Video: Financial Re-Engineering: Andrew Lo, Merton, Holstrom, & Wang
About the Lecture (via MIT World)
Like a contemporary “whodunit” with a global crime scene, the financial meltdown has left behind countless victims, and lots of pointing fingers. The reasons for the collapse are debated by this group of estimable economists, some of whom worry that without really understanding what happened, we are in for a repeat episode.
Moderator William Wheaton starts the discussion by suggesting that the interconnected global system of financial markets may be inherently unmanageable and overly risky, due to its complexity. Andrew Lo sees both peril and promise in these markets. Securitization, the bundling and trading of debt assets, “effectively allows ordinary borrowers that typically had to go through banks to tap into the power of global capital markets.” But there are “unintended consequences: Technological innovations outstrip our ability to understand them.” Financial transactions in a world of 8 billion people can become too complex, leading to uncontrollable systemic risk and disaster, much the way small brushfires swiftly grow and consume millions of acres.