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The Rise of the (Financial) Machines
BartlebyScrivener writes "A New York Times Op-Ed quoting Freeman and George Dyson wonders if Wall Street geeks and 'quants' outsmarted themselves with computer algorithms to create the current financial debacle: 'Somehow the genius quants — the best and brightest geeks Wall Street firms could buy — fed $1 trillion in subprime mortgage debt into their supercomputers, added some derivatives, massaged the arrangements with computer algorithms and — poof! — created $62 trillion in imaginary wealth. It's not much of a stretch to imagine that all of that imaginary wealth is locked up somewhere inside the computers, and that we humans, led by the silverback males of the financial world, Ben Bernanke and Henry Paulson, are frantically beseeching the monolith for answers.'"
The quoted essay from George Dyson is available at Edge.
Second, I don't think the current financial problem world wide is the quants' fault. I think this credit crisis and market failure (although it might have a little to do with the quants) can be directly attributed to the world market investing heavily in the subprime mortgage bubble. Now, there's still software to blame, but it's not the quantitative analysis guys, it's the software in the hands of people who were in charge of buying bad loans and shipping them off to Wall Street to be sold to investors with a monthly mortgage check paying a huge return.
There was a This American Life episode on this sometime back that dealt with explaining the global subprime mortgage financial crisis (now known as a worldwide credit crisis). About 26 minutes into the first episode, you hear them talk about exactly this (you can stream the shows from these links or look at transcripts). Alex Blumberg & Adam Davidson are two producers of the show interviewing those involved. Enjoy this dialog from the show on the no doc loans these idiots were handing out like candy to anyone:
Alex Blumberg: But Glen didn't worry about whether the loans were good. That's someone else's problem. And this way of thinking thrived at every step of this mortgage security chain. A guy like Mike Francis, from Morgan Stanley, he told me he bought loans, lots of loans, from Glen's company, and he knew in his gut they were bad loans. Like these NINA loans. ... we did it
because everyone else was doing it.
... didnâ(TM)t seem worried at all:
Mike Francis: No income no asset loans. That's a liar's loan. We are telling you to lie to us. We're hoping you don't lie. Tell us what you make, tell us what you have in the bank, but we won't verify? Weâ(TM)re setting you up to lie. Something about that feels very wrong. It felt wrong way back when and I wish we had never done it. Unfortunately, what happened
Alex Blumberg: It's easy to ignore your gut fear when you are making a fortune in commissions. But Mike had other help in rationalizing what he was doing. Technological help. Mike sat at a desk with six computer screens, connected to millions of dollars worth of fancy analytic software designed by brilliant Ivy league math geniuses hired by his firm, which analyzed all the loans in all the pools that he bought and then sold. And the software, the data
Mike Francis: All the data that we had to review, to look at, on loans in production that were years old, was positive. They performed very well. All those factors, when you look at the pieces and parts. A 90% NINA loan from 3 years ago is performing amazingly well. Has a little bit of risk. Instead of defaulting 1.5% of the time it defaults at 3.5% of the time. Thatâ(TM)s not so bad. If Iâ(TM)m an investor buying that, if I get a little bit of return, Iâ(TM)m fine.
Adam Davidson: Wait Alex. I want to step in for a moment because this is a very important piece of tape. A big part of this story, of this whole crisis, is that a lot of really smart people, people who knew better, fooled themselves with this data. It was the triumph of data over common sense. Can you play that tape again?
Mike Francis: All the data that we had to review to look at, on loans in production, that were years old, was positive.
Adam Davidson: As we now know, they were using the wrong data. They looked at the recent history of mortgages and saw that foreclosure rate is generally below 2 percent. So they figured, absolute worst-case scenario, the foreclosure rate may go to 8 or 10 or 12 percent. But the problem with is the
My work here is dung.
Somehow the genius quants -- the best and brightest geeks Wall Street firms could buy -- fed $1 trillion in subprime mortgage debt into their supercomputers, added some derivatives, massaged the arrangements with computer algorithms and -- poof! -- created $62 trillion in imaginary wealth.
Thanks, New York Times. Does your average reader have the reading comprehension of a 9 year old these days?
Here's what happened in simple English: investment banks invented various ways of packaging mortgages into securities. They then convinced ratings agencies to give these new securities AAA status even though the ratings agencies didn't understand them. This gave mortgage brokers a license to commit fraud because they could give a mortgage to anyone with or without a pulse and there was a sucker just dying to buy that new mortgage from them. With such easy money available, real estate agents were able to pump and dump properties (strong-arming housing appraisers was a favorite tactic) like there was no tomorrow and convince people that housing prices only go up in a straight line. In the final act of the play, the investment bankers, mortgage brokers and real estate agents that caused this retire in the Cayman Islands while taxpayers are left to clean up the mess while we hope our economy doesn't literally implode.
I don't see what's so complicated about any of this. It's pure and simple fraud on the most massive of scales.
I'm a big tall mofo.
It had absolutely nothing with the greedy executives telling them what numbers to put in, or the greedy people making the loans encouraging people to lie.
If civil engineers refused to back up their calculations with formulas derived from physics, they'd be liable when their structures fail. That's why they are lucky physicists -- at least the classical physicists upon which they base their calculations -- were fundamentally competent. The "quant geeks" are similarly limited -- but their problem is that their "physicists" are better than Court Astrologers -- but not by much.
Seastead this.
So, what happened to the 'risk analysis' all these wall street firms do on daily basis to run their investment to multiple scenarios and try to figure out the chances that they will lose their investment on a given horizon (Check out "Value At Risk"). All of them have teams dedicated to come up with a number Y given situation X - there are farms crunching data to produce these numbers on daily basis. The precise reason they exist is to calculate risk. I have worked for one such team for a year and half, doing their IT for them. The quants were recruited from top schools, were paid shitload of money, and generated shit numbers to please their overloards, day in day out.
But they can. They did. The '90s tech bubble burst. The funny money that was created in the run up was promptly transferred into real estate. Lenders, overcome by a similar greed that overcame retirement investors, lent to people they knew they shouldn't have (or should have known). And voila. We have a horrible mess - basically, we think we have a lot more money than we actually do. The only viable solution? We need to realize the loss. It was never our money in the first place.
This might make an interesting defence for the crooks and gamblers who caused the problem through their greed and incompetence, but I'm not sure it deserves a place on what is generally a science/IT website.
Should be found and put on trial immediately. Whichever financial guru thought Mortgage Backed Securities and Credit Default Swaps were good ideas for people to invest was either a moron or crook, most likely the latter. I encourage you to RTFA, though, it's a fun read (and I'm no fan of the NY Times).
Part of the hardcore faithful who believed in Apple long before it was cool again to do so
Does your average reader have the reading comprehension of a 9 year old these days?
The writing guidelines for just about all mass distributed print media here in the States specifies high school level (9th grade tops) writing for their publications.
The guys running the big investment banks and financial institutions believed what they wanted to believe..or believed whatever they had to believe that would give them multi-million $$ bonuses. If the computer models had predicted doom, they would have stopped relying on the models. The models were like magic mirrors that made them seem much bigger than they were.
1. House prices and property keep on rising. If you buy a house now you can sell it next year for say 15% more. Gear up, buy and then let out your property to make even more money. Look at all the TV proggys on making money from houses to prove this point. Whatever price you pay is not an issue. Borrow at 7 times your earnings and 125% of the said value of the property is no problem. Fill your boots and make a ton of money, guaranteed. No risk.
(Don't listed to those old type bank managers who were so unhelpful and whom banks fired years ago in favour of salesmen selling whatever they could. They knew nothing).
If in the unlikely event someone could not pay their mortgage (very rare event) the property would absolutely be worth more than their mortgage arrears. Even better sell the loans to some other sucker. No risk here.
2. As you all know interest rates are undeniably under control and will never significantly rise as our central banks are such clever chaps (and chapesses) and have everything under control. So we will see a low interest rate environment for many years, so no risk here.
3. Inflation is absolutely under control and will never get out of hand, again thanks to the geniuses managing our economy. So no worries here.
4. Gearing is good and isn't risky, if you are really clever. Gear up as much as you want and to make even more money at little risk. Better still borrow in say Yen at very low rates. The Yen will never rise against the $/£ to any degree, so no risk here.
5. Banks and bankers are very clever people and know what they are doing. Look at their pay and bonus packages to see how astute they are. Shareholders would never allow incompetents to have such large pay packages if they were not undoubtedly geniuses. With the bankers at the helm nothing can go wrong, obviously. No risk here.
Risk Calcs = 1 + 2 + 3 + 4 + 5 = naff all risk so fill your boots.
What could possibly go wrong?
The subprime money was backed by property. Adding shiny metals into the equation does not fix the problem.
It's not the fault of the quants. Look to the bank managers and politicans, Obi-Wan, and find your missing planet you will...
This isn't the reason for what's happened. But a lot of people hate math.
Why blame the computer geeks? More likely a 27 year MBA with a spreadsheet that somehow shows the expected industry revenue for something like network browsers exceeds the existing computer software market. And NO-ONE questions these numbers.
They've obviously been using Reason - no, not the virtual synth package, but the one described in Dirk Gently's Holistic Detective Agency:
Gordon's great insight was to design a program which allowed you to specify in advance what decision you wished to reach, and only then give it all the facts. The program's task, which it was able to accomplish with connsumate ease, was simply to construct a plausible series of logical-sounding steps to connect the premises with the conclusion...
...The entire project was bought up, lock, stock and barrel, by the Pentagon.
Douglas Adams
Shesh... and the guy also predicted Wikipedia and Microsoft (or did he *cause* them?)
(Since DGHDA also contained a fair bit about computer music, I assume that the name of the synth package is no coincidence).
In a survey of 100 programmers, 111111 thought that duck-typing was a good idea.
It is the same fraud that has been perpetrated by financial institutions for centuries. Money as most people understand it does not exist today except as 1's and 0's, the so called "gold standard" is long gone.
Money only exists because of debt, and we are slaves to that debt. The more debt created, the more money there is. Ever wondered why it is so easy to get credit?
http://video.google.com/videoplay?docid=-9050474362583451279
(an excellent 50 minute video explaining "where money comes from" - make time if you don't understand this concept already).
Peace,
Andy.
This particular piece is pretty bad, but I heard one of the more lucid explanations of the whole mess and bailout response by NYTimes reporter Gretchen Morgenson on NPR's Fresh Air with Terry Gross. That was back on September 23. You can find the podcast here; it's a little stale now as the baleout has evolved since, but Gretchen Morgenson won me as a fan that day.
