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Alan Greenspan Speaks on Financial Innovation. Why it Failed.

Posted by: Bruce Nussbaum on October 27, 2008

Please read the testimony of ex-Federal Reserve Chairman before Congress on why the financial innovation of recent years, which he championed, failed so utterly. It is important to understand this failure of metrics, this failure of modeling. It all gets back to what I learned at the Center for Social Research at the University of Michigan: with complex models made possible by computing, garbage in, garbage out.

This is from Ed Yardeni’s daily feed to me:

Greenspan: “In recent decades, a vast risk management and pricing system has evolved, combining the best insights of mathematicians and finance experts supported by major advances in computer and communications technology. A Nobel Prize was awarded for the discovery of the pricing model that underpins much of the advance in derivates markets. This modern risk management paradigm held sway for decades. The whole intellectual edifice, however, collapsed in the summer of last year because the data inputted into the risk management models generally covered only the past two decades, a period of euphoria. Had instead the models been fitted more appropriately to historic periods of stress, capital requirements would have been much higher and the financial world would be in far better shape today, in my judgment.”

Got that? It goes to what IDEO’s Tim Brown said to me last year at Davos—the products of financial innovation weren’t stress tested in the real world properly. It was bad innovation methodology.

Yeah, like so bad it’s brought us a global recession. Can we now get all those mathematical geniuses coming out of school to go into science and technology, instead of Wall Street?

Reader Comments

Peter Plum

October 28, 2008 1:22 PM

Why do you insist on calling this mess innovation? Conflating a bunch of worthless crap and buying a good bond rating for it is fraud, not creativity.

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Want to stop talking about innovation and learn how to make it work for you? Bruce Nussbaum takes you deep into the latest thinking about innovation and design with daily scoops, provocative perspectives and case studies. Nussbaum is at the center of a global conversation on the growing discipline of innovation and the deepening field of design thinking. Read him to discover what social networking works—and what doesn’t. Discover where service innovation is going and how experience design is shaping up. Learn which schools are graduating the most creative talent and which consulting firms are the hottest. And get his take on what the smartest companies are doing in the U.S., Asia and Europe, far ahead of the pack.

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