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Greenspan Tells Congress Bad Data Hurt Wall Street
CWmike writes "Former Reserve Bank chairman Alan Greenspan has long praised technology as a tool to limit risks in financial markets. In 2005, he said better risk scoring by high-performance computing made it possible for lenders to extend credit to subprime borrowers. But today Greenspan told Congress that the data fed into financial systems was often a case of garbage in, garbage out. Christopher Cox, chairman of the Securities and Exchange Commission, told the committee that bad code led the credit rating agencies to give AAA ratings to mortgage-backed securities that didn't deserve them. Explaining in his testimony what failed, Cox noted a 2004 decision to rely on the computer models for assessing risks — a decision that essentially outsourced regulatory duties to Wall Street firms themselves."
The guy's 82 for fuck sakes! Who gives a shit what some senile old fart thinks?! That's the problem with this world, the people running it are all far too god damned OLD.
If these people did not know what was going on, they are not professionals, they are just a schmuck who is being paid too much. To say that the computer models did not anticipate their stupidity is just denial.
That will teach ya for outsourcing your code to India!
Considering how he influenced the Department of the Treasury and related courners of patent land granted to government, they don't even care about M2 and M3 money supplies anymore. They just keep printing, fractionalizing all contracts that government has an equitable interest greater than the alleged owners intending that bill of exchange between eachother.
"Clearfield Doctrine" provides that when "government" removes its sovereignty and takes upon itself a new character (name in commerce) as a private Citizen when it enters an equitable relationship.
You people should wonder how a plain signature itself is the original banknote that creates all those private credit loans, yet they sell that original instrument to someone else and fake that they still have posession of it in order to slug the court clerks into thinking it is a debt-collection action from the true party in interest.
Get rid of Greenspan, and whip him by the merit of Congressman Louis T. McFadden.
The summary says bad 'code' led the credit rating agencies to give incorrect scores. The article doesn't say anything about code. It says bad data was responsible.
"Christopher Cox, chairman of the Securities and Exchange Commission, told the committee that bad code led the credit rating agencies to give AAA ratings to mortgage-backed securities that didn't deserve them."
What do they expect? Code can only handle preconceived models. If the programmers overlook something it's not like the code will fix itself.
These models are based off of incomplete information and it's up to us to fill in the gaps. We've never had subprime mortgages en-mass before and the model likewise didn't know how to handle them.
Well, back to rejecting software patent applications.
What a way to shoehorn a non-tech/nerd story into slashdot (BTW, why is this in politics??!!)
Bottom line, this had nothing to do with bad data. It was Greenspan's blindness to the consequences of easy monetary policy would have that caused much of the problems today.
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Oh great!! /.er, the whole fricken mess the world is in right now is our fault!!!! Should have better tested the program and put in safe guards to make sure idiots couldn't enter data. Then we should have made sure idiots wouldn't read the data.
jsut athnoer menagiensls ltitle psrhae for you to dcoede. Why do we wtsae our tmie dnoig tihs?
Models themselves, and the blind faith in "the market". When the model's wrong, quality of data becomes irrelevant - "not even wrong" (Pauli, I think).
Well, "the market" did sorta work - by eventually bringing down the crash, but gov't softened (and lengthened) it by bailing out the banks. But that's just semantic rubbish, of course.
Fuck systemd. Fuck Redhat. Fuck Soylent, too. Wait, scratch the last one.
Wikipedia has excellent articles on subprime and the housing bubble and their cause effect.
I still blame the banks and morgage brokers. Including the Sandlers who SNL made fun of.
-Leverage can be evil. The investment banks were highly leveraged. Caused the stock exchange to crash in 1929.http://en.wikipedia.org/wiki/Wall_Street_Crash_of_1929
Greenspan really is scarily inept... It amazes me that he was taken as seriously as he was for so long. The most amazing thing I found in his autobiographical book was that he believed in the 90s that computer systems were going to efficiency gains that accounted for the share price rises during the .com bubble.
http://www.amazon.com/Age-Turbulence-Adventures-New-World/dp/1594201315
It was profitable to give out subprime loans in the short run. So some banks did. They apparently didn't have managers scratching their heads and saying "hmm.. house prices are going faster than wages and jobs are going overseas so it's unlikely wages will rise any time soon" like the others..
I keep on harping about this. Who assures data quality? With web 2.0, cloud computing, distributed applications etc. who assures that those actual data are correct?
The article addresses that there were only 20 years of data, but doesn't address this fundamental issue. In the past 20 years we have had wars, terrorist attacks and recessions. Plenty of jolts. Once a data stream becomes polluted, in my experience, determining what is valid and what isn't is *hard*.
Though all-in-all I think Greenspan is in the hot seat and just looking for a scape goat.
putting the 'B' in LGBTQ+
If all else fails, blame your tools.
People fucked up. Ain't it always the case?
