Satyajit Das on What Went Wrong With Finance

Rob Johnson interviewed world renowned derivatives expert Satyajit Das on the evolution of modern finance. As Das recounts, he got in more or less on the ground floor as sophisticated new products and modeling techniques were introduced. Although Das is wry and understated in his criticisms, he is clearly skeptical of how the financial services industry has evolved.

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  1. Thomas Pratt

    Time to unpack your adjectives. Das is a world-renowned expert, though he may also be an expert of great renown.

    Sorry, the disappearing ed is this copy editor’s pet peeve. Happy holidays. Love the blog.

  2. Glen

    Nice to hear a sane voice in an industry and “science” full of psychos like Geithner, Dimon, and Blankfein.

    1. Susan the other

      Basically finance is very simple! It does 3 things: It can match borrowers and savers, handle and account for your money and offer a minimum level of risk avoidance. Pretty clear.

  3. F. Beard

    Mr. Das says banks lend money. That is misleading. Banks create money as they loan (“loans create deposits”). So much for banks being honest, they are not. Furthermore, the interest charged for those loans does not even exist in aggregate unless it is lent into existence too, leading to ever increasing private debt or if the interest comes from government deficit spending, ever increasing government debt (under the current system). So much for economic stability.

    I see little difference between banks and drug pushers. The more one uses their “product”, the more one has to use their product or crash.

    1. F. Beard

      Actually, the banks are worse than drug pushers since their counterfeit product spends as well as honest money. One might escape the presence of drug users but escape from the harm the bankers do is impossible and by design too.

      1. TM@dfgs.dfs

        You read like a bloody parrot.

        We get it: your religious beliefs don’t square with the financial industry. Can we please move on to something substantive now? Or, if not now, at least occasionally? For variety, if nothing else?

        1. Joe Rebholz

          F. Beard’s comments make more and more sense to me the more I read NC and referenced ideas. His comments seem to me to have merit irrespective of any religious basis.

          1. Ransome

            Interest is a relic. It serves no purpose. It is a lousy capital control. If you were going to invest in growth, why should you be charged a tax? The debt it creates an unnecessary drag on the economy. It is dawning on people that how money used is important to a political economy, not chasing unearned income which has become a “growth” industry where wealth constantly trickles up and pools.

        2. Birch

          Yes, TM, he does sound like a parrot – but a smart parrot that parrots the truth, for the most part, and interesting ideas for the rest of it. I think he keeps repeating the same line about the fraudulent banker counterfeiting cartel and compound interest ponzi scheme because it’s something we can’t hear enough of – and every time he repeats it there’s probably someone new scanning the comments section. It should be what MSM parrots, but they parrot bullshit because they’re bought idiots. It should be what we’re taught in school, but they’re also bought and paid for. At least the Beardo has something useful to say repeatedly.

          And if it was his religious beliefs that taught him these lessons about banksters and monopoly money, then I say thank god religion has done something moderately positive for once. It’s a rare thing; be grateful.

          And he does change. I mean, hell, he looks like a fuzzy cat now.

        3. F. Beard

          your religious beliefs don’t square with the financial industry. TM@dfgs.dfs

          Hah! I could oppose banking with anti-fascist beliefs alone. But destroying banking as we know it is not a task whose difficulty should be underestimated. Hence, I will use every tool I have.

        4. Leverage

          F.Beards is spot on a lot of things, and the more you understand finance the more you understand how wrong the current paradigm is.

          It’s a system which by design brings control and power to an elite which can screw the majority over and over by incompetence or by design; and creates instability. There are some things that could be done to shift to a better paradigm, steep by steep.

          Stop issuing public debt securities for a starter, eliminate CB’s and let the market set interest rates (Ed Harrison has some suggestions on how that could be done now on his blog) and pass on ‘lender of last resort’ function to the treasuries of each nation, forbid any sort of money monopoly law at the same time.

          With these things in place fiscal policies could be performed without any trouble (either cutting taxes or increasing spending, job guarantee programs or whatever), and politicians would have to restrict spending by technical parameters (inflation, %GDP, whatever) and normal parliamentary process (congress control). Let banks fail, punish stock holders and protect deposits.

          Next, enforce ‘fair world trade’, controlling surpluses and deficits between nations. Capital flows controls and restrictions on how the international banks can operate (restrictions on where or how they can move capital between territories), kill the shadow banking system and re-hypothecation and extreme leverage. Liberalize completely the forex market, stop currency pegging.

          Then we can start to solve real problems and not fictitious-made problems. Yes, we have a loooong way to go, realpolitik and the sport of screwing the majority by the elites.

  4. Susan the other

    When Das said that Greenspan underwrote bank losses until the debt-derivatives bubble became too big, i.e. everyone knew it was a debt bubble and stopped buying new debt, and that it was a Minsky moment and that now the mess is so vast that the Fed no longer has the capacity to “stabilize the system” I couldn’t help thinking that he himself was saying TINA. My unsophisticated observation is that Bernanke has stabilized the system both here and probably in the EU. It is just that we don’t know where to go from here. The debt levels are totally absurd and we are politically at a loss.

