Wall Street Insider to Volker: Blame bad people, not bad math, for economic ruin
byFeb 26th 2009 3:30PM
As the former U.S. Federal Reserve chairman and a key member of President Obama's economic advisory team, what Paul Volker says about Wall Street matters.
So how did so many financial giants lose so much money, so fast? And why are so many Americans now losing their jobs, their homes and their life savings? Forget shifty deals and crooked brokers: Volker says the real villain is faulty math.
In a speech in Toronto earlier this month, Volker put the blame for the crisis squarely on mathematical models used by economists and other market watchers to gauge the state of the nation's financial system. Get these models right, he says, and the economy is in good hands. That's also the gist of a recent article by Wired.
For Janet Tavakoli, a leading financial market consultant, that's just plain wrong. In her latest column on wowowow.com, Tavakoli takes Volker to task for relying on mathematical laws to determine the vagaries of financial markets driven by living, breathing human beings. Rather than seeking formulas to better capture "outliers" -- unexpected market events, or so-called black swans, that trip up conventional analysis -- regulators should be after the "outright liars" that cheated investors out of billions, Tavakoli says:
"The global meltdown was not caused by an unfortunate mistake; it was caused by malicious mischief," she says. "Wall Street knew about predatory lending, easy money, risky loans, over-leveraged homeowners, misleading loan documents, failed business models, over-leveraged hedge-fund clients, shoddy ratings on Wall Street deals and more. Any finance professional worth their salt knew the data being fed the models in no way represented the risk."
Tavakoli, who describes the process as a classic case of garbage in/garbage out, says owing up to this mistake is crucial, since perpetuating the myth of faulty models allows the true culprits to escape unpunished and imprudent and pernicious financial practices to continue unchecked.
"There shouldn't be a model at the end of this whodunit," she says. "There should be a long list of Wall Street bankers and perhaps a few congressmen and regulators."
Deborah Barrow is the Editor-in-Chief of wowOwow.