Re: General Theory seminar

["ÁÎ×Ó¹â HenryC.K.Liu ¹ù¤l¥ú" <hliu@xxxxxxxxxxxxxx>]

Ronald Calitri wrote:

>     I hope you understand that your commentary style includes many
> subordinate points drawn from the finance literature, upon whose authority
> you build.  This usually gets you over the face of the sticky parts. This
> time though, I wonder if you would mind explaining the following sentence.
> The first part is fairly clear; but why is it more serious? What is the
> corrective? And, could you please explain the "growth" part after ", and"?
>
> >Yet in fact the same degree of risks remains, because individual
> > risks are only passed on to systemic risks, but the nature of the risk has
> > become more serious, and added economic value comes mainly from accounting
> > creativity by turning risk into growth.
>

The reasons I call systemic more serious as compared to individualized risks
are:  1) systemic risk does not allow the purging of individual losers to keep
the system healthy, 2) there is no, or almost no warning of pending collapse and
3) systemic risk encourages built-in moral harzard.
When risk is fully socialized, caution or fear, which is the natural protection
from risk, evaporates.  A fully insured person lives more recklessly.
Over-insurance leads to arson.

Growth always entails a certain amount of risk, but now systemicly, an
unprecedented portion of growth is driven by risk.  Thus growth no longer just
includes a tolerance for risk, but it incorporates a high risk requirement.
Risk management is no longer for protection, but for maximising profit -
growth.  The evidence in very visible in th NASDAQ.

BTW, I personally do not like the systemic risk model but I, like millions of
others, have no choice.  The saying that "if you can't stand the heat, get out
of the kitchen" has gone haywire.  There is no need for the kitchen to require
asbesto heating suits to enter.

> In the end, I think you are in agreement with the (false(+/-))
> micro-structural suggestion; but since it is something the spinmeisters say is
> OK, will settle for a warning about chaotic behavior and a moral sermon.
>

I don't disagree with your views.  I only try to point out there are other
powerful factors at play.  One can probably build a workable investment model on
your true/false agents, betting on safe companies.  It will not yield the
highest absolute returns, but probably a decent risk adjusted return.  The
trouble is that it would be only of academic interest because nowadays, it is
not easy to find risk aversed investors.  So the funds that will use your model
would be quite small.  Risk has become sexy.


Henry