Here is a picture of a CDO-cubed deal put together by Merrill Lynch
The first thing to notice is that it looks more like an ecosystem web than a human-planned thing. Also notice how many lines connect between derivatives.
Every single line on that graph represents information and created value.
Merrill didn’t just pick mortgages from a phone book. They depended on rating agencies, who themselves were paid by the very entities they were rating. They ordered reports and tested the models for conformance to Black Sholes methods of valuations, and they worked with AIG to insure these things for the very, very unlikely event this CDO-cubed deal goes south. Highly efficient, with lots of redundancy. Each link in it was part of a planning process, but the entire structure was emergent. And if you think that is complex, consider that if you could drill down to any derivative, you’d see an underlying graph just like this one.
Think about the complexity of that. Now imagine millions of derivatives, each with its own CDOcubed graph, with overlapping obligations between contracts. It is hellishly complex, evolved, and no one understands it just like we don’t understand neural networks or ecosystems.
And you think central planners can do better? Do you think macroeconomists who analyze economies with aggregates like ‘production’ and ‘labor’ can possibly suss out what might be going on when growth slows or speeds up? Do you think the behaviour of that complex thing can be predicted over 10 years when a policy change happens?
The answer is no, and the evidence for that is that central planning on a large scale has never worked well, and economist’s predictions of the future have proven to be no better than a simple model like regressing from the present to the mean, or throwing darts at a board.
