News & Analysis
Horror of the Quants
Quant trading: How mathematicians rule the markets ... Trading floors were once the preserve of adrenalin-fuelled dealers aggressively executing the orders of brokers who relied on research, experience and gut instinct to decide where best to invest. Long ago computers made dealers redundant, yet brokers and their ilk have remained the masters of the investment universe, free to buy and sell wherever they see fit. But the last bastion of the old order is now under threat. Investment decisions are no longer being made by financiers, but increasingly by PhD mathematicians and the immensely complex computer programs they devise. Fundamental research and intuition are being usurped by algorithmic formulae. Quant trading is taking over the world's financial capitals. – BBC
Dominant Social Theme: It's just inevitable. Stock markets were always fated to be one big casino. Nothing can be done but to mourn the passing of equities as a rational investment opportunity.
Free-Market Analysis: This article by the BBC's Richard Anderson ticks all the boxes of a certain kind of dominant social theme. One is supposed to be slightly melancholy at the pace of progress in the global stock market and the application of trading technology to what used to be investible instruments.
At the same time, one is NOT supposed to question the fundamental underlying assumption of an article like this – that it doesn't have to be like this. No it doesn't! In this article we will examine how the West's investment industry has become so distorted and why securities marketplaces are now run like casinos.
Yes, to be sure, there is something fundamentally wrong with the way that equity markets (and all markets) are evolving in the modern world. We're not trying to be fuddy-duddy about it, or to sound nostalgic. There are real problems with Western business, industry and investing and saying so does not mean that one wants to stand athwart progress yelling "stop."
It is simple. The problem with Western finance is money itself – or more specifically fiat money. Western finance, in the past 100 years, has become a captive of central banking hyper-stimulation – the process of printing money from nothing. Articles and commentary that makes this evolution sound normal are presenting a power elite meme in our opinion.
One is supposed to be mournful and even a little angry at modern finance. But one is NEVER supposed to imagine that there is an alternative to what today exists. And yet there is. Without central banks and unlimited paper money, the world would be a very different place. It would be calmer and less "innovative," for one thing. A good deal of what people insist is "civilization" would not exist or at least it would be mitigated. Is that so bad?
Examine the "progress" that has been made in the past century – the first full century of global fiat money controlled by central banks. Fiat money produced by central banks is a kind of monetary crack. It makes people feel good and business people overinvest as a result. The hyper-stimulation makes people act crazy, in fact. They expand their businesses far too rapidly and then lose everything when the eventual downturn comes.
Big corporations – entities that likely would not exist without overwhelming judicial support – have the wherewithal to handle the downturns. The top executives of these huge multinationals cut back in the down times. They lay people off, draw down bank lines and generally use resources that are not available to smaller entities.
If the worst happens, government officials themselves may step in to support the largest companies until a turnaround can be effected. In our opinion, the largest corporations are owned or at least controlled by the great central banking families that have traditionally operated out of the City of London. From what we can tell, there is substantial overlap between fiat-fueled commercial banking and the largest Anglosphere corporations. These elite families control Western governments, too.
There is also significant overlap between stock markets, central banks and corporate activities. The entire fabric of Western money power is held together by Money Power, the ability to print as much currency as is necessary to fuel "Western civilization."
But is Western civilization an unmitigated good? How are things today ... really? Millions can't find work or have to work two jobs to bring home a pittance. Health care, government or private, is often unavailable. Food is full of additives. Water is polluted. Schools are dysfunctional. Prisons are filled. And that's just the West! Try living on a dollar-a-day as hundreds of millions do in the developing world. Civilization?
The entire system, as we have often pointed out, is unsustainable. This is not merely a theoretical statement. Fiat money systems are NEVER sustainable. China has run through about ten of them, one way or another, in its thousands of years of history. What is less well known is how fiat currency distorts economies and turns real ones into false ones. Almost every part of Western civilization is undermined by money power: from music, to art, to science, to education, to health care and medicine, to business and investing.
We often write about the advances of science and technology within the context of Western culture. But from what we can see, the money power that is driving Western advances is equally adept at RETARDING advances. Health care, alternative energy technologies, small business investment opportunities – all have suffered mightily under the current reign.
Many advances have been stifled because of the obsessive need for control exhibited by Western elites. Meanwhile, money-from-nothing has fueled vast armies and spread the Anglosphere empire far and wide. Printing money from nothing is not just corrosive, it has significantly changed the face of modern society, and even the history of the world.
