Saturday, October 11, 2008

Am I really that stupid?

Ignorance can be bliss. But probably not in the middle of the world's worst financial crisis since 1929. One of the features of the ongoing credit crunch that alarms me the most is the sheer complexity of the derivatives and other instruments traded on global markets. Whenever I try to get to grips with credit default swaps and suchlike, I always end up losing the plot somewhere along the line. There was a great idiot's guide in the FT this weekend, with a journalist using analogies to do with haystacks and managing the potential risks of fire. But I felt as thick as Farmer Barleymow as I searched for a tiny needle of understanding. Twenty years ago, I was fortunate enough to study at one of the top social science institutions in the world. But I might as well have spent three years stacking shelves at Asda for all the good it's doing me now.

Watching programmes like Newsnight and listening to Today on Radio 4, I gain a small degree of comfort from the fact that even the brightest brains of the media world seem a little bit uneasy when talking to traders, academics and authors who are specialists in this obscure field. The BBC is fortunate to have people such as Evan Davis (Oxford and Harvard) and Robert Peston (Oxford and the Free University of Brussels) who really do understand this stuff. But the generalists - who would be quite happy analysing Turkey's potential entry to the EU or discussing the influence of Arthur Miller on twentieth century American literature - start to struggle when confronted with physical settlements and cash settlements in a CDS contract.

I've come to the conclusion that you just need a particular type of brain to get to grips with it all. And short of a transplant, I'm never going to be an owner of one of those brains. You could put me in a classroom for weeks on end and I'd still come out none the wiser. I just hope that some of the people trading in these instruments have a better grasp of it all than me.

I'm certain there are people who left school at 16 or 18 and started commuting into the City from Billericay, who just have a knack of picking up stuff like par quotes, reference entities and z-spreads. The fact that they're reading The Sun on the train is all part of an elaborate cover.

1 comment:

  1. On the other hand, Phil, you could read "Fooled by Randomness" by Nassim Nicholas Taleb, and understand why for even those who do get it, it all usually ends up down the toilet anyway, because no-one understands risk properly.