In my experience in these matters, it wasn't the code, it was the fact that management kept disagreeing with the results and changing the assumptions until the answer became something they wanted to hear.
If you think deeply enough, you will have no single direction for your outrage.
This reminds me of a typical real-life instance where the source of the error is a user error, then the user blames the technology...
The problem was the computer models based loan risk upon 10 years of data instead of 79 years.
You would think they would run case studies to make sure the output was correct. I would suspect that a seasoned loan officer should have noticed these kinds of issues and raised red flag instead of blindly obeying the almighty computer.
It's another case of "the computer is broken, not my fault" mentality. Ultimately, people have to issue the loans. They are to blame, not the computers and not the data.
Yes, if only we'd had a computer to tell us that creating money out of thin air has negative economic consequences.
The data being flawed is very different than the code being flawed. In fact, what Greenspan is talking about has almost no connection to what Cox is talking about, and there's no real reason to put them both in the same article. Starting with bad data will abundantly suffice to explain the meltdown before any problems with the algorithms used have to be assumed.
Most of the bias that did the real damage is political. For example, the most recent figures on the economy show that in the months before the mortgage crash began, 68% of all spending was driven by individual consumers buying retail. If the last tax rebate had been aimed at 68% of the total going back to individual consumers, or the '700 billion bailout' had put 68% of the 200+ Billion actually committed so far into reducing the impact to non-institutional borrowers, those would be appropriately neutral positions - but in the current climate, those would both be classified as terribly liberal.
But that figure wasn't trumpeted about until after the bailout was passed. The same goes for the corrected inflation rates, which are still not accurate but are a bit better, and which again weren't corrected in releases to the general public until after the bailout was final.
Who is John Cabal?
Those bankster knew exactly what will eventually happen. But their modus operandi is to privatize profits and socialize losses. It's as simple as that. So why would they bother?
I did a gig at M*rg*n St*nl*y in London for a couple of months, on the options floor.
I got that via a connection to Standford theoretical physicist who'd found loadsa money that way (I used to be a CERN experimentalist).
They were all fascinated with the Black-Scholes pde; but no-one - I mean NO-ONE - had any clue what the model was about.
They just hired geeks to make up a number.
One of the in-house coders (and they are good coders, and paid) had to stick a random-number generator onto the back of a calculator for a set of exotics.
He presented the available information. It wasn't 'accurate' enough. So - quit, or stick in spurions. He did the latter.
It is NOT rubbish data in. It's a complete inability to understand what to do with the data.
Down with categorical imperatives
Bottom line, this had nothing to do with bad data. It was Greenspan's blindness to the consequences of easy monetary policy would have that caused much of the problems today.
Absolutely. Wait, rollercoaster interest rates are a bad idea? Really? And it took a genius to figure this out?
It's so easy to understand. Low credit and the push for home ownership at any cost led to insane price increases and speculation that it wasn't hard to see had to come to a crash stop. I had this figured out as of 2004 when I talked to a realtor who told me I needed to buy NOW with nothing down and use the guaranteed 2%/month price increase to refinance in a year. I can recognize a bubble when I see it.
That's why it pisses me off when Greenspan points the fingers elsewhere. He's the one who set the rates. He's the one who jacked them up, then down, waiting too long and overcorrecting to account for it. And he refuses to take the blame.
The funny thing is, this isn't the first time things have gotten sideways thanks to overspeculation. During the (mercifully) brief meltdown in 1998 due to the currency markets, he basically told the banks to do what they do, the government will help out if things go bad. The overcorrection to that mini-crisis and the post-9/11 slowdown sowed the seeds for what we have now. Gee, thanks Alan.
So now he blames bad data. Really, Alan, you're surprised that people selling certain securities said things about them that was overly rosy? Give me a break. At some point, you have to have some damned sense, and actually look at the securities without the computer models. When things defy common sense to that degree, something's wrong.
The funny thing is, it seems every crisis comes about because risk diversification models fail. Happened in 1929, happened in 1998, happened now. Investing houses have this theory that a lot of big risks can be less risky in totality, because the risks aren't correlated. Problem is, when the shit hits the fan, a lot of things become correlated that didn't use to be. Partly it's because everything's sitting on top of the same increasingly global economy. Part of it is that funds that are overly leveraged have to sell whatever they have to meet margin calls. The people who create the models study the risk correlation and assume things based on it that simply aren't valid in the real world. The book "When Genius Failed" has a good case study on this, where an investment house run by brilliant guys including Nobel Prize winners crashed and burned because they didn't understand that common sense trumps mathematical models.
To disclose, I actually see great value in statistical predictive models - indeed, that's what I do for a living. I design and implement mathematical models. But because of that, I also know what mathematical models can't do. Too much hubris by too many people, and we all suffer.
