Cliff Asness on the Current Crisis

Provocative comments from mega-quant Cliff Asness of AQR on the current crisis:

Let’s step back. Wall Street’s greed and short sightedness, and the consumers’ real-estate bacchanalia, was certainly a big part of recent events, but the biggest drivers in creating the current crisis were (IMHO) not the fault of private enterprise but, as usual, of the government:

  1. Not being willing to have a real recession. After Greenspan wrongly changed his mind and let the tech bubble grow to a dangerous level in the late 1990s, policy-makers decided instead to pump/print tons of free money to support the economy, creating a massive real estate bubble and the accompanying derivatives bubble.
  2. The GSEs were structured with the government/taxpayers absorbing the downside and a few anointed businessmen (I would guess the same ones who know how to get rent controlled apartments) and shareholders owning the upside. (Consumers who got cheap loans were also winners, but of course that was what GSEs were set up to do.) It’s the first part that’s bad. Tell anyone running a business that they get a lot of the upside and the government/people get the downside and watch what you get… That is a Frankenstein’s monster that free marketers and socialists alike should abhor, as it’s a toxic combination of the two.

Read the rest here.

As an amused aside, Asness’s disclaimer is arguably even better. An excerpt follows:

This is Cliff speaking now. AQR’s legal department would like me to add that I am criminally insane and barred by an order of rhetoric protection from speaking on AQR’s behalf. Anyone trading on my advice, or a client, consultant, employee or Iraqi insurgent thinking he has been wronged by my attitudes or opinions can have a $250 out-of-court settlement right now if they’ll sign a waiver, otherwise we’ll break you. Oh, and we lied about the $250, but seriously, we will break you. Please note, nobody can predict where markets will go in the short-run and sometimes even the long-run. When I point out individual things in the marketplace that I think are strange, or wrong, it doesn’t mean I have the perfect answer or can easily make money from it for my clients, for myself, or certainly for you reading this blog! Furthermore, if you read one guy’s opinion on a blog and do anything based solely on that, you are an idiot. Next, as the legalese above
alludes to, the actual funds and accounts AQR manages are run using models that may or may not agree with what I’m writing herein, particularly as our models will generally have a shorter time horizon than the things I’ll be writing about. LISTEN TO ME AT YOUR OWN RISK! If you choose to read what I write please only use it as one input for you to critically evaluate in your decision process.

Finally, my style is to write very aggressively and passionately about what I believe. So unless you are a libertarian/objectivist, small government and free market loving, socialist hating, value investing geek you probably won’t agree with everything or anything I say. If you find the way I say it insulting, I’m sorry about the first few words you couldn’t help reading, but if you read a moment past that (in this disclaimer or later), it is on you. I agree we need to censor things occasionally but only to protect children and madmen (and of course the children of madmen). If you believe in censoring anything else short of a nuclear secret you’d probably look good in hobnail boots and the crooked cross. Thanks for listening.

Sure. Got it. You go, Cliff.