Oh, yeah, it's not easy to pad these out to 120 characters.
Check out this 47 minute video for a very easy to understand and clear explanation.
http://video.google.com/videoplay?docid=-9050474362583451279
Unless you've been through university on some Economics degree - you were probably unaware of this.
Check out the inflation rate chart for the last 20 years at inflationdata.com. The Fed drastically lowered the prime, creating the housing bubble to advert potential RUN-AWAY DEFLATION from anti-inflation policies set back in the '70's. It exposed flaws in the financial system of the US, notable changes to the Community Reinvestment Act by Clinton who forced banks to accept more sub-prime loans. At Clintons time the economy was looking good and he thought it wouldn't hurt to stimulate the economy, but inflation was heading to below zero inflation when Bush took office. So the Fed had to act by lowing the prime.
In 2003 the Bush admin tried to get the Treasury to take over Freddie and Fannie, but couldn't get it past Congress. Again in 2005 under S190 was the warning called about the two GSE's "Socializing risk and privatizing the profit". But Congress failed again to get the job done. The bad paper wound up on Wall Street and the rest of the world economy suffered as a result.
So who is really responsible? Those who SOCIALIZED SUB-PRIME MORTGAGES and brought 100 year old companies to their knees. Only inept socialist agenda in government can do this.
Obama received over $125,000 from the GSE's, Hillary $75,000 and Dodd received over $165,000.
"Deregulation" as it has been demonized by the lefties, was really designed to streamline the HUGE mess of many government organizations watching the system. Not to take the controls off, but to make government and more efficient, cost effective. Against everything the Dems want, which is MORE control and MORE government.
But a lot of people took chances and gambled with real estate, they are to blame as well. But the Government ENCOURAGED IT as a desperate attempt to avoid run-away deflation. It exposed flaws in government that should have been corrected with SMARTER government, not necessarily bigger government.
I pledge allegiance to Goldman Sachs, and to the conspiracy for which it stands, one racket under Paulson, Communist and indivisible, with eviction and poverty for all.
Doctors destroy health, lawyers destroy justice, universities destroy knowledge, religion destroys spirituality
The real problem is that Greenspan and Bernanke seem to have failed both basic economics and remedial math. Also, they must have been absent on the day that Keynesian monetary policy was explained.
As unpopular as it may be with some people, what you are seeing today are the fruits of Reagan-era economic policy, "Reaganomics" or as G.H.W. Bush called it "Voodoo Economics."
Basically, the Fed. has kept their lending rates artificially low for the past 20+ years. They have kept this rate well below the rate of inflation. Banks are paying and charging interest using this rate as the basis, since this rate essentially determines the "cost" of money.
Keeping this rate below the inflation rate encourages spending and borrowing rather than savings. After all, why save at 1% when inflation is 8% and you can borrow at 6%? By borrowing now, you can increase your buying power immediately, and get more for the same amount of money, instead of losing money in a savings account.
That's all fine, assuming your wages increase along with the inflation rate, but for most people, they haven't. When wages are not increasing to match the rate of inflation, then people are effectively getting a cut in pay and can afford to buy less stuff. (Obvious, right, but many people need this simple fact explained to them.)
So, as mentioned above, the low Fed. rates encourage borrowing, and even with the modest income increases most people can afford to keep on borrowing, but only for so long. Unless wages make a dramatic increase, borrowing consumers reach the point where they have borrowed all that they can afford to borrow. They reach the point where they are making minimum payments on their loans, paying bills, and for food, energy and other essentials, and there is no money left over. Upon reaching this point, even the most obtuse consumers will cut back on spending and borrowing. Those who don't will default and go bankrupt, whether they file papers to seek bankruptcy protection or not, they will for all intents and purposes be bankrupt.
This is, essentially, what has happened to the U.S. economy. The orgy of spending and borrowing has ended because the sun has come up and all the drunkards are staggering home after the party with massive hangovers.
This is also why injecting $700 billion to buy "bad" debt won't solve a thing. Even if the gov't buys the debt, the consumers will still owe that debt, and the conscientious ones will still try to pay it. As long as the consumers have to pay that debt, spending in the short term will be curtailed.
In the short term, there is no easy fix. In fact, many would think the cure to be worse than the disease. The long term cure is to return to the days of higher interest rates, less spending and more saving. Quite simply, Greenspan's little experiment on the American people has failed to produce the endless growth that he promised.
Just be sure to wear the gold uniform when you beam down -- you know what happens when you wear the red one.
Market forces are not to blame here, it is government intervention - the stipulation given to Fannie to provide all with housing no matter their ability to pay, government bailouts in the 90s and early 00s leading to risky financial behaviour, the treasury's printing of fiat money allowing debts to accrue that could not possibly have accrued in the free makrets and manipulation of interest rates.
One would think either congressmen know nothing at all about economics or are being manipulated to make the Amero easier to foist on the American public
Look, if you live in an environment where you are under pressure to sell loans regardless of the risk, then you are likely going to wind up with computer models that tell you that it is going to work.
Computer models always carry the assumptions of the authors and those assumptions can be altered to suit climate. In the case of Wall Street, the assumption was likely the number of defaults on an M.B.S. as a function of credit score... and the thing is, that I bet that is spooking everyone is, that, credit score may not be a good predictor of repayment. I bet a lot of people had a decent credit score, right up until they mailed in the keys to their house.
This is my sig.
It's the IT guy's fault!
It' the F(y,(nerds,geeks)) fault!
What a novelty. Never heard that one before.
Administrations, markets, brokers, shareholders, media, and governments at all levels were all responsibly doing their part with ultimate honesty, dilligence and care.
No-one (absolutely) was engaged in generalized mindless near-sighted greed, omission, outright connivance and cumplity, had absolutely nothing to do with it.
It was those evil super-intelligent (therefore dubious, supercilious, arrogant - undoubtedly liberal leftist - bastards) incomprehensible (therefore evil, q.e.d.) nerds' fault! _They_ fooled everyone! Them and their damn computers. There was just no defense against them, none. (Except, maybe raucous songbirds and Roy Orbison all-out on a ghetto-blaster). They were too intelligent for us!
We had wealth. Wealth is good. (Actually, it's "glorious". :-? ) Doubting wealth is anti-american! And apple pies only taste good when sprinkled with greenbacks. Everybody knows that! Nothing wrong with that. That _couldn't_ be wrong.
That's why important stuff - like the economy, markets and nuculere power, ought to be left to "people like us", who wouldn't use our brains constructively if you paid us to.
There, there's a load off my chest! :-p
I am a quantitative analyst. True, there were many modeling flaws with the way ABS and MBS were priced, which made it appear that they were very safe and had good returns. Now when that happens what do you do ? You borrow short at a low rate, and invest in that secure product which produces a higher rate.
On a free market, this will quickly rise the short term interest rate (demand increase and the supply of saving is finite) and slowly drive down the return on mortgages as more house are being built.
On the US market it will not rise the short term interest rate because it is set by the FOMC, it will instead create inflation. Thus, the money used to invest in those mortgages will not be lended by someone, it will be printed. There is no direct mechanism by which the lending dry itself out... the guys at the FOMC have to figure there's going to be inflation.
So yes, there have been many mistakes in modeling, but such mistakes are bound to happen, in any industry, and they will have bad consequences (they're mistakes!)
The problem is the federal reserve system which magnifies the effect of financial mistakes by a few order of magnitude by disconnecting the interest rate market from reality.
\u262D = \u5350
No, the crisis is due to the risky mortgages which Democrats forced banks to issue with threats of racism. ACORN and others got paid to find such mortgages, and Fannie Mae and Freddie Mac were required to buy them from banks.
had listened to Ron Paul
Is it a requirement that before you can enter the temple of sacraments that a Ronulan has to post this refrain and something about the gold standard to a forum? This has been rammed up the collective butt of the internet so often you'd think Dr. Paul was a proctologist.
The author has a fundamental disregard for the actual underlying causes of the current economic crisis - the housing bubble. It cannot be that housing prices inflate over 300% (yes THREE HUNDRED PERCENT) in a mere ten years, while real inflation adjusted income remains the same. Sub-prime mortgages don't exist because there's a new generation of people out there who suddenly decided to default on their loans. They exist simply because no one can afford a house anymore.
Whoever you want to blame: "greedy" banks who made "irresponsible" loans (yeah, who ELSE were they going to loan the money to? There were no more buyers able to afford homes at those prices), the Fed for continuing to mismanage monetary policy (but the Federal Reserve has a history of doing this, dating back to its inception in the early 20th century), or creative accountants who tried as hard as they could to hide the shortcomings in these new "structured investment vehicles", the driving force behind today's (and tomorrow's!) economic woes is the pop of the biggest housing bubble in history.
The interesting thing is that the government has opted to print money to try to "save" the financial system and keep housing prices artificially inflated - as if anyone cares. The only person who cares about the price of their home is the person who wants to sell it. If you wanted to buy a house this year and sell it in 2 years for near 100% profit, well, welcome back to the real world again. This move on the part of the government will soon result in a collapse of the dollar.
But I was laughed at by some in July when the market was close to what many thought was a "market bottom" for saying the stock market was going to plunge lower. Guess what folks - we're still not at the bottom, despite being very near post-dot com bust lows. As a trader I watched the Dow drop 700 points in 5 minutes on Friday, only to bounce back positive, and then plunge again. This kind of volatility is NOT indicative of a bottom, it's indicative of a move to NEW lows. Housing prices should (if past bubbles are any guide) drop around 50%, which means they still have another 30% to go. Government interference in this correction will only serve to bankrupt an already insolvent US government, and destroy the US dollar's desirability on world markets.
The only people who are to blame are the greedy individuals who thought that the path to riches lay in buying real estate and "flipping" it a year or two later, with minor renovations - as well as a monetary system that is designed to spend today and pay tomorrow.
Seven puppies were harmed during the making of this post.
As unpopular as it may be with some people, what you are seeing today are the fruits of Reagan-era economic policy, "Reaganomics" or as G.H.W. Bush called it "Voodoo Economics."
This has nothing to do with Reagonomics. The idea behind Reagonomics was to lower the upper tax brackets from 70% down to a flatter rate so that people would be encouraged invest to invest their money and thus create a greater supply of consumer goods. This did exactly what it was supposed to do, as a whole the prices of consumer goods and commodities alike have largely been low, as investors sought the cheapest means of production. The essence of Reaganomics is that, we all have lots of stuff, and well, we do. So this aspect of Republican economics totally worked. Even Barrack Obama concedes, in his book, that in the USA, poor people have lots of stuff.
