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HTP071010_In_Defence_Avinash_Persaud - H T PAREKH FINANCE...

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HT PAREKH FINANCE COLUMN Economic & Political Weekly EPW july 10, 2010 vol xlv no 28 13 In Defence of Complexity Avinash Persaud That complex financial derivatives lay at the root of the financial crisis is a seductive but wrong idea. When liabilities are complex assets cannot be simple, otherwise we will have a mismatch between the two. The problem is not with the nature of derivatives but of the incentives. Financial regulators need to concentrate on incentives that reduce the build-up of lending in a boom, irrespective of the precise instrument of leverage. T here is a seductive story line that argues that the financial crisis was caused by the spread of weapons of financial mass destruction masquerading as financial derivatives. Their complexity and opacity allowed bankers to pull the wool over the eyes of their bewildered customers who bought instruments they did not under- stand at prices they could not fathom. The solution is to protect both consumers and the financial system by banning complex deriva- tives, like credit default swaps, and stopping banks from engaging in certain activities, aka the “Volcker rule”, named after the irrepress- ible former US Fed Chairman, Paul Volcker.
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