Thursday, October 18, 2007

Most crises occur due to liquidity needs

Market crises have a life of their own, separate from value
“While it is not strictly true that I caused the two great financial crises of the late twentieth century — the 1987 stock market crash and the Long-Term Capital Management (LTCM) hedge fund debacle 11 years later — let’s just say I was in the vicinity.”
With these solemn lines begins A Demon of Our Own Design – Markets, Hedge Funds and the Perils of Financial Innovation (Wiley, 2007), by Mr Richard Bookstaber.
“If Wall Street is the economy’s powerhouse, I was definitely one of the guys fiddling with the controls. My actions seemed insignificant at the time, and certainly the consequences were unintended…”
Arguing that market crises — like what the US has seen with the subprime mess — are an inevitable result of the market’s penchant for leverage and its abuse of derivatives and other innovative securities, the Demon created a stir on Wall Street.

No comments: