Friday, February 15, 2008

Group think and low returns

Yves Smith and the Epicurean Dealmaker: point the finger at money managers and suggest that it was their greed and "group think" that cause the current financial mess. The desperation for higher returns brings us back to the low rates on offer. Not just the result of Greenspan at the short end but also the Chinese monetary authority and others further down the curve.

"Yves Smith does get something right. There was group think leading up to the current crisis, all right, just not among the investment bankers:
Kay's observation has some merit, but I think it applies more to the money managers and other investors who bought dubious paper more than it does to the perps.2 They were surrounded by peers who were buying complicated new products that offered higher returns; being skeptical suggested one was a Luddite, or worse, not up to snuff analytically (not that anyone did much analysis, as we have now learned).
It was not for the investment bankers to tell their customers that they were wrong to want higher return and lower risk, even if the two could not be separated. It was their job to try and provide those things, because that's what the customers paid them for."

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