It is difficult to imagine our lives without so much monetary stimulation. Probably there would be far fewer wars. And healthier food. And far less drug abuse. Far fewer people in jail and much less poverty. Far fewer dictators and much less torture. Fewer taxes and significantly less inflation. Regulatory authorities and their dictates would not be in vogue. Lawyers would not be in such significant demand.
There would be fewer horrible depressions. And the fear-based promotions that the elites rely upon to push Western middle classes toward fuller global governance would not likely be available. Most importantly, the world would not be controlled, at least partially, by a tiny cabal of sociopathic central banking families.
But back to investing. Stock markets would be much different, too. Modern investing is a direct outcome of fiat money stimulation. Brokers, financial planners, accountants and actuaries are all in big demand because of the complexity created by fiat money.
This goes to the heart of the BBC article excerpted above. We are told that mathematicians and their trading programs are "increasingly taking the place of professional investors in financial centres across the world." But we are never told why.
We are left to imagine that this new trading paradigm is caused by the advent of new technology. But this is nonsense. Several thousand years ago, Chinese traders began to develop sophisticated futures markets. Technology had little to do with it.
Nor is it technology that is driving the ridiculous trading strategies of today's investment world. It is an enabler, but it is not the main driver. No, it is the unbounded amount of fiat money produced by central banks that has created the "mother of all bubbles" – the commercial banking and securities industry bubble.
Even now, we are deluged with mainstream articles about how "banks have to be recapitalized" – and how this is critical to the EU's survival, etc. There is no question about it – even though it is not true. The banking and securities industries constitute the biggest – unspoken – bubble in the world. And there is not a single bank or firm that the central bankers seem willing to let go bust these days.
Of course, we would tend to believe over time they WILL go bust, many of them. The Invisible Hand can only be held in abeyance so long. Markets eventually will come down to earth. The US$750 TRILLION in notional derivatives that now apparently exist will gradually deflate. We imagine it will take some sort of financial cataclysm to make this happen. We anticipate one.
In the meantime, we shall be urged to believe that what is going on in the investment markets globally is normal and natural – an evolution of technology and the increasing sophistication and intelligence of human beings generally. Here's some more from the article:
Firms are now employing gifted academic statisticians to track patterns or trends in trading behaviour and create formulae to predict future market movements. These formulae are then fed into powerful computers that buy and sell automatically according to triggers generated by the algorithms. These so-called quantitative trading programs underpin all quickfire trades - known as high-frequency trading (HFT) - in which stocks can be held for just a matter of seconds.
They are also used in more traditional trading, where the holding period can be days, weeks or months. Some are fully automated, but most require human oversight to ensure nothing goes too drastically wrong. Scott Patterson, a Wall Street Journal reporter and author of The Quants, uses the analogy of a plane on autopilot, which can fly itself but where a specially-trained pilot can step in at any moment.
These programs are immensely powerful, constantly monitoring market movements, trading patterns and news flows and are capable of changing strategies within fractions of a second. The most powerful even have artificial intelligence that can adapt strategies of their own accord. No-one can be sure quite how successful these quant programs are, but as Mr Patterson says: "They have been around long enough now to assume they are extremely profitable." Their proliferation would certainly suggest so.
One commentator says two of the biggest HFT firms, Tradebot and Getco, alone account for about 15%-20% of all equity trading in the US. As they are private companies, it is hard to know precisely how far their influence extends. Indeed, a recent government-backed study in the UK estimated that between a third and a half of all share trading in Europe, and more than two-thirds in the US, was HFT. "The vast majority of firms use quantitative trading," says Mr Patterson. "It drives almost everything that goes on on Wall Street." The impact and ramifications of quant trading are widespread, but ultimately unclear.
Actually, the impacts are not "unclear" at all. The idea of investing as an activity that funds worthwhile business is increasingly invalidated by what is occurring today. Markets are increasingly divorced from reasons they were created in the first place.
Also, the more hyperactive markets become due to fiat stimulation, the more "bigness" becomes the single most important quality within the context of modern investing. A company – GM for instance – can be entirely dysfunctional; it can make a wretched product and sell fewer units every year. But if the company is big enough, it can survive almost any setback. It simply will not be allowed to die.
Modern markets, especially stock markets, are not evolving toward a global casino simply as a result of some sort of non-analyzable series of trends. Technology is a driver, but absent fiat-money and central banking, stock markets and industry in general would look much different.