The critique of Reaganomics is, that, with its focus on investment, wage earners get screwed. You'll never see Democrats complain about having lots of stuff, and indeed, some will quitely condemn having so much stuff. Instead, you'll see them bemoan the social instability caused by Reaganomics. When you have investors able to shift their money around rapidly, you can leave social problems both when the money comes in and when it leaves. For every Silicon Valley or Shanghai or Dubai there is a Detroit. SO, the socialist retort is to not allow capital movement at all except via the will of the people, and, as a consequence, you can have a stabler society, except that, everyone has less stuff. North Korea is very stable, just like dead people are, and no one really has anything.
So now onto interest rates. Whether or not the Fed flooded people with low interest rates is not really the problem. You have low interest rates and low inflation because you need low inflation to have savings.
I do agree with you, though, that debt repayment by consumers will suppress economic growth in the short term, however, falling fuel prices will mitigate this somewhat. The problem is that everyone has borrowed too much. I've not seen too many figures indicating how much credit people are seeking, and, a ready indication of that figure would be a good tool for the fed to have and the people to see. I do believe that we shall public indebtedness decline and perhaps sharply. Just from my own perspective I've paid down about 30k worth of debt this year and I certainly have no plans to borrow soon, if ever. Like, I don't know that I'll ever take out another expensive car loan again...
But, if this happens, you see, people will need to save their money somewhere and it turns out that this savings can only go into precious few places. It can go under the mattress, which is stupid, it can go into commodities, which, I've argued might not be a bad move, or it can go into federal debt (treasuries), bank savings instruments, or securities, but all of those instruments are available to businesses as a means of obtaining cash for expansion and, you guessed it, the production of additional supply.
So, the moral of the story is, whether consumers choose to borrow and repay or save and buy, doesn't effect the overall course of Reaganomics all that much. All Reaganomics says is that investors are allowed to move their money about, just like consumers. The greatest irony of Reaganomics, we have achieved a sort of genuine sort of defacto socialism with it. There's a large percentage of the population that already does own stock of some kind, so much so, that one might well said that we as a people collectively do already own all the means to production.
This is my sig.
The entire debacle would not have happened if the rating agencies had done their jobs an not put an "AAA" rating on securities backed by the crappy mortgages, securities that should have been graded a lot lower. So much revolves around this "credit rating" that financial institutions just take the ratings without thinking and move on from there. Somehow, nobody points the finger at the rating agencies, now it's the quants who are to blame.
It stops being "backed by property" when they count that property x-times more via leveraging with sliced up diced and blended derivatives. 100-1 or 200-1 does not make 200 more magical properties. The notion that literally 10 to 20 more sets of mega profits could be built on top of one mortgage payment going upstream and changing hands constantly is insane. And a lot of contrarian/austrian school economists kept pointing this out while it was happening, but see, we let the same guys who profit from this run the oversight, look who gets hired to run the central bank money creation system and the US treasury-the same fools from the same firms who need bailing out now. The old phrase letting the foxes guard the henhouse comes to mind. They knew this would happen, but as long as "their guys" are in charge, they can issue scary decrees and threaten to collapse the financial system unless they get trillions more money "backed" by tax payer labor, ie, perpetual debt of the people to the overlords.
It's a conjob and has always been a conjob. It is the highest of stakes protection racket among other high level crimes.
Its that simple. this is a new setting, and we didnt have the rules and regulations to prevent such juggling of assets.
there was noone to tell them 'hey you cant create new assets out of those assets', because the rules to judge and act were not there and set.
as a result these people simply did what they did. its not the fault of computer systems. after all they are just tools. they could have done that with black ink and paper too, through the books.
Read radical news here
Um, yes it is a stretch. Word to the wise: prefacing any statement with "it's not much of a stretch to imagine..." does NOT mean the ensuing statement automatically becomes valid. (Related concept, illustrated in Talladega Nights: prefacing any statement with "with all due respect" does not warrant the rest of the statement as respectful.)
- First they ignore you, then they laugh at you, then ???, then profit.
Where did these sub-prime loans, that the quant-shops traded, originate in the first place? Google "Community Reinvestment Act" Whenever something bad happens to our economy, you'll find the government's fingerprints on it somewhere along the line.
I'm confused, and wondering what you're talking about.
The original leverage ratios were set by Basel, which pegged them at 8% (or 12.5:1). In 2004, this was updated. It's still 8%, but now assets are risk-weighted.
Claims on depository banks were were given the following risk weights:
AA- 0%
A- 20%
BBB- 50%
B- 100%
(worse) 150%
Unrated 100%
And to make matters worse, claims on securities firms were defined to be the same as claims on banks.
And the kicker, claims secured by residential mortgages were weighted at 35%.
As such, though the leverage ratio was officially 12.5, somebody who held nothing but mortgages could be levered up 35:1. And if you owned some bank issues, you could get nearly infinite.
But I'm wondering... what makes you think that these limits were going to be further increased?
No big surprise, anyone has had to work with the cobbled together mess-ball of code that Quants produce would know this. Most of it is badly typed copies of numerical recipes in C, with some guess work, lots of magic numbers hardcoded throughout, and a big bonus at the end.
The Voodoo Economics attack was at the Laffer Curve, which claimed that there is a ideal point of taxation that maximizes government revenue, and above that, people don't do economic activity and therefore taxes decline. Reagan predicted that his tax cuts would increase revenue, which was NOT the case, but it did free up capital, got the economy going, and tax revenues DID increase in time. Also, we have really cut taxes... I'd like them lower and flatter, but we can't do that without cutting the government. Taxes are running around 17% of GDP and governments expenditures at 20% of GDP... I'd like to see those both around 10% or less.
The real thing that Reagan cutting taxes did was:
A) transfer wealth to current savers (money in 401k and tax deferred annuity programs) had deferred 70% (or 90% at some point) taxes, and could now take it out at 30% in the early days
B) allow middle class people to build wealth... middle class people get paid a wage/salary, whether that wage/salary is 20k or 250k, they pay taxes on their labor, and if the rates are high, they can't build wealth, if they are low, they can work overtime/part-time second job, and use that extra money to build wealth, at 70% - 90% taxes, they can't
C) stopped the real estate only system... the tax code HEAVILY favors real estate investors -- you can tax defer the capital gains forever by buying a new property (important when Capital Gains rate was 40%, where Obama wants it, less important at the 15% it is now -- and you can depreciate property... if you can buy a building for 3M, and depreciate it over 30 years, you have 100k in "losses," so if you are making 100k/year in profits renting it out, it's tax free... sure your depreciation gets paid back when you sell the property as a capital gain (so you convert ordinary income, taxed at 40% with FICA into capital gains at 15%), and can be deferred on an exchange
The problem is Obamanomics is that it is NOT Clinton-style populism and fiscal conservatism (at least when paired with a GOP Congress), it is NOT FDR/LBJ New Deal/Great Society program heavy, it is European style socialism... heavy on regulation, income redistribution, etc... capitalism produces more gains/growth, but also downturns... Americans suffer more in economic downturns, but we benefit more in upturns... You can't have the upside without the downside, which is what people apparently want.
My wife and I went to Venezuela a few years ago for a vacation. Converted some money to Venezuelan Bolivares (about 3000 to a dollar - first layer of absraction). We then went gambling in a casino where they used credits instead of Bolivars. Asked my wife to convert $80 worth of Bolivars into credits (second layer of absraction).
Did really well and quadrupled our money, and cashed out.
When I counted the money, I thought they ripped us off.
Turned out my wife dropped a zero, and we only gambled with $8 dollars, and only won about $30, instead of 300.
Too many layers of converting, etc can make you lose sight of exactly how much you are dealing with, and its physical value. Granted it's not a perfect allegory, but the concept is there.
..........FULL STOP.
Originally was a way to translate the worth of something into the terms of something else. A cow, an apple, an hour of specialized work, etc. There was a limited amount of money because there was a limited amount of things to trade for, had no meaning to have $10 more than the amount of goods and services.
A lot happened in the middle, but somewhat money got detached from physical things and got its own life. And got a way to spread, fast. Main production of markets is more money, and the fuel they run on is human faith. With it you build your castles in the sky, your giant bubbles, and make/destroy millons/billons/trillons of it in a day with a bit more of changes of faith of a lot of people.
I know that this is the simplified version of how i got all wrong, but seems that the real core of the problem (if there is really one, not one of the possible consequences of something that we can't redefine) could be in the root of what money means.
A huge point is completely missing: all of the houses were appraised at the values the mortgages were offered. These appraisals were done at market value and were accurate - if you can sell your house for $500,000 today, then it should be appraised at $500,000 today. It's obviously not the appraisers' job to peer into a crystal ball and say "tomorrow, the bubble will pop and this house will only be worth $300,000."
Presented with a house appraised by a third party at $500,000, the banks financed it at that amount. Again, that is their job.
The argument being thrown around is that by lowering credit standards (partly mandated by the government's misguided "give houses to poor people" programs), they inflated demand, which created the bubble. I think that's unproven. There ere real estate bubbles long before the current lending practices.
You may be able to make a case that cheap money (low interest rates) stimulated demand and allowed people to get into houses more affordably...but of course, it's not Wall Street that sets the fundamental rates. And gee, rates haven't gone up, so...
This is not a simple "banks lent to people they shouldn't have" equation.
Advice: on VPS providers
Guess what, subprime defaults are still under 10%, and even if they rise to 25%, that still means that 75% of the people with subprime mortgages were able to buy houses that they weren't otherwise. So "blaming" subprime is silly... the problem is that the holders of the banks mistook the risks, but nobody cared because as long as prices went up, they WERE risk free.
The problem in the boom was people took 2/28 and 3/27 loans... these were priced at 30 year loans (for amortization), but after 2 or 3 years, they reset from the low "teaser" (often 1% - 2.5% higher than the prime mortgages) to a high rate that would be 10% - 11%... The people getting them often didn't know that if interest rates STAYED the same, their rate would go from 7% - 11%, and they were qualified at the 7%... they assumed that sure the loan rate would "reset," but if interest rates could go up, they could also go down...
