Streetwise Professor

July 16, 2012

There Are Some Who Call Him . . . Tim

Filed under: Commodities,Derivatives,Economics,Exchanges,Financial Crisis II,Regulation — The Professor @ 2:50 pm

I owe thanks to Tim Worstall (never to be confused with Timmy!) for his Forbes blog post on, and compliments of, my Blame it on Ben? piece from Saturday.

I also owe Tim props, for he recognized the dangers that low interest rates pose to the traditional broker model back when MF Global went bust.

One clarification.  I didn’t mean to suggest that low interest rates caused MF Global, or Peregrine, or the Whale, in the sense that low rates were a sufficient condition for these things to occur.  Low interest rates aren’t necessary either: some firms take risk or commit fraud when interest rates are high, obviously.

But risk taking (such as MF Global’s gambling for resurrection) and fraud (such as Peregrine’s) are more likely when firms are on, or over, the financial brink.  Low interest rates put these firms on the brink, and made the courses of action that Corzine and Wasserman chose more attractive and compelling than they would have been had they been making money the old fashioned way.  Put differently. low interest rates increase the odds of such conduct.

With that clarification made, just let me say thanks Tim, and keep up the good work.

Print Friendly, PDF & Email

1 Comment »

  1. I have to admit that it’s one of the things that really p**ses me off about financial reporting. The lack of knowledge all too many have about where money is actually made.

    Everything from Warren Buffett (sure, he’s a great investor, but he’s been investing the float of insurance companies for decades, not investing his own money. He used that to buy an insurance company to gain access to the float to invest) through to the ACA provisions on 80% of premiums being spent upon actual medical treatment. In that latter, in a normal interest rate environment, it would be entirely normal for an insurance company to be paying 90-100% on such care. For insurance companies, in competitive markets at least, live off the investment returns of the float, not some slice of the premiums.

    I just wish more people got it….

    Comment by Tim Worstall — July 17, 2012 @ 2:02 am

RSS feed for comments on this post. TrackBack URI

Leave a comment

Powered by WordPress