From what I understand, they were giving loans to people who had no collateral and no income. If your computer model says that loan is a safe loan, then you have a bug.
The invisible hand of the market would not let us down like that. Its mighty transparent fingers must have been deflected from its course by some foul socialist sabotage.
I blame whomever is the current political threat to continued deregulation and corporate empowerment.
Thursday, April 05, 2007 3:58:42 pm EDT Shah, Rahul Dilip (Structured Finance - New York): btw that deal is ridiculous
Thursday, April 05, 2007 3:59:05 pm EDT Mooney, Shannon: i know rightâ¦model def does not capture half of the risk
Thursday, April 05, 2007 3:59:09 pm EDT Shah, Rahul Dilip (Structured Finance - New York): we should not be rating it
Thursday, April 05, 2007 3:59:17 pm EDT Mooney, Shannon: we rate every deal
Thursday, April 05, 2007 3:59:30 pm EDT Mooney, Shannon: it could be structured by cows and we would rate it
Thursday, April 05, 2007 3:59:54 pm EDT Shah, Rahul Dilip (Structured Finance - New York): but there's a lot of risk associated with it - I personally don't feel comfy signing off as a committee member
... but not to big to have their CxO's doing some jail time for supporting that.
If nothing happens then those same people are just going to find ANOTHER dodge to exploit. Just like the Savings and Loan debacle.
There will always be SOMETHING that can exploited. Close the loopholes ... but also jail and fine the people who orchestrated this. And every other exploit.
There are plenty of human-factor reasons why these kinds of models fail: management wants certain results, modellers want to feel they are contributing valuable results, people with big-brother pretensions placing too much faith in fancy computing, geeks lapping up the attention, etc..
But the bottom line is that people were not properly using information about uncertainty: if crap data is all you have, you have to tell the model how crap it is. If you don't do that, then your model is misleading and dishonest. Forecasting the future is tricky business, and you just have to know when it's too hard.
The bottom line is that modellers who don't turn around and say "sorry, boss, the model can't tell you that" and insist on it are largely responsible. Unfortunately, as a rule, it is the person who makes the boldest predictions who gets the most attention, and attention becomes credibility.
Collectively modellers are the /only/ people capable of understanding the output of models. Modellers must have enough influence in an organisation that /their/ interpretation of a model prevails--they don't have to dictate decisions, but the CEO needs to know the modellers' interpreattion of the model, not some intermediate's. If not, then I think negligence or fraud charges should be on the table for someone--maybe the modeller who is oversells their result, maybe someone else.
Yes, I'm a modeller. To the extent that our opinions guide decisions (what is a model if not a collection of opinions?) we need a professional code of ethics, just like engineers, lawyers, doctors, etc..
...if your code is bad or your techinolgy is faulty if you are operating off false information. The market set its self up for this. Failure is bound to happen if you incentivize the formation of a marketplace where people can get sub-prime loans. Loans were being issued in circumstances where they should have. that creates failure
Alan Greenspan: "The economy is in the shitter because of computer error.
HAL 9000: "I'm sorry, Alan, this could only be the result of human error."
I'll tend to break ranks, and side with HAL on this one.
Schroedinger's Brexit: The UK is both in and out of the EU at the same time!
... and Greenspan loves to obfuscate his congressional testimonies.
I seem to recall that part of dot-com roller-coaster included a day where bad computer mojo triggered a shitload of evil resulting in something to do with automatic trading run amok after market close. Something like that.
We all bought it. And woopie-doopie, dumb Financial Sector, at least they got shit right, post-trauma.
Our top story today: in the housing roller-coaster, it includes a day where bad computer mojo is responsible for a shitload of evil in the Financial Sector that...
Fooled me once. Fuck 'em - fuck 'em all. Not worth one iota more of my brainpower on this issue.
Pathological kinda promises Path + Logical - but instead, you get stuck with pathetic.
From what I've heard a few weeks ago, Greenspan -- along with FMAC/FMAE and a whole slew of others -- IS part of the problem.
See, he had power to FORCE realtors and banks to NOT underwrite or process/make loans to people who could not in their wildest dreams sustain a mortgage. But, to keep the economic wheels turning, the Republicans in power (8 out of the last 12 or so years) outweighed the Democratic majority (face) and deferred to the forces or interests of banks, wall street, and construction.
If Greenspan USED the power he HAD at his disposal on the mortgage/real estate industry, he could have kept a tighter lid on things to prevent or delay out-of-control growth. Sure, fewer new construction homes might mean tens of thousands fewer DirecTV and others' set top boxes, furniture, and autos financed by bullshit/fake-ass "appreciation" but SO WHAT??!! If it would have helped stabilize the economy and prevent illegitimate growth....
