Tweet
Magnetar is a Chicago based Hedge Fund that Yves Smith highlighted as an abject example of laissez-faire finance as doomsday machine.
She deals with it in Chapter 9 of Econned - a great book by the way - and I've linked a shorthand version of the story below. But I'm going to try and highlight why I think it's a significant story.
The basic charge is that Magnetar came up with a strategy to profit from the housing collapse that actually magnified it's severity. Think about that. It's not a Chanos or Einhorn betting against a shoddy company. It would be more like a shortseller creating a shoddy company, placing the resulting investments - at arms-length, no doubt - with unwitting stooges and then betting against it. On some level it's entrapment basically.
But I don't think it's significant foremost on a moral level. It's important to me because a) of the apparent scale of Magnetar's effect on the market (Smith estimates it as contributing roughly 35 to 60 % of demand for subprime CDOs in I think the 2006-7 period, a period when everyone was scratching their heads as to what was levitating this market.) combined with the fact that b) it shows in a concrete way that finance can completely subvert the benefits of a "free market."
To my mind the argument for free markets rests on the idea that price discovery is a form of communication between free individuals. Any distortion of this by trying to game outcomes for some perceived greater good (home ownership anyone?) messes with the signals and entrains further gaming of the system and progressively worse results.
I think this is the short-hand version that most of us imbibed somewhere along the line and it still has great resonance. Call it Hayek on a cue-card. (this I think underpins much of the defensive reaction to attacks on "banksters" that pop up here.)
I think much of the public's general cluelessness as to the causes of the GFC - and therefore, as to what has happened to us - can be put down to the fact that it's hard to come up with a similar cartoon version of finance run-amok that has the same simplifying power as the sketch above.
Well maybe this it.
http://www.businessinsider.com/the-m...publica-2010-4
http://www.onenewspage.com/news/Busi...tic-Report.htm
http://www.propublica.org/feature/th...g-bubble-going
She deals with it in Chapter 9 of Econned - a great book by the way - and I've linked a shorthand version of the story below. But I'm going to try and highlight why I think it's a significant story.
The basic charge is that Magnetar came up with a strategy to profit from the housing collapse that actually magnified it's severity. Think about that. It's not a Chanos or Einhorn betting against a shoddy company. It would be more like a shortseller creating a shoddy company, placing the resulting investments - at arms-length, no doubt - with unwitting stooges and then betting against it. On some level it's entrapment basically.
But I don't think it's significant foremost on a moral level. It's important to me because a) of the apparent scale of Magnetar's effect on the market (Smith estimates it as contributing roughly 35 to 60 % of demand for subprime CDOs in I think the 2006-7 period, a period when everyone was scratching their heads as to what was levitating this market.) combined with the fact that b) it shows in a concrete way that finance can completely subvert the benefits of a "free market."
To my mind the argument for free markets rests on the idea that price discovery is a form of communication between free individuals. Any distortion of this by trying to game outcomes for some perceived greater good (home ownership anyone?) messes with the signals and entrains further gaming of the system and progressively worse results.
I think this is the short-hand version that most of us imbibed somewhere along the line and it still has great resonance. Call it Hayek on a cue-card. (this I think underpins much of the defensive reaction to attacks on "banksters" that pop up here.)
I think much of the public's general cluelessness as to the causes of the GFC - and therefore, as to what has happened to us - can be put down to the fact that it's hard to come up with a similar cartoon version of finance run-amok that has the same simplifying power as the sketch above.
Well maybe this it.
http://www.businessinsider.com/the-m...publica-2010-4
http://www.onenewspage.com/news/Busi...tic-Report.htm
http://www.propublica.org/feature/th...g-bubble-going
Comment