On 27 February 2009 Mr Alan Greenspan published an article in the Financial Times. (Full text)
In response I sent a letter to the Editor.
Dear Sir
On the front page of today’s Financial Times there is a picture of Mr Alan Greenspan with a following punchline: “Greenspan: what went wrong. ‘we have never successfully modelled the transition from euphoria to fear’”.
This is a manifestly incorrect statement. A pyramid scheme structure is a correct model for transition from euphoria to fear. Especially it reflects its dynamics accurately: at the time when a financial pyramid keeps growing, pyramid customers get euphoric over their wealth on the paper (basically on the basis of their bank statements, they think they rich). However at some point, which happens quite fast due to exponential nature of pyramid growth, a financial pyramid cannot be sustained by market liquidity, i.e. a gap between a value of balance sheets and money available on the market is too huge. At that point a pyramid collapses and euphoria turns into fear, even panic and/or anger. (That happens when pyramid customers realise that not only are they NOT rich anymore, but in fact they lost a lot of money.)
This model is very well known. It was described and tested many years ago. I can refer you to financial pyramids in Poland in 1990 of Lech Grobelny (BKO) and Albanian gangsters in 1996 – 1997. But there are plenty other examples.
There is nothing mysterious or complex about the current financial crisis. There is nothing sophisticated about the financial markets (like financial instruments which are mathematically quite trivial). Basically bankers, regulators and some politicians engineered a global classic pyramid scheme that collapsed. The truth is that simple and that brutal.
Is anyone going to face criminal charges, do you think?
Yours sincerely
Greg Pytel
In response I sent a letter to the Editor.
Dear Sir
On the front page of today’s Financial Times there is a picture of Mr Alan Greenspan with a following punchline: “Greenspan: what went wrong. ‘we have never successfully modelled the transition from euphoria to fear’”.
This is a manifestly incorrect statement. A pyramid scheme structure is a correct model for transition from euphoria to fear. Especially it reflects its dynamics accurately: at the time when a financial pyramid keeps growing, pyramid customers get euphoric over their wealth on the paper (basically on the basis of their bank statements, they think they rich). However at some point, which happens quite fast due to exponential nature of pyramid growth, a financial pyramid cannot be sustained by market liquidity, i.e. a gap between a value of balance sheets and money available on the market is too huge. At that point a pyramid collapses and euphoria turns into fear, even panic and/or anger. (That happens when pyramid customers realise that not only are they NOT rich anymore, but in fact they lost a lot of money.)
This model is very well known. It was described and tested many years ago. I can refer you to financial pyramids in Poland in 1990 of Lech Grobelny (BKO) and Albanian gangsters in 1996 – 1997. But there are plenty other examples.
There is nothing mysterious or complex about the current financial crisis. There is nothing sophisticated about the financial markets (like financial instruments which are mathematically quite trivial). Basically bankers, regulators and some politicians engineered a global classic pyramid scheme that collapsed. The truth is that simple and that brutal.
Is anyone going to face criminal charges, do you think?
Yours sincerely
Greg Pytel
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