Brokers, new in the field, said things like "prime rate is stable, long term rates shift," because you had a 2 year stretch without the Fed moving it's rates. If someone had a low credit score now, they weren't going to be better in 2 years, because new home owners underestimate the costs of owning a home... but on paper, if you had some blemishes on your report, in Fannie Mae conforming only REALLY looked back two years (looked at 4, but mostly at 2)...
If you had a business or health failure, and took a LOT of hits on your credit score from not paying bills but nothing before/after, maybe you were better in two years. Most subprime people have a bunch of problems that are permanent. But, even if your score didn't improve, you could always refinance with another 2/28 in two years, giving the brokers your new equity in the house to try again...
So nobody worried, because with the market going up, if you couldn't make the payments, you could refinance out of trouble.
What caused normally cautious lenders to make subprime loans in the first place?
I see where you're going with this. You're blaming the "Community Reinvestment Act" (CRA) that basically forces banks to lend to people they wouldn't otherwise lend to (i.e. people with bad credit) because they have to fulfill racial quotas.
I agree with you that this is part of the issue. But this whole problem is so far beyond liberal/conservative or Republican/Democrat. The problem is that we have a fairly corrupt system right now and everyone in power is culpable.
How about one of the reasons they made subprime loans was because they made money from them and they didn't have to bear the risk? You know, good old fashioned banker greed. So CRA was pushing them in that direction - but they were more than willing to go along!
I'm a big tall mofo.
The housing crisis basically turned into a big Ponzi scheme, not unlike the Dutch tulip mania that hit in the 1600s where certain tulips went for as much as 1 million dollars for 40 bulbs. Everyone got into the act, then, and just like today. Regular people started to "flip" tulips, but contracts, etc.
Many of the people defaulting are house flippers, real estate agents, etc, because they had some money - enough to invest and "flip". FLippers tended not to be poor, since they didn't have enough capitol to start.
..........FULL STOP.
They are only entertainers after all.
Uncontrolled greed of CxOs and mortgage brokers, focus on quarterly bonus instead of long-term business success - that's where roots of CDO/CDS debacle lies.
SEC tried to indirectly blame equity market participants by banning 'short-sellers' - and learned it fast that speculators reduce market volatility, not increase it. At least SEC had guts to acknowledge that by not extending short-sell ban further or not going back to tick-test (which previously was proven to have no impact whatsoever).
Where are all the people trashing the source, like when anything is posted from Fox News?
NYT is at least as biased, only pointing out the blame that wall street (and their thikin' machines) surely deserves, while leaving out the equally responsible and beloved federal government.
No mention of Barney Frank and Chris Dodd pushing bad (NO money down, NO documentation of income required) loans to "help" poor people who can't afford them, while taking campaign contributions from Fannie and Freddie. (And in Barney's case, having an affair with a senior exec at Fannie)
You should have posted only the essay from Freeman Dyson instead of shooting it through the sh*t stained lens of the NYT op-ed page.
Here's equal time:
http://www.youtube.com/watch?v=_MGT_cSi7Rs
The way you explain point 1, it highlights how the housing market (and everyone saying its a good idea) sounds something like a Pyramid Scheme?. Each new buyer is taking more risk than the ones before them, as its pushing the whole system towards a tipping point under which the scheme will collapse. As each new property investor takes on ever more debt, they expose themselves to ever more risk if the market implodes but as the house prices go up it also makes it ever more likely it will implode. Take on a house, sell it, buy 2 houses, sell them, buy 4 houses, sell them, everyone buys 16 houses and ah.. hang on, no one wants to buy any more houses... hmm.. so err... I now have to pay the rent on 16 houses!... ahHHH!!!
http://en.wikipedia.org/wiki/Pyramid_scheme
With so many people "investing" in property these days, plus so much dept, I wonder how much of this $62 trillion is really imaginary wealth? ... if even just 2% of that $62 trillion is imaginary, then the $700 billion isn't going to make a difference, to hold back this avalanche of collapsing stock values and even some banks. If its more than 2%, then the markets are very likely to implode a lot further than we have already seen, as they fall back to earth... Its a scary thought if these "financial initiatives" etc.. are so far just hiding how much imaginary wealth is in the system?. The whole thing sounds criminally corrupt in how much its all got out of hand.
when you use words like "socialist retort", "socialism", you make all your readers think that you are a brainwashed holistic economics zealot that thinks there is only unbounded and uncurtailed wild west capitalism and its counterpart strict socialism in the world, and lose them.
and let me break another news while im at it : there is a third concept : balanced economies. economies in which existentially critical services are controlled by government (like military, police, justice, healthcare) and all the remaining sectors are properly regulated so that no self interest group, criminals, fraudsters, scamsters can do stuff to break the entire system.
what im describing is europe.
judging from the success of europe in the last 20 years (in all respects, including better distribution of wealth), and the extent that u.s. sank ( to the point of sinking ENTIRE world economy with itself), i'd say that that holistic economic rant of yours have no substance anymore.
so please, stop it at least from now on, and conceive something new. reagan, republican eras are dead. and they wont return. neither the stupid 'let businesses be' 'youll kill jobs' 'market can solve' stupidity and accompanying wild west behaviour will.
Read radical news here
Taleb saw Fannie Mae as about to blow up. Page 255 footnote from Taleb's "The Black Swan" (published in 2007):
Taleb's book The Black Swan discusses how statistics are (incorrectly) used to predict financial markets. Unfortunately the markets don't fit the assumptions of the statistics and sh** happens that is unpredictable with the statistical models. Taleb has much to say and contribute about finance (he was a trader and quant for years) and also about science.
no sorry, i couldnt hold myself. i will say again ; idiot.
havent you RTFA ?
mortgages, subprime loans, the houses are ALL there. they are devalued, but they are still real assets. if this was the issue, all the banks who got into subprime lending would get out of it by themselves, although losing a great deal of money.
however they cant, because they showed those subprime loans as assets, created DERIVATIVE assets (investment funds) over them, and then sold those funds to everyone, AND then showed those inflated inv. funds as assets and AGAIN loaned to everyone. (banks can loan more money than the assets they have, up to 1 to 10 ratio. so despite they had 1, they showed it 10, and lent 100).
the difference is this : there is $1 trillion worth of mortgages. (700 bn from america, a few hundred bn from europe already covers those totally).
BUT, there are SIXTY TWO TRILLION DOLLARS worth more 'assets' (Stuff that are actually tied to those mortgages, but inflated in value by trading) around, THAT is the thing sinking entire world.
it is EXACTLY government NON INTERVENTION that caused this problem. someone should have walked in, checked the books and said 'hey, you have 10 worth of assets youre showing me, but 9 of those assets are actually 'derivative' 'assets' over the rest 1. they DO NOT EXIST. i cant let you lend 100 worth of loans to people or sell investment funds as such. your REAL value is 1, you can lend only 10'.
but noone did. you know why ? because the crazy church of holistic economics and reaganomics have been yelling 'let businesses be' 'government out of my turf'.
and here we are. ALL the world, paying the SH@T that has been the doing of those idiots. some of you may not like to see this, having been used to liking that 'hey unbounded economic freedom brings wealth' bullcrap.
yes, it brings wealth. it brings the wealth like the one you are experiencing. watch markets on monday, if the coordinated intervention (regulation - get used to it) by the world banks does not fix.
Read radical news here
First let me say, I don't think your analysis is wrong per se. At the level of the mechanics of where the crisis happened and how it played out in the minds of the people in the middle of it, it is perfectly valid.
However, this whole line of analysis is very much like analyzing a car wreck and concluding that the cause of accident was the driver's excessive application of braking and over correction. The driver was dead drunk. The underlying cause was the fact that his reflexes were so shot he couldn't react properly. It is largely irrelevant what the details are of how he lost control of the car, he was bound to do so under the circumstances.
Likewise the so called 'financial crisis'. Think of our economy/financial system as a bit like a building. Every part of the structure both adds 'load' to the building, and also supports the weight of the other component parts. As long as enough structural integrity exists to support the load at every given moment, the building stands.
Unfortunately what our whole society from top to bottom has been doing is looking at this structure and saying to themselves "you know, it is a waste of money to have that beam be 150% stronger than the load it is carrying" and then someone comes along and removes the beam and replaces it with one that's only 105% strong enough so they can use the extra materials someplace else, make more return on their investment.
Well, that could only go on for so long, and naturally people got a bit nervous and engineers pointed out that the building maybe was a bit shaky, so we invented a way to tie all the beams together more securely "well, if one fails its ok, if we spread out the load enough then no one part of the building will be overloaded".
Until finally one day the wind started to blow... Once one single part, ANY part of this massively over leveraged structure reached its failure point there was no margin left anywhere to take up the extra load anymore! Every part was already stressed to the absolute maximum limits of its capacity. And as long as things had kept going on an even keel it was inevitable that the search for profit would create even more leverage until inevitably the whole structure became so intolerant of even the slightest disturbance that it had to come crashing down.
The really disturbing part of this is that, as any engineer can tell you, when you reach this kind of situation of critical instability any small problem results in a cascade failure of the entire system. Every industry, practically every business, is leveraged out so far that even the smallest dips in cash flow result in immediate insolvency, which then propagates down the supply chain and up the 'wage chain'.
This thing is like an avalanche coming down the side of a mountain at 300 mph. The snow all around it looks all nice and quiet, but that means nothing. This thing has momentum, large momentum, and there isn't any stopping it because there's no redundancy left in the economy to act as a brake. No bailout plan or insurance scheme or nationalizing of banks or any other action anyone can take now is going to stop it until it gets to the bottom of the mountain.
The sad fact is we clearly saw, or should have seen, it coming. The system gave us every sign of being ready to fail. What was the 97 Asian financial crisis except a localized version of the same thing? It just didn't get big enough to build up the momentum to smash the whole system. Only one wing of the building fell off that time. If we had exercised any prudence whatsoever we would have taken the hint. But 'This American Life' certainly has it right in the sense that greed and hubris overrode common sense.
And look at where we are now. Hope you all have a nice supply of canned goods stashed. Best case scenario is they're about to get a lot more expensive.
"Malo periculosam, libertatem quam quietam servitutem." -- Jefferson
People should go to jail, and the system should be reformed so it cannot happen again. But then, the "system" is being managed and communicated by the same folks who have been involved in the scheme, or their best friends.
You can't blame the quants, they knew exactly what to expect. They were doing what the person paying them wanted them to do. Then those same people were paying off the loan officers in commission to look the other way when they knew a bad loan couldn't be paid off.
