The Money Formula

CHAPTER 10Systemic Threat

“I was looking for an opportunity to use my skills and knowledge. This is an interesting firm.”

—Former Chairman of the Federal Reserve Ben Bernanke accepts a position as senior adviser to the $25 billion high-frequency trading firm Citadel in 2015.

“Sunlight is said to be the best of disinfectants; electric light the most efficient policeman.”

—Louis Brandeis, Other People's Money and How the Bankers Use It (1914)

Because of the bankers' insistence on treating complex finance as a university end-of-term exam in probability theory, many of the risks in the system are hidden. And when risks are hidden, one is lured into a false sense of security. More risk is taken so that when the inevitable happens, it is worse than it could have been. Eventually the probabilities break down, disastrous events become correlated, the cascade of dominoes is triggered, and we have systemic risk. A risk to the whole financial system. None of this would matter if the numbers were small relative to world economic output, but the numbers are huge. The infiltration of derivatives into society is like an inoperable metastasized cancer. Underneath many of the most innocent of human financial arrangements there's likely to be a complex structured financial product, with some banker taking his cut. And ultimately it's your money he's taking his cut from. And when a bank goes bust, the stock market collapses, and house prices tumble, it's your bank account, your shares, and ...