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Bo Peng
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I run a fund based on automated trading and technical analysis. But my favorite pastime is thinking and talking about political economy. I guess I'm George Soros. Writing helps clarifying my thinking. All opinion expressed here is mine, wholly mine, nobody's but mine. And all trading/investment... More
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  • Failability of Smarts, And Financial Regulation 0 comments
    Jun 16, 2010 1:54 AM

    American pop culture is full of stories about evil geniuses and mad scientists. It reflects a deeply rooted insecurity and populist suspicion against elites. I find this fascinating because it's much more pronounced in the US than the rest of the world, not much in Europe as far as I know and certainly not in Asia.

    And it's healthy. Raw capability is like a nuclear weapon. Capable people have higher capacity to do both good and bad. This is common sense. What's not often discussed is that smart people are just prone to do obviously stupid/crazy things as average Joe (if not more so) and, when they do, it tends to cause more harm and harder to admit failure.

    IQ can be roughly defined as the ability to see pattern out of incomplete and otherwise seemingly disparate information. It is ambiguous -- just one measure of basic human capabilities -- as it is precise, in that a difference of 5 IQ points is simply insurmountable. With an IQ of 156, I was once greatly humbled when someone with IQ 160+ explained to me a solution to a puzzle and I still could not get it. A smarter person can see patterns and connections that you not only cannot see yourself, but also cannot understand even if it's laid out and explained to you. Now this is really depressing, as it is awe-inspiring.

    Problem in real world is that reality is so complex and information so incomplete that the patterns geniuses see may often be every bit as wrong as average Joe. While Joe laughs at Genius' conclusion in his ignorance, though correctly, Genius is quite confident because she sees it with such clarity -- how could it possibly be wrong?

    So the geniuses at LTCM (and I use this word without any sarcasm), when faced with market dislocation, did the only logical thing to do: double down. And the Clinton-Greenspan-Rubin-Summers Axis of Genius (they are all geniuses by most standards) saw that financial deregulation was the only logical thing to do. It has to work. It has worked. It has no reason not to work. (Note to self: get out of the shorts if this sucker's rally continues.)

    But what's not necessary is the popular tendency to demonize the smarts. As I argued in an earlier article, the game became destructive once deregulation started. All the Wall Street executives, traders, and janitors could, at least in theory, be well within the legal and ethical boundaries and we would end up more or less in the same hole we're in now. The society gave Wall Street its various advantages and took away the regulatory constraints that had worked reasonably well since the Great Depression. What do you expect? As a commentor put it, hate the game, not the players. And take your share of responsibility, too -- where were you when the deregulation started and continued, busy counting profits in internet stocks and house flipping?

    When Greenspan, at the ripe age of 82, admitted to Congress in 10/2008 that he had been wrong about self-correcting power of free markets, I could not find in my cynical heart the need to doubt his sincerity. By Occam's Razor, it requires a lot fewer assumptions to say that he was simply wrong than to say he was evil.

    And we do need the smartest, most hard working people humanity has to offer to be our banksters. We just need to put them on a leash, which we have failed to do so far. This is worth a lot of cynicism. And the joke is on us.

    Disclosure: None

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