About Scott Cleland
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You are hereIndex FundsSystemic Flash Crash Vulnerability: Financial Crisis Root Causes: Part IVSubmitted by Scott Cleland on Mon, 2010-10-04 16:48The SEC/CFTC report on the May 6th "Flash Crash" helps confirm that automated index trading technology was a contributing cause of the 2008 Financial Crisis and why recent financial reforms are not enough to address the ongoing destructive systemic vulnerability that automated index trading technology increasingly poses for financial markets going forward.
Systemic Uneconomics: Financial Crisis Root Causes: Part IIISubmitted by Scott Cleland on Thu, 2010-01-21 16:03To discern the real “root” causes of the financial crisis of 2008, one must probe beneath the surface and examine the health of the “root system” of our capital markets “forest.” The roots of the capital markets forest are sound economics; the natural market function of automatically equilibrating supply and demand and risk and reward, that is commonly appreciated as Adam’s Smith’s “invisible hand.” We generally assume that the natural market strength of the capital market forest’s root system ensures that all the trees are not in danger of being blown over in the crisis of a storm.
In the fall of 2008, we all were shocked to learn that the root system of our capital markets, that we had always assumed was healthy and strong, was actually frighteningly weak and brittle requiring the slapdash reinforcement of multi-trillion dollar emergency scaffolding of whatever material was close at hand, a TARP, bailout lifelines, capital sandbags, etc. -- to buttress the main market “trees” from toppling over, trees that the Government judged to big to be allowed to fall.
The Father of Indexing Calls My Indexing Thesis "Nuts!"Submitted by Scott Cleland on Fri, 2009-07-03 17:35When Investment News asked John Bogle, Vanguard's founder and the father of indexing, about my "Indexing into the Ditch" thesis (that indexing is one of the root causes of the financial crisis) he said: it “is nuts! Last time I looked, index funds accounted for about 0.4% of all stock trading ... Just perhaps the other 99.6% might bear a teeny-weeny bit of the responsibility.” Let me first respond to Mr. Bogle's points in order. The thesis "is nuts! "I must admit I smiled at the ad hominum implication that my thesis was "nuts" and not worth listening to; I remembered that Bernie Ebbers called me the "idiot Washington analyst" because my research was the first to charge that WorldCom's business simply did not add up. Challenging Mr. Bogle's Claim Indexing is InvestingSubmitted by Scott Cleland on Fri, 2009-06-12 12:34With all due respect to Mr. John Bogle, legendary founder of Vanguard and de facto leader of the American index fund movement that now manages ~$1.5 trillion, I must respectfully challenge, on the merits, Mr. Bogle's, and others, ongoing mischaracterization of indexing as "investing." Indexing into the Ditch -- Financial Crisis Root Causes -- Part ISubmitted by Scott Cleland on Thu, 2009-06-11 17:43Despite the widely held view that indexing is the safest way to invest, indexing helped recklessly drive our financial system and economy into the ditch last fall.
A major reason the system has become so unstable and dangerous to financial security is that over ten percent of money management vehicles on the road today are indexers, which by design drive the wrong way against the oncoming traffic of a market economy that allocates capital based on economic merit. Diagnosing the Financial Crisis' Root CausesSubmitted by Scott Cleland on Thu, 2009-06-11 17:43This is an introduction and background for my new multi-part research series on diagnosing the root causes of the Financial Crisis. |