Fraud and Finance

by Shihang

Well this is more than a little bit clever. In one of the most quoted pieces in the blogosphere these days, Waldman demonstrates that the financial system is designed to move us towards “a high-investment dynamic rather than a low-investment stasis”.

I realised that this is a bit similar to what I was thinking a little while back about citizen banking, namely that without banks as the intermediary, there will be a lack of investors in high risk projects and a glut of investors in low risk markets, or more fundamentally, credit with different risk levels are different products!

But Waldman’s analysis really gets clever when he argues that rational investors will realise that there are only so many safe, sure-win products (and I think the pipeline for CDOs shows that sometimes these financial products have to be conjured up). What I find surprising about his conclusion is that the system must rely on deception to convince people that all this stuff the banks are dabbling in is relatively harmless.

I would think that he is right to argue that banks have to lie a little: after all, we accept that a high investment equilibrium is most beneficial, we agree that most people, especially those without a good understanding of how capital works tend to want their money to be as safe as possible, and we also accept that there are just not that many places to park your cash. An important thought to have the next time we try to fix finance.