People say finance has become too complex. This is probably the only industry anyone could ever say that about with a straight face. Increasing interconnection and complexity are what dynamic, free economies are all about. Are Apple and its hugely creative products too complex? What about any sort of software engineer? FedEx logistics? How about information security folks like EMC? Or the products of defense contractors like Lockheed Martin? How about robotics maker Fanuc?
Of course not—any and all of those are creating value via increasing complexity. But in finance, for some reason, increasing complexity is a villainous thing—oh, those CDOs, those CDSs! Folks said the same thing about mutual funds, credit cards, derivatives, junk debt, ETFs, LBOs, and so on. Everything new in finance seems to go through this phase of perceived villainy because it’s complex.
Nope. All these are fine and good things—finance tends toward greater complexity just like many other things in this world. Plus, I don’t know that any of those evil complex products got sold to the average person—CDOs and MBS are not the purview of the average investor, or specifically the average real estate investor.
Don’t be afraid of this stuff, just know that new financial innovations also tend to be viewed as panaceas at first, then become overwrought, then eventually take their rightful place among all the other choices.