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.The rush of these currents has been extremely rapid and hasadvanced upon the world at nearly the same time.Their remarkable historyis quite recent and still very fresh in our memory.First came globalization.Walter Wriston, the former chairman of Citi-corp, sensed it early.In 1985 he told us we were witnessing a  gallopingnew system of international finance, one that was not built by politicians,economists, central bankers or finance ministers, but by men and womenwho interconnected the planet with telecommunications and computers.Asa result, Wriston stated, the world had replaced the gold standard with theinformation standard.Indeed it had.Our separate financial existence was transformed intoone interrelated, interdependent world economy.Geographical borders thatonce could limit the flow of capital are history.Internal national mecha-nisms that once could insulate a population from external price influencesare increasingly impotent.Financial markets have become virtually unen-cumbered, continuous, and worldwide.A company located anywhere inthe world can use resources located anywhere in the world, to produce aproduct anywhere in the world, to be sold anywhere in the world.Second: political.As Nobel laureate Milton Friedman predicted, the freeeconomic precepts of Adam Smith combined with the principles of politicalfreedom espoused by Thomas Jefferson have resulted in an unmitigated tri-umph of market-driven economic order over central planning, of capitalismover communism, of democracy over dictatorship.The world experiencedthe incredible might of these two ideals as together they seemingly overnightforced the unification of Germany, the liberalization of Eastern Europe, thePresented at the Annual Meeting of the International Association of FinancialEngineers, November 9, 1995, New York.121P1: OTA/XYZ P2: ABCc12 JWBT139-Melamed June 25, 2009 13:11 Printer Name: Courier Westford122 Messenger from the Futuresfall of communism, the collapse of the Soviet Union, and the dissolution ofapartheid.This political/economic transformation has propelled virtually every na-tion in the world to move to a market-driven economic order.It is a uniquehistorical happenstance.For the past 20 years when we spoke of a globaleconomy, we were only talking about 25 percent of mankind mostly NorthAmerica, Western Europe, and Japan.As recently as 1988, almost 70 per-cent of mankind was living under Marxist or socialist economic systems.Suddenly, there are 3 billion more participants in the capitalist system.Sud-denly, every country on the planet is a competitor in the global marketplace.Third: microdynamism.This is a word I made up to explain that theworld has moved from the big to the little.In physics we traveled from Gen-eral Relativity to quantum mechanics.We went from contemplating atoms toinspecting their nuclei and discovering quarks and leptons.Particle physicswas upon us.Similarly, in biology scientists migrated from examining indi-vidual cells to peering within their structure and ushering in the era of geneengineering.Molecular biology was born.This microdynamism and downsizing can be seen in every aspect of ourlives.Today s personal computer, small enough to be stored in a briefcase,can do much, much more than the UNIVAC, the world s first computer,which required an entire room to be housed.We wear much lighter mate-rial that is warmer and stronger than the bulky clothing of previous eras.Fiber optic cables are replacing mountains of copper wire.Transistors trans-formed the radio and a myriad of other electrical appliances into handhelddevices.Microprocessors miniaturized the entire technological world andkeep getting smaller and smaller.And on and on.In markets, the evolution was strikingly similar.When advancementsin computer technology were applied to established investment strategies,the result was remarkable.Just as it did in the sciences, market applicationswent from macro to micro.Intricate calculations and state-of-the-art analyti-cal systems ensued, offering financial engineers the ability to divide financialrisk into its separate components.Derivatives the financial equivalents toparticle physics and molecular biology were born.Investment methodolo-gies were transformed from all-encompassing traditional strategies to finelytuned modern portfolio theories.Long-term hedging evolved into continu-ous online risk management.The foregoing three primary crosscurrents, coupled with a swarm ofsecondary flows, have converged to create our present financial marketenvironment.It is unique to history.It is still undefined and not understood.It is volatile and dangerous.At times the whirlpool is smooth and easy toanticipate.Suddenly it is vicious and unpredictable.Markets go up withunrelenting force, only to turn without warning and collapse without end.Participants find inventive ways to cash in, only to be caught in unsuspectingP1: OTA/XYZ P2: ABCc12 JWBT139-Melamed June 25, 2009 13:11 Printer Name: Courier WestfordWakeup Call 123savage traps.Rogue traders unearth ingenious techniques to deceive orcheat as traditional controls are found antiquated or woefully inadequate.Market regulators, along with business managers, seem helpless and offguard.What shall the world do? Condemn the events that produced the tur-bulence? Curse the reality of the present? Outlaw the markets? Restrict pricemovement? Ban futures? All of the above?We can neither expunge the history that brought us to this fate norprevent its ultimate resolve.We are in the midst of a great transformation.We are negotiating an unknown expanse between a world we knew andthe one we know not.We are on a gigantic bridge between past politicalarrangements, past economic orders, past technical capabilities, past marketapplications, past internal controls, and a new reality.We are yet insufficiently conversant with the new order, its dimen-sion, its demands, its potential, to write the rules.If we act in haste toseverely harness the currents, rigorously restrict its flow, or sternly directits course, we take the risk of creating conditions far, far more dangerousthan what is naturally in store for us.If we so fear the computer that weadopt a Luddite philosophy, if we so recoil from Procter & Gamble, OrangeCounty, Metallgesellschaft, Barings Bank, Daiwa Bank, or similar debaclesyet unknown that we enact Draconian rules to prevent their occurrence, ifcorporate boards shrink from the use of futures because of fears of conse-quential losses to their corporate bottom line, civil actions by shareholders,or sanctions by regulators, then at best corporate profits are headed south,and at worst Western civilization has hit its top.At this juncture in the transformation, while we dare not ignore the dan-gers it has engendered, we must not cower in its presence [ Pobierz całość w formacie PDF ]