Nassim Taleb on the Crisis

In Financials on April 4, 2009 at 23:54

If you want a realistic perspective on the current financial crisis I highly recommend you to watch “Mr. Black Swan”, one of the very few to have predicted the crash, trying to explain the source of failure.

  1. As interest always present in loans, money growth rate is increasing in certain time interval, one can conclude that growth rate is exponential, which partly explains why there were gaps between intervals that caused difficulties in money circulation, continuing in our days as well. Basically, it can be regarded as the cancer of social-economic structure. In the beginning of the loan period, growth rate is not significantly high, but the longer the maturity of the loan the higher interest debtor will have to carry.

    • what do you mean exactly because interest is primarily the cost of money and money growth rate is controlled by the Central Governments by injecting or withdrawing money from the economy. So what’s the point u r tryin to make?

  2. The point I’m trying to make is that in the presence of interests and technological innovations, a slight change in interest rates causes alteration of financial resources, buying cheaper and selling shorter bonds, profits can be made. Firm took highly leveraged position in pursuit of higher profits. thus huge leverage,and investing in unstable countries, massive investments in illiquid bonds, promoted the decline. It is not about contraction or injection but what the consequences it brings to the market.

  3. Well today’s financial system is rather complex and fragile so a minor ‘alteration’ in financial resources causes massive shifts of capital funds from one area to another causing the respective contraction. Hence, there should be a central mechanism that would monitor the fluctuations of derivative positions and set a limit on the degree of leverage to avoid systemic risk exposure and consequences like those today.

  4. The central mechanism for avoiding excessive leverage and systematic is interest rate basis causing vicious cycle of interest rate differences, which is in turn brings crisis over and over, may be there should be another concept of regulation mechanism

  5. I was referring to a new mechanism that will have direct control and could set an upper limit on leverage to avoid bubbles like the previous ones.

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