How's this for a simple explanation for the current crisis: We borrowed too much money and spent it on non-productive consumption. If we had instead spent much of this money on infrastructure, on factories, on railways, then we likely wouldn't be in this mess. The subprime debacle was merely the bolt of lightning that lit the already tinder dry forest.
This and no other is the root from which a tyrant springs; when first he appears as a protector - Plato (423 to 327 BC)
1. Actually, I have to wonder how much of it is simply the old game of passing the blame.
See, those computers didn't program themselves, and evem those brilliant geeks coding them probably weren't also Ph.Ds in economics. They also probably weren't the ones who gathered the wrong data, that then got fed into the machine. They weren't the guys who decided the business process they were asked to implement or rate.
The computer does exactly what it's told, and based on the exact data you feed into it. It doesn't have gut feelings. It doesn't do "but what if the bubble bursts?" scenarios unless you explicitly ask it to... and even then, only within the parameters you set for that "what if" scenario.
The computer can jolly well nod a bubble, if that's what it's been programmed to do. E.g., if you ask it to only judge a mortgage based on X% interest, Y% default rate, and the house price rises Z% per year, you can get it's blessing quite easily. If Z > X, it can even end up that defaults are the _ideal_ case, and you make more money out of a default than out of a paid back loan. The "what if Z drops below X again?" scenario won't be evaluated unless you explicitly ask it to run it.
And I suspect that this is exactly what happened there. Those computers and those geeky "quants" calculated exactly what those higher up the pyramid told them to calculate. There was someone higher up who decided to go with those parameters. And now they're trying to pass the blame to the peons which implemented it.
Even the bit you quoted, is surrealistic: "As we now know, they were using the wrong data. They looked at the recent history of mortgages and saw that foreclosure rate is generally below 2 percent. So they figured, absolute worst-case scenario, the foreclosure rate may go to 8 or 10 or 12 percent." Essentially they _made_ _up_ a piece of data (that worst case scenario rate) from little more than a wild guess, _garbage_ data therefore, and fed it into the computer. And somehow expected that GIGO (Garbage In, Garbage Out) wouldn't apply?
Even if I'm to believe that that was all that tripped them, the blame lies not with the computer or with the nerds who coded it, but with whoever came up with that number out of thin air, and decided it's ok to bet the farm on it. Or on an analysis based on it. _That_ made up number and basing decisions on it, was the flawed decision there, from which everything else is just consequence. Whether by computer or by pen and paper, the rest is inconsequent. Someone made up a number and based a business decision on it. That person is to blame. The computers and the "quants" were just props in the play that unfoldd from there on, and trying to pass them the blame is stupid.
2. How did that number come to be anyway? By what maths did they come up with it? Why is that the "worst case scenario" number, instead of the more obvuious, "if you give money to people with no income and no assets, worst case scenario is that none can pay it back." Note that they didn't say "most likely scenario", but "worst case scenario."
Is it possible that it was the "worst case scenario" where the computer still gave the OK? I.e., that it's essentially reverse-engineering the system to come up with a lie that it still accepts? In that case, it's not the program which is to blame, but the person who deliberately tried to game it.
3. Or maybe they're genuinely _that_ stupid? A quote from Charles Babbage comes to mind:
That was: asked by members of the Parliament, btw.
One could probably even find it funny that before a computer even _existed_ (Charles Babbage was inventing one, but it hadn't been built yet) some people were actually hoping it would be a magical device where you can just d
A polar bear is a cartesian bear after a coordinate transform.
Price Balloons, whether fed by the Government Sponsored Fannie Mae, or by Medicare, are typically either a function of private irrationality (silver mines) or government irrationality (Fannie Mae, Medicare). The goal of generalized home ownership or universal healthcare may be laudable, but the ensuing shift in demand that is propelled by those factors causes a price bubble; when that bubble 'bursts' a discontinuity (crash) becomes obvious.
There is a simple reason why all this has happened.
No knows who owns the Promissory Notes for these mortgages.
When you go to court for foreclosure, you can demand the Bank produce the original note.
The problem is they sold/negotiated the Notes after bundling them into a Collaterized Debt Obligation or Asset backed Security. These unregistered securities are supposed to pass by assignment and are not supposed to be negotiable.
How good is the paper you hold if you can enforce the seizure of the collateral? How good is the paper if you don't even know if the Note was properly assigned?
The other thing is if your Note was sold your "loan" was really an exchange of currency. Your promise to pay for the Federal Reserves. Now tell me why you should pay it back? They are both worthless promises. The both are only valuable upon acceptance as valuable by another party.
The fraud is that the banks have negotiated non-negotiable paper by using it as backing for a financial instrument that is negotiable. This is fraud.
No wonder why the FED is now paying interest. They don't own the dollar anymore. They owe money for using our private credit.
Now hold on a minute!
I have a small business, and I rely on NIMA loans.
The banker doesn't understand my business and doesn't really want to either. That's the nature of non-standard business models. It doesn't apply to restaurants, retail or traditional manufacturing.
But imagine if Sergei and Larry had walked into a bank when Yahoo and Altavista ruled the web, and said "We have no revenue, but we've got a really bitchin' search algorithm and we need $3 million to buy a building so we can move out of the garage."
They'd go nowhere, fast. Hand it off to a VC and lose 85% of your ownership. OR do what I did, buy a building with a NIMA loan, then rent the building to the business. Suddenly, what was a liability is now income to me.
Of course, I have a 790 credit score - that's what made it all work.
Th system is good and it was put in place to help people. It's only the scumbag ass-hats who hyper-leverage and take advantage of the system that ruins it for the rest of us.
Make the world idiot-proof, and only idiots will want to live in it. What we really need is someway to identify and persecute people who are gaming the system.
Give freedom and capital to people with good ideas and it enriches all of us.
If the basic inputs like risk ratings, initial asset valuation, etc. are wrong you will get bad answers, no matter how well the model was built.
The US Federal income tax system.
I mean, consider this:
1. We have 35,000-plus lobbyists in Washington, DC trying to "warp" the Federal tax code to support their narrow constituencies. And we know what "warping the Federal tax code can do, as noted by the current sub-prime mortgage meltdown.
2. This results in a completely unwieldy Federal tax code, with 60,000-plus pages of regulations that is barely comprehensible even to the most seasoned tax professional.
3. We're now spending nearly US$600 billion per year trying to comply with the Federal tax code and in pre-compliance economic decisions.
4. The Federal tax code discourages people from actually saving because of the taxes on savings interest, dividend interest, and capital gains on property or equity sale.
5. Because of #4, many Americans are sending their liquid assets out of the country to avoid the clutches of the IRS. Why do you think some experts estimate we have at least US$14 TRILLION socked away at offshore financial centers (OFC's) in places like the Bahamas, Grand Cayman Islands, Panama, Switzerland, Liechtenstein, Singapore, Hong Kong, Nauru, Monaco, and so on?
It is high time we kibosh the current Federal income tax system and come up with a consumption-based income tax system that encourages people to invest and save. Perhaps the best example of this is the FairTax proposal, which intends to replace the current income tax system with a single 23% consumption tax (no deductions whatsoever), where the Federal government sends a monthly prebate check to cover the 23% consumption tax on basic necessity items up to the Federal-defined poverty level. While FairTax is not perfect, it certainly beats the current income tax system for these reassons:
1. Because of no more taxes on paychecks, interest income, dividend income, capital gains income and even on estate, it encourages people to save and invest (there's nothing wrong with that!).
2. Because of #1, the advantages of "offshoring" your liquid assets are gone. That means potentially several trillion US dollars coming back to the USA to be invested in our financial institutions, which would quickly stop the slide in the stock market and provide a new liquidity base for loans and lines of credit.
3. With no more taxes on investments, foreigners will send several trillion dollars of investments themselves into the USA, since we will become the world's largest legal tax haven. Again, this provides a huge bolster for the liquidity base in our financial system.
4. With no more taxes on payroll, corporate income, dividend income, and capital gains, it encourages American companies to keep as much goods production in the USA. Cities like Detriot and Cleveland could experience an economic boom as blue-collar jobs return to the USA under more advantageous tax conditions.
There in fact has been a concerted governmental effort to destroy credit as a meaningful system. If you find a phone book from 30 years ago, look up 'Credit Bureau'. There was probably one in your county, and one in about every county. The credit bureaus had the job of preparing meaningful reports on individuals, including local data like Judgements and Liens, that are not included on the big deduped listings.
Now look in your phone book- I'll bet you do not have a local credit bureau. They were pretty much all eliminated due to shifts in government loan policies. In fact, banks did not want potentially negative credit information about prospective buyers, and preferred the big 3 credit aggregators. Home sellers, realtors, banks and Fannie Mae all pushed the destruction of meaningful credit.
I worked as a mortgage quant on Wall Street for over 10 years, with my latest time focused on the non-agency market, subprime in particular. This NYT article is a joke. Let me go through it piece by piece.
First off, Buffett is completely wrong on derivatives. They are not some evil "weapons of financial mass destruction". In fact, Mr Buffett uses derivatives all over the place. The reason he makes these comments probably has more to do with ego placement than any financial reality. Because a derivative is a zero-sum game, it is difficult for them to cause wide-spread financial chaos, although they can and do shift risk from one party to another. Depending on the way the risk is distributed, this can either increase or decrease total, systemic risk. It is highly likely that the uses of dervivatives today decreases systemic risk. While apparently they may seem complicated to Warren, the vast majority of derivatives are quite simple mathematically. MBS and CDOs (especially CDOs on MBS) are not simple at all, but these structures only account for a fraction of derivatives. And, calling an agency pass-through MBS a derivative is really a stretch, and that is $3T of MBS right there. The only risk that is split off from these is the default risk to the agencies (see below).
The article continues hyperbole, and solidifies the author as a someone who really is out to make a dent in the Sunday readership as opposed to making a thoughtful analysis, by comparing derivatives to nuclear weapons. That really is ridiculous.
Now, with fear clearly in the forefront, the reader belittles people who have studied difficult subjects and gone on to make an enormous contribution to the financial work. We have seen this kind of condescention multiple times since the subprime mortgage mess began to unwind, and I suspect it tells us more about the self-perceived envy of the writer than cogently discussing the problem. Translation? These quant-bashers have PhD envy. That's why the write such articles. After all, they always point out that they don't understand the problem. So, how else could they make such a damnation of the supposed brilliant minds?
