Document Sample
sinclair Powered By Docstoc
					Old and New Wisdom in Finance

Peter Sinclair1

March 2008

Table: Old and New Wisdom in Finance

                           traditional               2003- August 2007        now
The First Law of …if you can prove ..anything”                                ..just possibly - if
Credit         Markets: you don’t need to”                                    you are seen as a
“You can borrow…                                                              sound bank, that is”
Uncovered Interest May well hold, in RIP                                      Reports of some new
Parity:                    time, on average                                   sightings
Aggregate value of = x+y                             ≥ Max{2x, 2y}            ≤ Min{2x,2y}
assets x and y
Expected          payoff Negative         without Often positive, and “If I’m a bank, heads
from a financier’s inside information                with positive serial I        win,   tails   the
gamble                                               correlation              taxpayer loses”
“Solvency is....           ..terrain   that   you …an issue strictly for …in the eye of the
                           must never leave”         the nerds”               beholder”
“The first law of ..there’s nothing for .. what’s dear today … come back to our
prices is.…                nothing”                  may be quite cheap: website when it has
                                                     watch it rise further”   been rebuilt”
“Risk is …                 .. sold to those best … effectively traded … sold to those who
                           able to bear it”          away to nothing”         understand it least”

1; Professor of Economics, University of Birmingham.