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In this era of financial systems that track billions of shares traded, why is it that nearly every story on the sub-prime mortgage crisis starts with a statement about no one knowing the extent of the crisis? I did a column about the need for more friction in this high tech frictionless economy which spurred a comment from an old friend of mine with ties to the financial markets. His take is that the volatility and uncertainty in the subprime mess, “lies in the relative lack of automation supporting exotic products such as derivatives, which normally trade at such low volumes that execution of transactions involving such products can be done manually.
The volatility of the markets during the past 10 weeks has increased the volume of trade in such instruments by factors of 1000X or more–overwhelming the capacity of clerks to track them.” So there you have it, this entire subprime mess which threatens to breach the mortgage levies and send the general economy into recession was cause by a lack of pencils.