Next up: Where in the world did this $62 Trillion number of wealth come from?? ARE YOU SERIOUS??????? People, global wealth is only somewhere in the area of $60-70 Trillion. All I can say here is Oh My God. To quote the article: "not much of a stretch to imagine that all of that imaginary wealth is locked up somewhere inside the computers". After the Nuke analogy, I thought nothing could be more ridiculous, but it only took 3 paragraphs to prove that idea wrong. Wow. People. Wealth is not locked up inside of computers, unless you open the case and actually stuff bills inside. Holy Shit.
The Dyson quotes are interesting, but irrelevant. Just because something is not produced from a "factor of production" does not mean it is useless. It is sometimes the case that economists do not understand finance. They are not the same thing.
The paranoia in the article regarding turning over "power to the machines" is actually funny. Honestly, I wonder if the author just watched Terminator while experimenting with the latest batch of LSD. Holy Shit Again.
The article descends from that point into babble talk. Unfortunately, the athor ignores the various parties that actually have real fault: The rating agencies, Wall Street firms, regulators and buyers who miscalculated risk on a gigantic scale; the homeowners who took loans they know they couldn't afford; the brokers who stuffed mortgages down the throats of people who did or didn't understand them; the originators for lacking any kind of quality control in the process; the apparaisers who blatantly faked values; and the politicians who watch it all happen knowing it would end badly and did nothing about it. About the only thing NOT to blame is the computers.
Now, let me say, having done it for over 10 years, calculating mortgage risk is a wildly complicated task that people did not understand, and frankly I
Maybe then what we should do is add another kind of metal.
Lead.
In naked short sellers.
But...but...a 73 year old obstetrician from Texas told me the gold standard would help fix the economy!
The people who made this a catastrophic mess (as opposed to just a nasty mess) are the credit rating agencies (Moody's et.al.) who pretended there was any way to make a security (mortgage-backed or otherwise) exactly as low-risk as a U.S. Government obligation. Far fewer folks would have been legally allowed to purchase these products if the ratings had reflected the actual risk inherent in them and thus the potential impact to the economy of a failure in MBSes and CDS insurers would have been far, FAR less.
Moody's played exactly the same role in this debacle as Arthur-Anderson played in Enron's and I personally think they *ought* to suffer the same fate AA did so that future ratings agencies understand that failure to perform due diligence jeopardizes their company's existence. Wall Street understands Moody's role in this and the broad market continues to tank in spite of Bernanke's and Paulson's actions because we don't trust the ratings given by Moody's to other financial products or even companies so nobody knows how much risk they are really sitting on.
Let me say this clearly -- the heightened leveraging of the investment banks caused some problems but it isn't the leveraging that made this a catastrophic problem. The problem is catastrophic only because (a) folks who shouldn't have been allowed at all to be exposed to these risks were allowed to buy in and (b) folks who should have been allowed to take these risks weren't prepared through proper compensation for the risks they took on. All because the credit rating agencies did garbage-class work.
Until the credit rating agencies get as scared of the consequences of their negligent actions as accounting firms were post-AA this will continue to be repeated every time some finance person imagines up a new way to pretend to eliminate risk from investments which are fundamentally risky.
1.) Rent money and buy house
2.) ???
3.) Profit
The reality is that the smart ones weren't outsmarted at all.
;).
After all, the smart ones got paid very well and got big bonuses.
Sure some of them might be out of a job now, but since "everybody was doing the same thing, it wasn't their fault" AND it made their bosses rich too, so they'll soon be rehired to do the same thing all over again. After a nice holiday in the bahamas or something
It's the stupid ones who don't get it, and don't see how all this "fancy math" is actually just adding games to the casino. But a casino where if the smart ones lose "too big", the stupid ones have to pay.
Call me cynical but that fancy math is almost like the finance equivalent of the "Chewbacca defense".
Think about it, if the "fancy math" was really to reduce risk, stuff wouldn't be blowing up so regularly e.g. 1987, 1997 (remember LTCM?) and 2008.
Do people really think the smart ones don't know what they are doing when Warren Buffet himself came out and referred to their schemes as "financial weapons of mass destruction"?
They probably were thinking: "I hope he shuts up before the sheep realize what's happening".
Privatize the pain, socialize the pain.
Now if they actually started putting a special tax/levy on finacial institutions that'll be progress. Then at least they'd have to pay for their own bailouts.
The first mess was the stock market crash of 1987. They came up with something called "portfolio insurance". They combined program trading, futures, and options into an incomprehensible stew that was supposed to allow a mutual fund to buy highly profitable, highly risky stocks but insulate itself from their risk. It went haywire and the market crashed.
The second time was Long Term Capital Management in the mid-to-late 1990's. It isn't clear what they were doing, but it almost caused a worldwide financial collapse and required government intervention.
This time it was financial deregulation, predatory mortgage lending, collateralized debt obligations, and credit default swaps. None of this stuff was understandable, including the mortgages and all the derivatives. Many mortgages violated Truth in Lending laws. They misled the prospective homeowners about the terms, and put them in fine print that an average person couldn't understand.
The underlying problems are these:
1. Financial derivatives. They take stocks, mortgages, and bonds and bundle them into other financial instruments, such as index instruments, and mortgage bundles. They do other things like splitting the interest from the principal and putting them into separate instruments. They then create futures, options, and options on futures for the bundled instruments. Options on stocks and bonds are reasonable and understandable. Futures on real commodities are understandable and valuable to producers and users of the real commodities. The rest of the derivatives add more and more complexity.
2. Allowing derivatives to settle in cash. This turns the derivatives into side bets on the real financial instruments. This is how 4 trillion dollars in mortgage and other bonds turned into 62 trillion in credit default swaps. A speculator doesn't have to hold the bond to buy "insurance" that the bond will pay off. A speculator doesn't have to hold a stock or borrow and short it (creating an obligation to buy it to close the loan) to place a bet on its price.
3. Arbitrage trading strategies that connect the derivatives side bets to the real market. The side bets don't remain side bets. The trading strategies do things like enabling speculators to drive down the prices of stocks while bypassing the discipline of the short sale procedures (which were also relaxed due to financial deregulation). These procedures include requirements for the stock price to go up on the transaction preceding the short sale (the "uptick" rule), and requiring the short seller to actually borrow the stock before selling it.
4. Financial deregulation that allowed all of the above problems to fester, and in some cases explicitly placed some of the financial instruments outside the scope of regulation. We can thank Phil Gramm, John McCain's best economic buddy, for this part of the problem.
5. Allowing some derivatives to be traded in unregulated markets and concealed in financial reports. The scope of the problem was allowed to be invisible.
6. Faulty models of the derivatives markets. The quants' algorithms were based on faulty models. Based on an op-ed in the Washington Post, the models appear to assume simple linear market behavior and normal random variability. They are most likely based on faulty economics like the "efficient market hypothesis" that is a fundamental principal of "free market conservative" economics. Markets simply are often not efficient. Charles Mackay (author of Extraordinary Popular Delusions and the Madness of Crowds) is every bit as good a describer of markets as Adam Smith. Since the derivatives and quants became more central in the markets, we have had more Mackay markets than Smith markets.
My suggested solution is to require any derivatives to settle in the underlying financial instruments or commodities. No purely cash settlements would be allowed. As a transitional provision, I would suggest immediately imposing a stiff tax on any derivative settlements that are made stric
http://www.sinfest.net/archive_page.php?comicID=2952
analysis. Sure, there was talk along those lines, but the rhetoric didn't match with what actually happened. The Fed engineered a rather LARGE bailout of LTC. Essentially what they did was spread the losses around enough to insure that the overall structure withstood the collapse of one part. There was obviously enough flexibility in the system to do this at the time, coupled with the fact that the Asian markets were enough decoupled from the rest of the financial industry that a cascade failure could be averted.
Essentially what they're attempting now is the same sort of strategy on a gigantic global scale. The difference is there is no longer a stable part of the system to isolate the damage from nor is there some portion of the system that will remain standing once the affected elements inevitably reach their end state (some level of collapse). No strategy is going to fix this, and the reaction of the markets to all attempts to do so thus far bear this view out.
What exactly the end result of this collapse is, what is left standing and what isn't, is likely to be almost impossible to determine, which is in and of itself enough to create the panic which is just serving to amplify the effects.
In a year or two when the dust settles we'll have some idea of where we stand. One would hope the situation is that enough of the really core elements of the financial system remain in place and able to function that we HAVE a global economy still. Here we can ask the question "what actions would best insure that", but notice that those are questions dealing with longer term strategy. Mere TACTICS, bailing out this, that, or the other thing, etc is just largely irrelevant. Nobody knows for sure what CAN be saved nor what MUST be saved.
Consequently it would seem the only prudent strategy would be to decouple oneself (as either a business or an individual) as much as possible from the whole system for the time being and hope to step back in after the dust settles.
"Malo periculosam, libertatem quam quietam servitutem." -- Jefferson
Has finally been revealed (partially).
The Gummermint of the USA has been in cahoots with Wall Street for seventy+ years now, massaging statistics to further political agendas etc. It's been getting steadily more blatant for the past seven years with ridiculous inflation and employment figures that do not require a doctorate to recognize.
I killed da wabbit -Elmer Fudd
The Reagan tax cuts really did increase revenue. (Or at least the tax cuts were associated with rising revenue, if you want to argue about causation.) Many other interesting graphs here.
Q: What does the "B." in Benoit B. Mandelbrot stand for? A: Benoit B. Mandelbrot
t generally goes like this
If (canPinBalameOn(BlameConstants.BLACK_GUY)) {
blame(BlameConstants.BLACK_GUY);
} else if(canPinBalameOn(BlameConstants.GEEK)) {
blame(BlameConstants. GEEK);
} else if(canPinBalameOn(BlameConstants.ADMIN_ASSISTANT)) {
blame(BlameConstants. ADMIN_ASSISTANT);
} else {
noneOneToBlame();
}
compensateExecutivesHandsomly();
I am not an economist, so I'm probably wrong. I think this talk of derivatives and subprime mortgages might be a big red herring to cover up America's gargantuan trade deficit.
After the Breton Woods agreement, the world came off the gold standard, and because America won the second world war, it was decided that the dollar would become fiat currency ie the world's commodities would be traded in dollars.
This was not a problem then, because America's trade balance was extremely healthy, Europe's cities were flattened in the second world war, so their productive ability was very low.
America lent the rest of the world oodles of money, so as to fund the export of tobacco, this fund of foreign currency is starting to dry up, as people realize how bad tobacco is for you.
