There’s no complex modeling required here on an interest rate swap. The payout on swaps is easily calculable and the range of outcomes knowable. There’s not much overlap in the context of what Buffett talked about and what happened here besides the word “derivatives” and the idea of exogenous shocks tending to lead to outcomes outside your range of modeled assumptions.
I’d be glad to engage more but it seems like you are fixated on a slant and cannot be convinced otherwise.
I think the equivalent would be if, a very modestly able coder, were to insist on this forum that nobody should ever have loops in their code because sometimes they do weird things.
> The payout on swaps is easily calculable and the range of outcomes knowable.
While this is technically correct, it's the solvency of the counterparties that is not easily calculable or knowable. Derivatives must be viewed in the totality of the system in which they are used. Focusing on the fact that payouts are calculable and therefore perfectly safe in isolation is extremely myopic.
> I think the equivalent would be if, a very modestly able coder, were to insist on this forum that nobody should ever have loops in their code because sometimes they do weird things.
I think the equivalent would be if, a very modestly able coder, were to insist on this forum that because the database is up 99.9% of the time, there's nothing wrong with not handling errors, because the DBA team is running with an average IQ of 143, they all went to MIT, they know what they're doing, black swans do not exist, and that 99.9% might as well be 100.
Derivatives are inherently dangerous because they are a knowable mathematical system coupled quite tightly to an unknowable system of risks. You can't mentally decouple them and claim that welp, the math works, it's fine, ship it.
And given the web of interdependencies among the counterparties, every counterparty should be assumed to be overly exposed to a systemic risk that everybody is currently discounting. If that risk happens, it will be difficult to predict who will be affected, and it will be impossible to unwind the deals in a hurry.
We have had a number of financial crises that have required external intervention to keep the whole system from melting down. Most famously, 2008. And they show how quickly a solid counterparty that everyone trusts becomes a source of contagion that poses a risk to everyone touching them.
If we have a long planning horizon, what kinds of shocks should we be prepared for? Well here are a few sample scenarios.
1. Russia collapses, leading to nukes floating around to bad hands.
2. China finally invades Taiwan, threatening everything that needs computer chips.
3. A US government shutdown finally results in non-payment of Treasuries, causing a "risk-free" investment to have to be priced for risk.
4. A repeat of the 1859 Carrington Event happens, with damages in the trillions of dollars. No seriously, https://www.space.com/the-carrington-event shows how plausible this is.
The financial system treats all of these as unthinkable and therefore impossible. But between all of them, over a period of decades, the risk of SOMETHING on this order of magnitude happening is significant. It is a problem that the entire financial system fails to appreciate that there IS a risk, let alone fails to do anything to mitigate it. Indeed, quite the opposite, the 2008 bailout has let the financial system believe that the government will always bail them out. And so has become complacent about their role in creating various minor financial crises.
But there is no guarantee that the government will always be in a position to do that. The result has been a normalization of deviance that has to end badly at some point. See https://www.ostusa.com/blog/normalization-of-deviance-defini... if you're not familiar with the phrase "normalization of deviance".
Thank you. Although I think the risk of #4 is greatly overblown. We watch the sun constantly now, and detection of an X20+ class flare aimed at us gives us about 10 hours or so to disconnect as much as we can, limiting damage to maybe only a trillion or so.
My personal favorite pet risk is a combination of #1 and #4, though. A few HAEMPs de-orbited and detonated over North America by a collapsing or collapsed Russia gives us no time to disconnect anything. And the fantasy that neither defense.gov, nor mil.ru, have many of these in orbit right now because "OMG it would be a Space Weapons Treaty violation and nobody would ever do that", is as naive as the pre-Snowden "OMG the NSA would never spy on Americans because it's illegal" normie zeitgeist.
> the equivalent would be if, a very modestly able coder, were to insist on this forum that because the database is up 99.9% of the time, there's nothing wrong with not handling errors,
I’d be glad to engage more but it seems like you are fixated on a slant and cannot be convinced otherwise.
I think the equivalent would be if, a very modestly able coder, were to insist on this forum that nobody should ever have loops in their code because sometimes they do weird things.