    1. VietnamVet

      I am afraid you are correct. The technocrats are scared of the derivative payouts that would be triggered by any kind of debt jubilee, so they push austerity and kick the can down the road hoping for better outcome tomorrow. The bankers and the oligarchs are simply unwilling to take any haircut at all; screw the rest of the world. Western Politicians are bought and unable to propose any solutions that would work.

      Bank nationalization, debt forgiveness and an end to derivative trading is required. This means economic malaise for the rest of my life or until the Great Depression II strikes and what should have been done in 2009 finally takes place.

      1. different clue

        What perfectly legal actions could we take in the private econosphere which would force the issue if enough millions of people did the same things?

        “Move your money”, pay domestic repairfolk to fix the things we have rather than pay Free Traderite Corporations to pay foreign semi-slaves a pittance to make new things? Those with yards turning their yards into gardens to grow as much food as possible and use the money thereby freed up to buy sole-proprietor grassfed beef for a high price instead of Corporate ShitBeef from Corporate Feedlots at a low price? Things like that?

        1. Joe Rebholz

          Better yet, don’t eat meat. It’s better for your health, it’s good for the environment, it’s more efficient to eat the plants than feed plants to animals and then eat the animals, it’s cheaper, it’s less suffering for the animals, and it screws corporate farming.

          1. different clue

            (I will try replying again in a different form to see if it gets through).
            I would approach the eat/don’t eat meat question with more nuanced subtlety. Notice that I said home gardening might free up the money to buy sole-proprietor/family farmed
            range-and-pasture fed shinolameat specifically , as aGAINST petromega corporate feedlotted shitmeat. Every bit of high-priced handmade meat bought from a real farming-family family farm is money going to keeping that land in citizen farmer hands and thereby out of corporate land monopolist hands. Then too, land in mediocrely-managed rangeland/pasture is less subject to erosion than land under okay-managed annual rowcrops. And land under truly-expertly managed range-pasture animal-systems is actually gaining topsoil-in-place and is actively sucking carbon down out of the air and packing it into the soil. Here is a small family farm which is becoming a cultural flagship/icon of the non-corporate non-feedlotted approach to raising animals to be killed and eaten.

  5. Kelly

    What I got out is how Das indicated that it was all BS. They didnt really know what they were doing but if they showed a nice chart it convinced the senior management and/or client that they did know. He was just lucky because the margins were large enough to cover his mistakes. Not today, so he’s writing books.

    Gotta know when to hold’em. Gotta know when to fold’em
    Know when to walk away. Know when to run.

    1. Hugh

      “The didn’t know what they were doing” line is a con because it allows for good faith on the part of the actors. They were just ignorant, incompetent, or mistaken. What it covers over is the criminality of those involved. As I wrote here yesterday, during this time we had the biggest frauds in history going on. Cons on cons on cons. Yet in this case, although it had the same effect of separating the marks from their money, and indeed magnified that effect, it was just people in over their heads, not knowing what they were doing. This is my perennial criticism of Das. He was part of a criminal enterprise. Once you look at it from this perspective, what happened becomes easy to understand and predictable. More than this, it becomes apparent why, even after the meltdown showed how destructive they are, the industry continues to defend and sell these instruments. But instead we are invited to believe the story that an industry filled with the best and most brilliant mathematicians money could buy and yet somehow they all missed, and continue to miss, the fatal flaws in these products that even simple arithmetic would reveal. It has become a fixture of our age that lies, even obvious ones, repeated often enough will be treated more seriously than the truth. So it is that we can see the victims of great crimes in their tens of millions, but no criminals, so we are told, who committed them.

      1. Elizabeth Cook

        Righteous and true. No more excuses for criminals on Wall Street and in the international banking cartel. Support the occupy movement. Many folks intuitively understand that the system is gamed and their role to play is sucker.

    2. Knut

      Speaking as a professional economic historian, I couldn’t be happier with his remarks on what I have been doing for a living for the past four decades. It’s a lot harder than it looks.

    3. Typing Monkey

      No, it’s not “all BS” (nor did he say that it was!)

      He’s making the point that the models don’t perfectly reflect reality (as any good engineer will tell you without first costing you a few trillion dollars). As people start relying more and more on the outcomes of those mathematical models and stupidly believing them without understanding the assumptions and underpinning, they become more aggressive in the pricing in order to gain market share (and bonus money, which is stupidly paid out based on very game-able metrics).

      Eventually, that pricing no longer reflects the risk, and eventually when everything blows up (“black swan” if you prefer the now-common misnomer), the risk takers go broke. If those risk takers (or, more accurately, their employers) are big enough, they crash the system in the process.