Conclusion: The complexities of globalism, governance and government are not inevitable. They are manmade and one simply repeats an elite meme if one accepts the idea that they are the outcome of "civilization." In fact, in a sense, what is occurring today is profoundly UNCIVILIZED – and on numerous levels. The devolution toward a global casino is but one small part of it.
Posted by jdwheeler42 on 09/28/11 11:58 PM
A fundamental weakness of quantitative trading programs is that no program can predict its own effects on the market. (There are mathematical proofs to that effect.) It takes a bigger and more sophisticated program to predict the effects of the simpler program, but as soon as that is used, the bigger program can not predict its own effects either.
Posted by Bischoff on 09/28/11 09:22 PM
From 1935 on, but actually from 1971 on, when Nixon suspended redemption of the USD as required by the Bretton Woods Agreement of 1944, the USD was entirely represented by the "irredeemable" FRN.
The Fed central banking system works by U.S. Representatives entering into the annual congressional budget "ear marks" for projects to be funded with federal money in their districts. Invariably, the congressional expenditures will be in excess of the tax revenues, thereby requiring the selling of debt by the U.S. Treasury.
The FED, which is the Board of Governors of the Federal Reserve, and specifically the FOMC (Federal Open Market Committee), is the entity which markets U.S. Treasuries.
Prime dealers of government bonds like Goldman/Sachs and Morgan/Stanley enter bids at the NY Fed "Open Market Window" to bid on an interest rate to acquire the bonds. These government bonds are then sold to overseas governments and individuals. The proceeds gfrom the sale are funneled through the FED to the Treasury to pay for the projects in the local congressional districts.
The large Fed banks like BofA, Wells, US Bank, Citi, Chase (J.P. Morgan), etc. were extended a certain amount of initial credit (this goes back to the Fed banks' gold inventory of 1933). Based on this credit authorization, these banks can make loans through their local branches to businesses and individuals in local economies.
Before a Fed bank can make additional loans through their branches, it has to present to the "Fed Agent" T-Bills in the amount of monies sofar received as a repayment on outstanding loans.
If you understand this part, you understand that the FED does not print money "out of thin air". Instead, the federal government spends the money received from the sale of Treasury debt on projects in the local congressional districts, and the large Fed banks then recycle this money based on reserve requirements which used to vary between 10% and 21%.
If you think this out, you will finds that contrary to the assertion that the Fed can multiply a deposit by five to nine over, all the Fed can do is to accommodate the production cycle which is either longer or shorter (in terms of weeks) depending on the local economy or the business cycle.
Up to this point, the whole central banking system works pretty much like banking under the Real Bills Doctrine. The problem with central banking comes in when the interest on the Treasury debt sold keeps compounding year over year. After several decades, the compounded interest due exceeds the original debt sold. At that point, the currency is "toast".
We were coming to that point under the Clinton administration, but Treas Secty Rubin found ways to muddle the awareness of it. Then came 9/11.
Then came interest rate swaps to as a way to further lull awareness of the inevitable collapse of the currency. Finally, the trouble with a Scottish and French bank in 2007, causing the collapse of Bear, Stearns ushered in the breakdown of the world currency system.
When Lehmann was let to go bankrupt, the interest rate swaps "blew up" and AIG which held most of them was insolvent.
The Government and the Fed searched for available money, but there were not enough "ear marks" in the hopper which could have possibly been enough to be the basis for Treasury paper with which to acquire the funds needed to keep the banking system afloat.
At that point, the Congress and the FED resorted to TARP (buying up every bad mortgage in existence) to create money. Now that all the defaulted mortgages have been monetized, and collected taxes are not enough to pay for the interest due, the FED resorts to Quantitative Easing. QE is another word for "printing money out of thin air".
Do you see a difference between creating TARP and QE currency and the currency created through congressional "ear marked" debt recycled through Fed bank loans... ???
Posted by John Danforth on 09/28/11 09:35 AM
Posted by dotti on 09/27/11 10:05 PM
Thanks for the reply. I was hoping you would give feedback.
Re: "I have to say that the Fed central banking system did not actually collapse until 2008. It was at that point that with TARP and the QEs the practice of "printing currency out of thin air" was started."
This is something I really have a hard time with. Prior to 2008 they did not purchase the Treasuries themselves? They just legitimately found purchasers for the debt? Or created the fiat that was then sold as debt by the Treasurery Dept?
In exchange for our imports from China, we were offering them our Treasuries so that we not only owed them for the price of the goods, but we also owed them cumulative interest?
