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Red-Blooded Risk: The Secret History of Wall Street by Aaron Brown

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Where Did the Money Come From?

How did a few nerdy quants incite this riot? Let's answer that question by asking another one. Who paid for all this growth? Did people suddenly start saving more, or taking money that had been other places and giving it to Wall Street? No and no. Global savings rates declined. People changed the types of financial institutions that held their money, such as from bank accounts to money market funds, or using mutual funds instead of whole life insurance for retirement planning, but they didn't contribute significantly more money in total. The reason it seemed that more money came to Wall Street is that most private retirement plans changed from defined-benefit plans where the employer manages the retirement account to defined-contribution plans where the employee does. But Wall Street held the funds under both systems.

It was quants who created the money to pay for the party. You're welcome. We did it by redefining the basis of value from cash or gold in the vault to risk equations. That basically doubled the amount of capital available for everyone. Unfortunately, we didn't do as good a job as we should have. That's the main reason we had the recent financial crisis. Sorry.

Economic activity is limited by the amount of capital available. The total value of all goods in the process of production or available for sale, plus the total value of all capital assets used for production, has to be financed by somebody. Institutions can be a conduit for this, ...

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