The only way for America to cover up it's enormous trade imbalance was to sell mortgages, to people who could not afford them, then to sell those dodgy mortgages abroad to get badly needed foreign currency, so as to fund their profligate life style, American fuel is still only about half the price of European fuel. America has vast amounts of it's own oil, yet still imports oil, it gets away with this because oil is priced in dollars all over the world.
If China starts to off load it's enormous pile of dollars, then the whole house of cards will come tumbling even faster.
America you can fool all of the people some of the time, you can fool some of the people all of the time, you cannot fool all of the people all of the time.
It's called an elephant's trunk whereas it is in fact, an elephant's nose, a nose by any other name would smell as sweet
. Only one wing of the building fell off that time. If we had exercised any prudence whatsoever we would have taken the hint.
It's the job of business to make money, and damn morals, prudence, or anything else which might get in the way.
This is what we call "moral hazard". This is the REASON why we have regulation, and why reaganomics was declared a failure decades ago.
Still, these moronic, bull-headed politicians and their faux-news commentators (i'm looking at you bill) keep pushing it.
Self-regulation is no regulation.
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A huge point is completely missing: all of the houses were appraised at the values the mortgages were offered. These appraisals were done at market value and were accurate - if you can sell your house for $500,000 today, then it should be appraised at $500,000 today.
Uh no. The fact that a house sold for $500,000 does not mean it is worth $500,000 to another buyer. The whole point of appraising for loan qualification was to assure the lender had a good chance of getting their money back in case of a loan default. What happened was that appraisers were generally pressured into approving sale prices if they wanted business from the real-estate agents.
My take is that there were too many people involved in the process that were making money without any long term responsibility. Things might have been different if say 50% of the mortgage brokers commisions were based on loan payments.
The other big problem was that there was too much leverage in a speculative market - which is exactly what led to the 1929 stock market crash - and that speculation was driven by the Fed maintaining low interest rates.
Comment removed based on user account deletion
This effect is called the "money multiplier", and it's been around LONG before anyone went off the gold standard.
Without the money multiplier, the industrial revolution would not have gotten very far.
The reason we're facing massive economic collapse is not because of debt defaults per say, but because the markets are so skittish that nobody is lending, thus the money multiplier is being squished into nothing.
This is exactly what happened during the depression, though for slightly different and more severe reasons.
Back then, the banks themselves went bust. The money multiplier was gone, and the money supply evaporated. This meant businesses could not get loans to weather the economic storm, so they went belly-up.. and unemployment skyrocketed.
The blessing here is most assets are covered by the FDIC now, when they weren't in the late 20's. This should help cushion the worst case scenario.
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Everyone knows the (simplistic) explanation of leverage. The bank starts with $1.00 in deposits and loans out $0.95. The borrower invests it with another institution that loans out $0.90. etc., etc. Soon, you've pumped that original dollar up into $40 or $50 of paper wealth.
Its a variation on a Ponzi scheme. Aside from the people borrowing to finance production or services, the system still only has $1.00 or real wealth in it.
Have gnu, will travel.
Securitized mortgages aren't the cause of the current problem, the CDS "insurance" products that backed up the sub-prime securitized mortgages are the main problem. Followed by the rating agencies looking the other way.
Imagine if company "A" was tired of turning-over safe securitized mortgages for pidly profits and wanted to sell some stupid thing that would generate a higher return (e.g., sub-prime mortgages). The problem is that there is no market for these the stupid products (because of the risk).
Imagine if company "B" could sell an "insurance" product that wasn't really regulated as insurance so you could write simple business2business contracts to cover arbitrary credit defaults and collect a premium without any required reserve in case shit hit the fan.
Imagine now that company "A" thinks they can mitigate the risk of their new stupid sub-prime-securitized mortgage product by pairing them with company B's "insurance-like" CDS product. But that isn't really that great yet (since they have to pay the premium), so they chop up the security into various tranches (senior debt vs second-tier debt) because presumably only a fraction of the underlying mortgages will default. Company "A" suggests to the ratings agencies the senior tranches of this stupid product should be AAA-rated like US-treasuries because of course there could "never" be that many defaults. They can now sell this senior tranch with a really low interest rate (more money for them) and the second-tier debt at a higher interest rate. They make so much money on the senior tranch (because it's AAA) to cover up for the premium and the presumed risk-return of the second-tier debt.
Company "A" is happy because they created a new product that is more marketable since they mitigated the risk with this "insurance-like" product, Company "B" is happy because they are collecting this premium.
Now imagine if the standard terms for these contracts didn't require you to hold the actual primary credit risk that could be defaulted on (e.g., you could speculatively "bet" on someone elses default). Now imagine speculation on in that market for these contract. This allows this instrument to be used by hedge funds to partially hedge against buying all these stupid second-tier product and getting the high interest rate (so there are CDS on the primary credit and also hedges in the second-tier debt market).
Imagine now that shit has hit the fan and company "B" realizes that company "A" can't make good on their contract because there's no reserve. Not only did company "A" write these contracts on primary debt (which could presumably be "fixed" by guaranteeing the primary debt), but they have secondary exposure to the second-tier debt (the tail tranches that were really crappy mortgages that were expected to default first).
Now nobody wants to touch these stupid AAA-rated products because the CDS part of the product is really of unknown quality (probably insolvent companies) and the mortgages are also of unknown (probably bad) quality. This causes the credit freeze because nobody wants to lend money to a bank that has too many assest of this type (because they don't know if the company is solvent or not).
So the inventors of the CDS are the real villian. They allowed this stupid product to exist and were unregulated so that companies could write contracts that they really didn't have a reasonable reserve for. They ratings agencies are also to blame because they created a situation with a risk-return anomoly where a product could be sold which didn't have the proper risk-return allowing companies to make an unreasonable amount of profit selling the product (because they weren't paying out an interest rate to compensate for the risk).
So who invented this CDS idea? I don't know, but I bet it was one of those financial "geeks" or "quants". Who came up with the ideas for hedging with these products? Probably the same folks. Who allowed a CDS to not be classified as an insurance contract and thus regulated? Why our current bribe taking friends in congress of course...
My family's been trying to claim money thats been locked in German banks since 1933.
B..b..b..but some dude on Slashdot told me that the man who has spent the last thirty years studying and writing about Austrian economics and who has served on the Senate Finance Committee is completely wrong! And besides, he has big ears! LOL!
"Gold still represents the ultimate form of payment in the world." - Alan Greenspan, 1999
Parent's explanation is really accurate. Most of the comments are re-spun pablum carefully constructed to blame no one.
Most posts have also failed to note the inherent problem in the math used to come up with these packages.
"Risk" was ignored in order to make the financial package models work. Real-world "risk" includes events way beyond the deviations used to make the investment vehicles work. The quants don't have enough data to model out very far from the center, so they can't even quantify it.
A simpler way to say it: quant reports made their way into a meeting of people who are experts at blame shifting their failures and taking credit for others successes.
While everything was going great, it was because they sponsored the financial product. When the wheels came off the whole scheme, they blame Research for not making the risks known. In both cases they believe they are in the right and deserve every dollar/perk they get.
This personality is poisonous and at the same time presents the illusion of creating wealth.
http://www.maxineudall.com/2010/02/should-economists-be-sued-for-malpractice.html
It's simply... garbage in garbage out. Humans suck.
One of the differences between simplistic models of electrical circuits and real circuits is the nature of "noise". Simplistic models assume gaussian noise, real cicuits usually have a 1/F component as well as the gaussian component. One of the best descriptions of 1/F noise is in Horowitz and Hill's "The Art of Electronics".
People have grown tired of debunking this same old crap.
It's been done in about a dozen threads where this blatant misrepresentation has been brought up.
Later posts in this thread show it to be false.
Heck, even posts by people supposedly "supporting" this have shown it to be false by quoting materials fed to them by the echo chamber that they didn't even read.
Those posts are modded "overrated" "troll" "flamebait" while this gets to +5 "interesting".
Slashdot is the new ISO of online news.
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The problem at the heart of financial crises is fractional reserve banking. The empirically "stable" fraction is roughly 9.5% right now, and as "wealth" increases, that fraction decreases because real value isn't created to balance it out. The banks simply negotiate the most aggressive numbers they can get away with, and since all wealth is purely electronic, they can fabricate it out of thin air - they don't need to print it anymore!
The fact that money is so far removed from the concept of value, is the very reason the system has collapsed - you can only build so high on any given foundation.
-Billco, Fnarg.com
You are quite right to say that it is wrong to stay that socialism is risky. IT's not. It's a known, proven, stupid thing to do and if Democrats genuinely get their way, you can expect to see that we shall all be sold the benefits of a sharply reduced standard of living in order to cover for the failures of that system. WE'll all be nice and poor but the earth will be safe, and you won't have to bitch about the rich, because there won't be any... just a few high place appartchiks in government.
You know, its pretty hard to call this the work economic downturn in 100 years when we are all sitting at home on our fancy computers and writing posts on slashdot. If this was the great depression or anything like it, we would be out looking for food and it is probably that we might not even have electricity, let alone Core 2 Duo processes. That we could even call what will likely be a modest economic downturn a "depression" is really indicative of just how successful free enterprise is.
Let us contrast our "worst" of capitalism to some of socialism's supposed successes. Is the living standard of Cuba so high right now? Where's that big explosion of Cuban computer programmers? Similarly, the people in North Korea do not even have electricity at all.
We can say that this big capital meltdown is a disaster, but, let's remember that we did, for this 700B bailout, wind up getting nearly 6 trillion dollars worth of new housing construction and for a country whose population is going to double over the next 50 years, this is not a bad investment to make at all, long term. And, it is very likely, given experience with similar bailouts such as occurred with RTC, the spinoff of Conrail, or even the bailout to Chrysler, that the government will actually take a profit from it.
This is my sig.
high time we kibosh the current Federal income tax system and come up with a consumption-based income tax system that encourages people to invest and save.
Oh, you mean a policy which favors the rich even more than it does today.
The only thing "fair" about the fair tax is it allows the "fairly" rich to hoard their money and never give back to society (despite conspicuous consumption, they don't spend very much of what they make). I suppose you could actually call it the "unfair" tax.
the Federal government sends a monthly prebate check to cover the 23% consumption tax on basic necessity items up to the Federal-defined poverty level.
So people at poverty level, who are exempt from federal taxes anyway, are also exempt here.. big deal.
Social safety net systems are funded by people who make their money on backs of the rest of the public, and who make use of military and police services in which people DIE to protect their wealth.