Posted by Bischoff on 09/27/11 09:31 PM
Good presentation of your points. As regards the Fed central banking system, which has operated since 1935, and the function of Freddie and Fannie within the U.S. monetary system, I have to say that the Fed central banking system did not actually collapse until 2008. It was at that point that with TARP and the QEs the practice of "printing currency out of thin air" was started.
Freddie and Fannie were used to funnel USD/FRNs paid to China for their exports back into the USA by selling the Chinese population GSE mortgage debt instruments based on subprime mortgages.
Posted by Bischoff on 09/27/11 08:47 PM
As regards the "ghost-cities" in China, they are the mirror replication of a monetary system which created domestic currency based on "real estate" loans, just as Freddie and Fannie caused USD/FRN currency being created by buying up residential loans.
Now that workers or businesses can't pay the rent in the new buildings in China, these cities have become "ghost-cities", and the currency created against the loans on the buildings creates inflation.
It all hits the wall when there is no longer any USD/FRN currency sufficient in the hands of the U.S. consumer to keep commerce in China, and for that matter, commerce in the rest of the world afloat.
Then, we create a new redeemable currency, take powwer back from the federal government by repealing the 16th and 17th Amendment, and let the individual states set tax policy. Thereafter, let the rest of the world compete with America. I have no fear about who is going to win in that competition.
Posted by Bischoff on 09/27/11 08:33 PM
It is true enough that marginal residential borrowers and small business borrowers are the first victims of the mortgage peddling game when the economy slows down.
When it comes to commercial real properties, the bare land values are usually created and supported by taxpayer's money. While a commercial developer comes up with capital to built improvements and acquire the initial fee simple title, the value of the location is increased due to improvements financed by the taxpayers for such things as streets, highways, light rails, subways, not to count services paid for by taxpayers which strictly benefit the commercial property "owners". All this puts the commercial property owner in a preferential position which is gratefully acknowledged by these commercial property owners by furnishing local politicians with campaign contributions. The commercial property owners of huge office towers are seldom the victims of mortgage lenders.
Mega-condo developments on the other hand are another matter. Mortgages for condos are structured differently than mortgages for houses since the "fee simple" title to the bare land for a condo complex is held in common by the condo owners.
The "good" mortgages, represented by loans to commercial property owners are held by lenders. They are never sold off to Freddie or Fannie.
Off course, when the final depressionary collapse comes, even the banks will be down and out. Then the dictatorship that follows will decide what happens thereafter.
Posted by dotti on 09/27/11 07:14 PM
I've been reading the posts and thinking about your questions. I'm a bit embarrassed to give you my ideas, but everyone here contributes in whatever way they can. My contribution may be to get someone else to dismantle my ideas and in the process clear things up for both of us.
I think that Alan Greenspan's directive was to keep the economy going. His way of doing that--maybe the only way--was to continue the debt expansion. He was praised mightily as "The Maestro" because he went for so long without allowing a recession--I remember someone saying 17 years, and it may have been more than that.
In 1996, he made the infamous "irrational exuberance" remark, but refused to remove the punch bowl.
After the dotcom bubble burst, taking the stock market with it, something had to take up the slack. Central bankers can NEVER allow contraction. The politicians wanted to please their constituents. They also wanted to grease the palms of those who profitted from the machinations of Fannie Mae and Freddie Mac. Greenspan wanted to avoid a contraction.
They all got what they wanted by Congress "directing" Fannie Mae and Freddie Mac to make loans to people who were basically not credit worthy. Debt--any debt--goes through the system creating prosperity--either real or false.
I don't understand it very well--if at all--but when the Fed creates money out of thin air, they have to find a way to insert it into the real economy. All these people with blank checks, signed by the GSEs, entered the housing market. It was a wonderful rush of power and false prosperity. This was not "trickle down economics"--it was opening the floodgates and letting the mortgage money flow through the construction industry, through the stock market, through middle America. And the financial wizards made out the best of all. They took the mortgages that the GSEs accumulated and packaged them up and sold them to investors--many of whom were outside the USA and some of whom even thought that they were guaranteed by our government.
False prosperity has been created again and again by increasing debt more and more. When debt starts to decline--that turns into a deflationary spiral. That is what central bankers fear most. (Well, other than crowds with torches and pitchforks!)
All the fiat that is "printed" is represented as someone's debt. But for it to really work, that debt has to belong to someone. (Here's where I get really shakey!) If everyone in America decided to refuse to use credit for anything--house, cars, clothes, vacations--the moneychangers would have a terrible time trying to get the money into the economy. They would have to take up the slack with government spending. War, anyone?
