The continued downward trend in the financial market is an issue of concern to many world economists and scholars. Richard Bookstaber in his book titled: A demon of our own design” has raised an alarm in his evaluation of why crisis in the financial market is having such a drastic trend. His has contributed on this topic since he was the risk manager at Wall Street. He then headed some of the leading firms like Morgan Stanley and Citigroup. Richard Bookstaber was also a member of the world largest hedge funds.
Bookstaber sees a risky world than we can ever think of. The same things done in order to make the world safer have actually backfired. The efforts to make markets safer have not yielded the many needed solutions. This has become even more dangerous to us. The crashing of the Citigroup in 1987 and the closing of Solomon ARB unit further deepened the looses gained. The demise of Long Term Capital Management also contributed to this crisis. Richard Bookstaber explains his own activities in a bid to save the crash.
A Demon of Our Own Design
A Demon of Our Own Design has been brought up in an attempt to manage the market risk and its repercussions. Not featuring in the market crisis management is the examination on what Wall Street should do on the pitfalls of all the latest investment mechanisms. The effect of combining derivative, hedge funds and leverage is not indicated in this book. Despite the fact that Bookstaber has spent most of his life designing derivatives, he could not manage the financial market risk, yet this is his major professional undertakings. What must have happened? This is the challenging question in our minds when such a situation arises on financial risk management.
The key assumption of this article on market crisis is that it talks about risk management which is very relevant to the given market conditions. This also helps in projecting the liquidity crisis in the market. We have actually managed to create a demon for ourselves through the clever innovations on structured finance. This is through the innovations of derivatives, swaps on credit default and derivative loans. Richard Bookstaber outlines the most painful irony on the market risk management. The crisis had continued to increase abundantly. The dangers were experienced in the market yet the technological innovations could not help to signal any danger. Through the government regulation and oversight role, there is still more danger to the financial market risk management process. According to the financial times, Richard Bookstaber’s book has covered risk management which is a relevant aspect to capital markets and liquidity conditions.
More economic crashes and catastrophic events are said to occur in the W. Huge amounts of funds are lost. For instance, the first crisis was faced in 1987. This crisis caused financial collapse and drove down the industrial average of Dow Jones by about 20 %. This destroyed more market wealth than it was generated by world economies (Bookstaber, 2007). It is worse that the economic crisis of today does not come about as a result of economic instability and the way the financial markets are designed themselves.
In his book, Richard portrays a picture of the financial situation at Wall Street. The world is ever moving towards a financial disaster. Richard Bookstaber gives an insider perspective on the management decisions that had been made by the worlds’ powerful financial figures from Sandy Weill, Warren Buffett and John Meriwethers. This is in addition to his contribution on market calamities. Richard Bookstaber had designed complex options that combined with derivatives on the world market globalization to cause chaos. The continuous increase in the transaction speed contributes to the slipping of the market out of control. He explains the reasons why most efforts from various institutions in creating a safeguard to manage risks came up. Such efforts help in the off market regulations. Technological innovations have resulted in multiplying the instability.
The Demon of Our Own making gives a glimpse of the risk management with technical descriptions of what happens when pipes bust and boilers explode. The interactive detail in this book brings out the two aspects of its views. The first aspect is whether one may find it more fascinating when there is market risk. In helping to manage the inner risk attribute, Richard Bookstaber notes that it is encouraging for all trading desks to take whack most often. The profits can then be given back when there is a failure or if something wrong happens.
Most investment houses are also very active and can last for many years. For instance Wall Street is gigantic and steadily moving economic base with substantial returns. In relation to this, the risk managers in agreement with Bookstaber’s goal are busy creating safe management decisions in a bid to save their companies. His postulation is for readers to understand that financial markets are mostly unstable. The fact that the market is very complex as the book reflects is very risky for the economic stability. The counter example that the author gives is the US Postal Service (USPS). The USPS had numerous potential failure and many moving parts with no catastrophic linkage involved. There is also need for risk management instruments that can be very useful in the management process. Continued support for projects and future successes highly depends on involvement of community financing. This may help to reduce any risk capable of draining companies.
In comparing the economic market crisis to nuclear reactor, financial crisis can be initiated just by a small system hitch in risk management. For example, the nuclear reactor is always tightly coupled and any point of failure lead to a knock in the chain reaction. The minute anything goes wrong, the entire mechanism in the reactor will roll out onto a disastrous path. This is how risk management is very critical (Bookstaber, 2007). In this regard, the market is not being seen as a postal service but like a nuclear reactor. In the process of aggressive leverage, there are very complex methodologies and interlocking segments which are leading to a significant financial catastrophe. The mistakes made by the financial evaluators and the risk managers are many times blamed for major market shake up in the financial system. This may be very difficult to correct in the long term.
The validity of these assumptions is true to the best of my knowledge. This is because from an International Monetary Fund (IMF), market risk is one which occurs due to the variation of the market price. Some of the examples of market risks include equity risk and risk due to the interest rate (IMF, 2009). In addition, there is also currency and commodity risk. These variations on the prices have an impact on the risk management process.
Integration of Other Sources
Robert Shiller, the author of Subprime Solution: how global financial crisis happened blames subprime crisis on irrational exuberance that drove two most bubbles in the US economy. This affected the market stock in 1990s and even housing between 2000 and 2007(Shiller, 2008).The market economic bubbles led to unsafe overextension of credit which now results in over closures. He calls for better restructuring on the institutional financial system that will be able to create good conditions for prosperity. This will also help the interconnected economy of the world. This supportive book on the market crisis helps in outlining the seriousness of the economic crunch.
It is observed that finance has its own principle. Successful model can be adapted to progressively avert risky financial crunch. Wall Street has been likened to an evolving animal in its struggle to fight for profit in the market. One must be vulnerable to the slightest change. In this regard, financial risk management instruments are necessary on market risk (Simkovic, 2009). The financiers normally make decisions based on investment and lending models. Assessment of individual risk is necessary because it helps in the analysis and mitigation of any potential impact. Assessment of returns is crucial since it helps in verifying the cost and revenue projections in the market.
When fitness landscape changes or the market stability is not favorable, the specialized competitors in the market get crushed. Richard Bookstaber persuasively used cockroach in his argument that we should consider reducing our excessively specific ways. He uses the example of cockroach to mean that cost of rough edged approach is creating excess profit in a favorable environment. This benefit can survive in a wider situation including very harsh environment. In addition, the market conventional liquidity providers such as the speculators, traders and market makers are able to disclose their positions on time to the world. These are the issues that the author reflected on in an effort to mirror the market crisis. Richard Bookstaber was able to understand the financial markets which had altered the economic status of the whole world.