Some of those social safety net programs are worth considerably more than the simple taxes, to which these people are already exempt. (more on that below)
2. Because of #1, the advantages of "offshoring" your liquid assets are gone. That means potentially several trillion US dollars coming back to the USA to be invested in our financial institutions, which would quickly stop the slide in the stock market and provide a new liquidity base for loans and lines of credit.
what exactly is this snake oil?
Investment capital gains are already taxed considerably less than normal income tax at the income brackets you are talking about here.
What it WOULD do is, again, cause cash to the government to be further limited, and the resulting budget cuts won't be taken from military spending or pork.
They'll come from education programs, day care subsidies, and numerous other programs which make the daily lives of people at or below the poverty line "livable".
. With no more taxes on investments, foreigners will send several trillion dollars of investments themselves into the USA, since we will become the world's largest legal tax haven. Again, this provides a huge bolster for the liquidity base in our financial system.
Because we all know giving money to the already wealthy top echelons of business will definitely guarantee "trickle-down", rather than big fat bonuses, golden parachutes, and more funding for programs to offshore increasingly skilled professions for the sake of cheap labor.
4. With no more taxes on payroll, corporate income, dividend income, and capital gains, it encourages American companies to keep as much goods production in the USA.
Once again counting on the wealthy to give a damn about the great unwashed below their feet. Fox, please meet henhouse. hens, do you remember the gilded age?
With no more taxes on corporate income and capital gains, Donald trump could buy his kids platinum ferraris instead of the cheap, solid gold ones their friends make fun of.
Cities like Detriot and Cleveland could experience an economic boom as blue-collar jobs return to the USA under more advantageous tax conditions.
Because the massive corporate welfare system we have now just isn't enough right, surely adding more policies to put money into the pockets of the wealthy will encourage their generosity the same way such previous programs have.
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Lets see, feeding BS to computers, whipping up a nifty algorithm in order to show the results you want to see? Sounds a lot like what the climatologists have done to stir up belief in "Global Warming", and only when confronted with their lies, they changed it all to "Climate Change"... still doesn't change the fact they made all this stuff up and invented a problem along the way.
How much time & effort do we need to expend trying to solve imaginary problems?
As far as this financial market mess goes, all one needs to do is rescind the mark-to-market rules that were enacted by SarBox regulations and the crisis is over.
Good security is based upon reality and common sense. Common sense is a function of having common knowledge.
WE have bigger cars, larger houses, more electronics, and for that matter, even private gun ownership
And I put it all on my credit card!
to that end American economics are better
D'oh!
Socialism is also such things as a profitable fruit canning company owned by farmers - or even simple Christian charity
And in the free market, you can invest in either or, if you so choose. As much as you bemoan religion, you can, in a free market society, choose what company and cultures that you wish to support.
What's interesting is that, as much as socialism obsesses over ownership of the "means of production", and continues to carry this tired argument absurdly in the face of the fact that in the USA more people own the means of the production and have a share in its profits, as a practical matter, than have ever had before in any country anywhere. And, had George Bush's plan to private a sliver of social security been enacted, -everyone- would have had a share of the means of production that you so dwell on.
Better still, you can choose what production you want to own a part of. In a purely socialistic economy, everyone is forced to choose to own a tiny sliver of all of the means of production and are thus essentially powerless. But, in America, you can choose to entirely invest in companies who conduct their business in a way solely consistent with your values.
The bottom line is, the basic economic complaint of Karl Marx's reactionary response to tool carrying craftsmen being replaced by capital intensive industrial machinery has been answered, in fact, by capitalism. The modern stock market allows everyone to participate and own stock if you choose, and with companies such as e-trade charging no minimum balance, anyone genuinely can. The best and most fair chance to have everyone own a piece of the pie, was in fact, to partially privatize social security, but instead, what we got from the left wing was fear mongering.
The bottom line is that any sane person can analyze the economic behavior of the American left wing and ultimately conclude that the objective was never about the worker at all. It was about power. Republicans threw ownership on the table and it was refused. One has to wonder, given the determined efforts by the left wing to not only undermine American wars, but also to constantly attack the very means, the stock market, by which ownership is shared amongst all the people, then, one has to wonder if all of this so-called banking crisis is so accidental after all, and if this sudden rise of the Democrats is an election, or if it is really a coup. Perhaps we shall find that this banking crisis is the Reichstag fire of our time.
This is my sig.
Good lord, does that article really say gray eminence? And does someone on the New York Times really think "well, Joe Sixpack isn't going to understand 'eminence grise', but he'll pick up 'gray eminence' like a hanging curveball"? Jeez.
Gee. And all this time I was under the delusion that I successfully exchange my labor for money, and then successfully exchange that money for all sorts of valuable goods and services. Thanks for clearing that up!
Are you adequate?
Private Mortgage Insurance...
I'm paying about 9K a year on it. It is required if
you do not have 20% down payment on the home. You can partially get around it with an 80/10/10 loan meaning.. 80% loan for home. 10% down and 10% separate loan to cover the other 10% down.
. Why aren't we hearing about PMI during this crisis.. aren't they the ones guaranteeing the loans..
... that in the future, we'll be owned by computers, I thought they means "pwnd", and not literally "owned", as in "property".
You can describe the so-called success of Europe over the last 20 years but the fact of the matter is that Americans have more stuff. WE have bigger cars, larger houses, more electronics, and for that matter, even private gun ownership, and so to that end American economics are better.
yea. you have them, ON DEBT. and now the debt bubble is exploding.
enjoy.
Note this: while the poorest of Americans have about the same standard of living as the poorest of Europeans, the richest of Americans are far, far better off than the richest of Europeans. Richard Branson might be able to buy himself a spaceship, but Bill Gates could buy himself a fleet of them.
the real rich of europe do not appear in newspapers, buddy. they are long past that stage. there are enough cash in swiss banks to buy the world a few times over, including america. did you know it ? the only reason the cash in those banks cant be spent is there arent enough services and goods on face of the world to buy with them. if they moved into the market by any means, be it investment or anything, inflation would go sky high.
arrogant americans. you dont know zit, and yet you babble. STILL.
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Current Share Price Current Market Capitalization Everything beyond is either irrational or manipulation or bubble.
I'd like to buy homeland for our 10 million people. http://twitter.com/mahadiga
the relentless drive for greater and greater profits is a built-in feature of the entire system. While regulations certainly work in the sense that they can prevent specific activities there will always be ways to 'route around the damage'. Outlaw naked shorting and someone simply comes up with some new class of instrument that does basically the same thing some other way, etc.
I don't have any brilliant solutions, but in the final analysis I also don't think that any regulatory regime could have prevented what is happening now. Look at Europe, they have much more comprehensive banking and financial regulations than the US, and yet they're still swirling around the drain just like we are. It would seem to be time for some serious out of the box thinking.
Naturally being a tech geek myself I have to wonder if perhaps there is an engineering approach to the whole question. Banking as a utility? Some way of buffering crazy flows of capital moving around in the system? Dunno...
The libertarians amongst us will scream at the heresy of course, but I can't help but point out that freehold ownership and unrestricted markets seem to lead to socially undesirable results. I'm thinking it is sacred cow slaying day.
"Malo periculosam, libertatem quam quietam servitutem." -- Jefferson
I think the previous post has some pretty reasonable ideas to consider, and there are other voices I've heard saying some of the same things, maybe banking should be a 'utility' like electricity, not a competitive enterprise.
However, you've certainly raised the contervailing objections. There are other 'systemic' problems with such a proposal as well. One would be 'how do you initiate economic development in an underdeveloped segment of the economy?' If a bank say wants to go into a town where there is little development, how would they write mortgages if they can't bring in outside capital and leverage it? This was one of the problems the US had internally in the 19th century which motivated the creation of the regional Federal Reserve banks.
The last point you made is also a good one. Such a system is unlikely to work unless it is applied at least to some extent worldwide. We have to face the fact that there are no such things anymore as 'National Economies'. The whole topic of world governance has to be addressed as part of any solution. This is going to be neither easy nor quick.
"Malo periculosam, libertatem quam quietam servitutem." -- Jefferson
Propellerhead got the name for Reason from Neal Stephenson's Snow Crash. It was the name of the nuke-powered still-in-beta chain gun used by the Mafia on some pirates (and later used by Hiro himself, if I remember correctly).
Not a bad guess, though. I had forgotten about that little jewel.
Your brain is not a computer.
is about.
The problem you're failing to see is that the supply of goods and services can easily grow faster than the supply of gold. In this case, over time, more goods and services become available, when you add everything up, there won't be enough gold to buy the whole supply of goods and services at a profit to the aggregate of the producers. This means that producers will seek to match their output to the gold supply, instead of matching it to the economy's real supply and demand capacities. (Exception: producers can barter their output, but barter doesn't scale up to a complex economy. How do you barter programming labor for heart surgery?)
So, in short, the problem with using gold as money is that there won't be enough money for producers to trade all the goods they are capable of producing, and therefore, they will not produce.
Are you adequate?
at times i feel a great connection in between apostrophes and myself. intimate moments.
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pal, bubbles are not a problem. bubbles DONT sink entire world economy. remember dot com bubble. it was even worse. hundreds of millions of dollars went under with the flopping of a single hip and upcoming tech company, spent on NOTHING.
with the housing bubble there are SOLID assets, HOUSES abound. that cant sink the world economy.
1 million homes risk foreclosure. even if you say that these houses were bought from 600, but valued from 400 now, the total difference is just 200 billion dollars. ONE THIRD of the money america is readying for bailout.
germany just arranged 600 billion for its own banks. france a 458. england 160. other countries alike.
the lost value in housing bubble is 200 billion, but that much money is needed to bailout the system. can you see the picture now ? there is big difference.
the difference comes from LAWLESSNESS.
the difference are the hedge funds that have been 'created' by 'indexing' some funds to those mortgage values.
to make long story short, investment banks conjured $3.6 trillion or more 'assets' ouy of those 600 billion worth houses. THEN showed these assets in their balance sheet to government, and got the permission to lend TEN TIMES more money. they lent THIRTY SIX TRILLION DOLLARS of cash that they DIDNT HAVE. hell, that money didnt even exist in the first place !
that is the reason for global meltdown. and the only reason it is there, because someone from the government did not go out and say 'hey, you cant do this, this is total fraud' to the investment banks. because all of those republican and holistic economic shills were yelping 'hands of business' at that time.
there.
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I don't know about that...