Right now large corporations are holding trillions of dollars but are not willing to invest (spend) them. I have wondered how much of those trillions are offset by "cheap debt" on the other side of their balance sheet, but I'm not that sophisticated to figure it out.
With regard to the Chinese workers, as long as they have jobs and get a paycheck--even though it is small by our standards--they are not likely to revolt. The Chinese are implementing something like FDR did in the 1930s, but apparently not even as well as he did.
Molly, I've thrown out some ideas here. I hope I haven't confused you more. I'm really hoping that Ingo or someone else will decide to take pity on us and go through my post and patiently explain how I got it wrong and tell us how it really is.
You raise some excellent questions. I hope someone else will jump in with answers.
Posted by Molly56 on 09/27/11 05:41 PM
Or maybe (re: Bischoff) there are just that many beleaguered Chinese workers? At some point it all has to hit the wall...
Posted by steve on 09/27/11 05:05 PM
I am no expert on the stock market so correct me if I am wrong, but aren't these HFTs simply doing the same thing that used to be done by the brokers holding seats on a stock exchange. I think they called them market makers.
Their function was to always provide both a bid and ask price for a particular security keeping a market liquid. However they always had to keep some stock on hand, they would drive the price down to hit some stops and fill up their position. Then they would drive the price back up to where the sell orders were making their profits on the spread. This sounds a lot like what the HFTs are doing.
Posted by Molly56 on 09/27/11 05:01 PM
I guess it ought to be simple, but what gets me is why any developer or group of serious investors would be tricked into it decade after decade. I've been watching this pattern all my life. If it's worldwide, the size of the phenomenon is so enormous that it seems like it swamps the capacity of the pool of "bigger fools" to fall for the con. Maybe it takes 50 years to notice the pattern...
Posted by josejoe on 09/27/11 04:52 PM
i'm sure many of us grapple with much of the good information provided by a myriad of amazing contributors to this great site. i hope you all continue to chew on and try to digest much of this, it is really one of the most amazing sources of information that i have stumbled upon in my 72 years of rather naive existence as a citizen of this 'once great'-but surely 'to be again' country!!
Posted by rossbcan on 09/27/11 04:51 PM
"I'm sure I'm missing some pieces to the puzzle"
... some are tricked into investing capital (which they lose) in acquiring / building it, and, when it proves to be uneconomical, the vultures sweep in, acquiring it for "pennies on the dollar". What could be simpler?
Posted by Molly56 on 09/27/11 04:26 PM
I'm still grappling a bit with this...
I can easily see this scenario with the "liars' loans" and individual home owners being fleeced by mortages they could never have afforded, but what about the huge office towers and mega-condo developments? They're not exactly "bull-dozable". It sounds a bit like ultimate foreclosure would be part of the plan, here, but what is the advantage for a bank to hold on to a dead-in-the-water development that is hemoraging money when it can't be leveled? What about the "ghost cities" in China? I'm sure I'm missing some pieces to the puzzle...
Posted by rossbcan on 09/27/11 04:11 PM
... this is an example of systems (some composed of man obeying "rules", others machines, obeying "rules"), dedicated to the principle of "profit without productivity", wealth re-distribution without contribution.
Not gonna end well, but, it must and therefore will end, sooner than most can imagine. "Mathematics of Rule" proves that:
Click to view link
Posted by Bischoff on 09/27/11 02:57 PM
Interesting that you mention real estate. The real estate acquired by developers is improved with capital structures to raise the general value of undeveloped land adjoining.
The mortgage contract for any buyer includes the "cost" of acquiring the "fee simple" title for the bare land, as well as the "cost" of the capital improvement. As the "unnecessary" building continues, the value of the bare land goes up and the mortgages contain an ever greater portion for the "acqusition cost" of the bare land.
When finally the capital improvements no longer pay for themselves, the bare land values, i.e. the value of the "fee simple" title plunges. When the mortgage can no longer be serviced, the lender simply forecloses. The lender takes over the fee simple title and bulldozes down the capital improvement or rents it out to less than the optimum use for which the capital improvement was originally made.
It is the fee simple title in which the lender is interested. That's how it works. The lender can hold on to the fee simple title easily enough as the tax laws, particularly in California, favor the "owners" of unimproved land. Then, later when private capital investment improves economic activity again, the unimproved land is needed, and due to the higher demand for the use of the unimproved land, the lender realizes huge gains by selling the "fee simple" title.