      The key point is this: DON’T MISTAKE YOUR MODELS FOR REALITY! For some unfathomable reason, people have to relearn this lesson over and over and over again in almost every field. Numbers are the output of thought–they can never replace thought.

      1. different clue

        “Money” is only a model of wealth. So don’t mistake “money” for wealth. That could be a very important case of not mistaking models for reality.

        If you were shot into space, would you rather be wearing a million dollar space suit? Or would you rather be wearing your underwear and holding a bag with a million dollars in it? Or which would you rather go scuba diving with? Scuba tanks full of compressed air? Or scuba tanks full of gold coins?

        Money is not wealth. Those who know the difference very busily manipulate those who do not know the difference.

  6. Eric L. Prentis

    $707 trillion dollars in derivatives, daisy chained around the world. Tick! Tick!. Derivatives have first call on assets in bankruptcy. The bankers squeeze out more money from the ECB and the Fed to purchase more bonds, which will be in the back of the payout line once bankruptcy occurs. After the financial collapse, taxpayers are fleeced yet again, because these bonds will not pay off. Banksters will move to their offshore islands, even richer than before, all the while laughing at those so foolish to believe in “free market fundamentalism.”

      1. different clue

        No . . . so why didn’t a reply I just wrote in get printed? Does a certain length prevent posting? Does a certain threshhold number of offered-links prevent posting?

        1. David

          “Too many” links (in my experience maybe 5 or 6) does put a post into moderation, which then has to wait for Yves to review it and/or white-list you.

          1. different clue

            My experiments make it look like anything over one link at a time gets the comment excluded. So I broke my reply about meat and so forth further upthread into three sub-separate comment-components with one link apiece.

  7. vivek

    Great video but is Finance really just matching borrowers and lenders and hedging risk?
    Yes, from the point of view of the models but no in real life.
    For long periods, Finance was associated with
    1) austerity, penny pinching, an anal retentive attention to detail- the Banker ate his tomato and lettuce sandwich and looked askance at the industrialist, or the aristocrat, who ate caviar and drank champagne. That changed in the Eighties, but, maybe that’s just a blip, and historically, the secular trend towards ascetic, anal retentive, penny pinching and due dilgence may continue after this ‘blip’.
    2) instilling a rational accounting and decision making ethos such that efficiency increased and conflict resolution was eased leading to higher growth, less uncertainty, a fairer society etc. In a feudal country, people with power may block development for purely thymotic or religious reasons. Finance has been good as a driver towards Globalization. Back in the Eighties it was still seen as an Upper Class White Man’s club. That image has changed and that is by itself a good thing.
    3)a demonstration effect- providing a model of trust, conflict resolution, honouring contracts, etc- as well as of senior Financiers setting an example of philanthropy,public service etc. Again the excesses of the last couple of decades may represent not the secular trend but something else viz a change in how the drama of the divorce between ownership and control is being played out because who owns industry has changed. Also there has been a big demographic shift which the actuarial industry doesn’t seem to have taken on board- viz. we are living longer and expect to have really quite fancy life styles for at least twenty years post retirement, not to mention very expensive medical care for perhaps another twenty years before death mercifully supervenes. This is a story about how expectations have to adjust to reality- historically the only way that can happen is by a lot of people getting a truly shitty deal for an unconscionable length of time.

    Das’s point about how the Bonus system was gamed and how that gaming itself became the fitness landscape for the industry, could with equal validity be made about many other Service industries- Health, Education, Politics and so on.

    Again, superb video.

  8. LAS

    One can see from the video why Das was a successful insider for so long: he’s very agreeable. Every client of his probably felt well supported, reinforced. Whatever attitude they chose, he’d slip the proper chair under their rump.

    His affect did not always make sense, as – for example – when he spoke about the millions of people around the world negatively impacted by commodity price fluctuations, as if the consideration were a cheerful thought because it would confirm predictions.

    While we need to understand the perspectives of industry insiders, I think we should be a little more critical, too.

  9. Swaggie

    As always, a lucid and entertaining interview. So is there a conspiracy or is it all a bunch of people who don’t know what they are doing hmmm ?

    I think a lot of the answer lies in how us humans work. At the micro level, lots people take advantage if they can. At the macro level people take advantage if they can.

    Sort of like a fractal pattern, repeating itself up and down scale. Just recently at work, the staff were not putting the right cash into the tin for the social club chocolates and drinks. So I said, put a picture of something there which has eyes which follow you round the room. So they pasted a picture of a mean old cat onto the cupboard and problem solved, no more missing money.

    The problem with the world financial system is that there are no eyes that follow these guys around the room. They’ve bought the eyes and shut them. Hello Mr Geithner and all the friends of GS in govt jobs.

    Just like the troll on the internet etc, when there are no rules and no supervision, the basest human instincts can run riot.

    So the financial industry is now run by and for the financial industry and it appears that there is no longer anyone large enough to stop them. They are out of control, literally.

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