crisis

11 Things Worth Knowing About The Financial Crisis

Joe, from 2parse shares the 11 Things He Learned While Trying to Figure Out the Financial Crisis.

A very, very interesting read and I highly suggest that you take a look at it. My favourite ones include:

2. The Martingale. Wall Street fell for a 400 year old sucker bet, the martingale. You always win in this betting game – as long as you can cover your losses. But once your losses are too great, this “double-or-nothing” game leads to catastrophe. The formula to understand this is simplified as:

(0.99) x ($100) + (0.01) x (catastrophic outcome) = 0

In other words, playing for $100, there is a 99% chance that you will make at least $100 dollars playing this game. But there is a 1% chance of a catastrophic outcome. If you never stop betting, the catastrophic outcome is inevitable.

A very succint, but not quite accurate way of looking at things. It’s much more delicately laid out in the Slate article he links to but a very interesting fact indeed.

7. The Shadow Banking System. Existing alongside the regulated banking system is what is called a shadow financial system – including money market accounts, hedge funds, investment banks, and countless other financial creatures. This system was invented in order to avoid government regulation of various sorts. This crisis has been mainly but certainly not exclusively in this shadow system – and those regulated banks have been the big winners in all of this (aside from Goldman Sachs.) Even the remaining independent investment banks – Goldman Sachs and Morgan Stanley have chosen to be subject to greater regulation. Nouri Roubini speaking at the Council on Foreign Relations explained that the shadow banking system is on the verge of collapse because of their lack of transparency and because they took risks they would not have been able to if they were subject to regulation.

As usual, we have those trying to circumvent the rules for peoples happiness and safety screwing it all up for everyone.

And don’t miss his #11: Damn it feels good to be a banksta!