive read in a long time +1Rec
I'm a big fan of NNT and this defines why we are adding more risk into the system rather than alleviating it.
> This type of alignment among investors in risky positions is precisely what the central economic planners at the Federal Reserve intended when, in response to the historic credit collapse, they commanded interest rates to zero and signaled that they would prop up all risky assets.
Exactly, everywhere you turn, every structural problem in the economy leads back to the FED and their central planning. It is not GS who is a giant squid, it is the FED.
Interesting indeed, and the writer is right that easy money made an event that was eventually going to happen worse than it would have been without the easy money.
What remains a point of discussion is the extent. Mr Spitznagel exaggerates that. There is two reasons for that.
1) Read this quote again: "Sensing safety in numbers, the herd quickly followed, and in no time the market had consumed the Fed's gifted 2% profit spread and then some." (stress is mine). Sure, the fed gave us an extra 2% spread. Not more than that.
2) Not everyone in the market borrows money to get in. Quite to the contrary: most players in the stock market are not leveraged. Only those who did borrow could take advantage of the extra 2% spread. All others, like me, could not. So on average, investors had considerably less than 2% extra spread.