What did the lender pay for the "fee simple" title... ??? Essentially nothing. It came with the foreclosure due to the defaulted mortgage. Who furnished the money for the initial mortgage... ???
It was Freddie Mac and Fannie Mae. Where did they get the money... ??? Of course, they got it thanks to legislation pushed by your congressional friends Chris Dodd and Barney Frank. Their legislation allowed Freddie and Fannie to acquire mortgages from lenders for the purpose of promoting home "ownership". Freddie and Fannie then combined these mortgages, and they sliced and diced them into Mortgage Bonds, and they marketed them as instruments issued by a "U.S. Government Sponsored" entity, leaving buyers to believe that the U.S. Government guarateed them.
Who were the buyers of these GSE Bonds? Many of them were average Chinese workers who earned US Dollars for producing items sold in the US market. If you don't know it, WalMart is the 8th largest Chinese export customer.
Where did the U.S. consumer get the money? They got it from the Congress and the Fed which operate the Federal Reserve central banking system by monetizing U.S. government debt. They sell the debt and funnel the proceeds to local economies according the "earmarks" entered into the annual budget by your U.S. Representative.
This money then pays consumer goods produced in China, while the rest goes to mortgage payments.
Then, the whole cycle repeats itself ... ... . I think you get the picture.
Posted by I<3Liberty on 09/27/11 02:49 PM
I've been visiting The Daily Bell for about two years now, and I am still amazed by the elves' insight and knowledge of history. Who knew the Chinese started futures contracts thousands of years ago? :-)
Can you please suggest a few books/websites for a 20-something male who doesn't trust a word uttered by the mainstream media? Ones that would help me deconstruct dominant social themes and memes? Any material the elves think is important to further knowledge? I'm currently half-way through The Creature from Jekyll Island and am enjoying it wholeheartedly.
Thanks for the great work DB!
Reply from The Daily Bell
Thanks. Obviously we would suggest High Alert.
See here, toward the bottom of the page for a description (in free gifts) ...
Click to view link
Posted by dotti on 09/27/11 02:17 PM
Very interesting. I never knew that about Lehman Bros. refusal to play ball with the Fed.
I have been wondering where the money will come from--2 trillion dollars, is it?--to fund the European bailout plan. I believe--I'm not sure--that all the contributing nations are running deficits--even Germany. Is it all to be "new money" and if so, what will be the "outlet" for it? Would it come from our Fed so as to offer cover to the European sovereigns?
Ingo, I thought you may know the answers to these questions.
Thanks for any light you can shed.
Posted by dotti on 09/27/11 02:12 PM
Thanks for the link.
However, I didn't find it funny.
Do you think it is ridiculous? I thought it was just plain honesty.
Now. Do I think that anyone will fare better with US Treasuries--or any dollar denominated asset--than with any other fiat alternative? Absolutely not.
So if that's what you think is funny--I can relate to that.
I was mostly amazed to see someone admitting that they were going to make lots of money when everyone else was getting clobbered. I'm not sure how his friends will react when he's rich from the same scam that left them destitute.
In any event, thanks for the link. Maybe someone else will find it very funny.
Posted by Bischoff on 09/27/11 02:05 PM
Long Term Capital Management (LTCM) and their Nobel Prize winner studded staff had the answers also. When it all went awry, thanks to Alan Greenspan's push to have the big banks and trading houses anti-up $200 Billion (Lehman Bros. refused... .big mistake... !!!), the system survived.
Of course, eventually it was the taxpayers who had to bail out the banks who would have failed due to the LTCM debacle. Lehman Bros. paid for their refusal to play ball with the Fed at the time by being pushed into insolvency in 2008.
If people don't understand it yet, it is time that they do. The expense of the failure of the ideas of the geniuses who run our banking system will always be charged to the taxpayers, unless the taxpayer puts down his foot. The sad part is that the average taxpayer acts like a sheep to be shorn, never to complain.
As a warning to the average taxpayer, anybody who peddles this same mathematical crap to determine the optimum future outcome, it simply wrong. Central control will never work. NEVER... . It is simply contrary to "Natural Law". The expense of the failure in trying will be born by the average person.
It is simply a fact that when a prediction is made the immediate effect is to change the predicted outcome. Predictions may appear to be corrrect in the shortrun, but a mere prediction alters the predicted outcome in the long run.
What's the long run... .??? Any time frame from a milliseconds to several decades.