Yeh, he MADE all kinds of warnings about problems and such, but how could he NOT? If he's watching embers burn, he'd better be the first or among the first to admit there's not just smoke but REAL fire.
http://money.cnn.com/2008/01/30/real_estate/congress_subprime.fortune/
http://en.wikipedia.org/wiki/Alan_Greenspan
Previously: "Linux... Toward the Sunrise..." Now: "Linux... Toward the-- No, now, part of Every Sunrise"
'bad code' is exactly the type of term thrown out there that scapegoats the engineers. the code is fine, the administrative decisions built into the code are bs.
Except that when reality and greed collide, greed wins any day, and twice on Sunday. The blind worship of market economy ensured that greed win out.
Greenspan just confessed before Congress to being shocked to discover that after 40 years of blind devotion, he's lost his faith in free markets here
When all of your thinking and all of your models are based on false assumptions, ALL your data is going to be spurious.
A-Bomb
As soon as the elections are complete, there will be criminal investigations into the fraud and illegal practices that lead to the financial crisis. There are reportedly a multitude of rules and laws that were broken in the course of this "gold rush" of bad-mortgage-backed-securities selling.
Every step of the way, each person involved knew that fundamentally, it was a bad risk. Everyone from the mortgage sellers, to the lenders, to the securities sellers. It's far from rocket science to know that adjustable rate mortgages being sold to people who won't be able to afford it once the adjustment comes is a bad idea. It was believed that somehow the practice of selling and re-selling bad debt would somehow spread the losses around so much that no one would notice... which is reasonable when it's one, one hundred or even one thousand bad loans... but not one million or more.
And for these clowns to try to blame the computer is simply insane. "We are going to lie to you and bet that you won't be willing to prove it."
The next thing we will hear is that the tubes of the internet were installed badly by Joe the plumber.
i say let the greedy pricks who caused this problem either fail naturally, or bail out the company and make them do highway road side clean ups (or some other public duty)for the rest of thier lives.
If you mod me down, I will become more powerful than you can imagine....
Computers and programs do what they are built to do, exactly like they are programmed by programmers. and programmers code what they are TOLD to program.
this senile old bastard is trying to drop the blame ball on someone else than himself. he was the person who ushered the 'let everyone run around lawless' era in finance. he was praising it and saying that 'free market' was this and that. now he comes up saying he is 'shocked' to see the market not regulating ITSELF.
i have news for you, bastard, what you call market is comprised of PEOPLE, and its a social activity. just like life doesnt 'regulate' itself so that you still need laws and justice system, the social activity you call 'market' also is comprised of people and full of opportunists, schemers, bastards, exploiters, criminals and crooks. if you just let everything be, IT BREAKS. and IT DID.
any person with only a few decade of life experience under his/her belt would be able to realize this.
but you and your fellows in the church of holistic economists were SO zealots in your belief that, you were unable to realize this simple fact of social existence despite your 5-6 decades on the face of this world.
shame on you old man. shame on you for preparing the grounds for breakdown of ENTIRE global economy with your zealotry and foolishness, and your attempt to blame others for it.
blame the data !! after all, noone can do anything against it right ?! its not live, its nobody, and even if you hate its guts, you wont be able to remove it from business, so problem solved.
Read radical news here
Other stories are pointing out that he also repudiated the free market.
http://www.bloomberg.com/apps/news?pid=20601087&sid=a_IH5AnCyOm4&refer=home
That and the fact that many mortgage-backed securities got their AAA ratings by being insured by the commercial insurance companies.
"This security is backed by a pool of actual mortgages AND it's insured by AIG. You CAN'T lose! In fact, they're so bullet-proof you should even leverage yourself to the max to buy as many of them as you can!"
Any sect, cult, or religion will legislate its creed into law if it acquires the political power to do so.
In my dealings with MAJOR US financial institutions, I can attest to the very low quality of data. First, despite there being standardised data formats (Fannie Mae & MISMO), the big lenders don't use them. This becomes a big problem whenever data needs to be sent out, eg for auditing or when selling loans.
Second, the data they keep is in many cases worthless for proper risk analysis. They will calculate important values related to the risk presented by a loan and borrower (such as borrower's debt to income ratio), but then not store the data used in the calculations. This makes it impossible to verify if the calculations were correct without resorting to digging in their paper files, something which they will not do of course.
Third, there is no set standard scoring system for risk analysis, meaning it is impossible for a lender buying another lender's loans to be able to determine the risk of those loans, except for an "these are good loans" line from the selling lender.
Fourth, and most important : there wasn't any kind of government requirement for lenders to have their loans audited by an independent third party during any part of the loan's life-cycle. Of course there are regulations to follow, but these were not very strictly enforced. We just trusted the brokers and lenders to act in a responsible way, and not tweak numbers around for their own benefit.
Thankfully, this last bit is set to change in Congress soon, but at this point is too little too late for the current crisis.
As far as the other points, I think the current crisis will at least force major lenders move in the right direction. I want to say they have learned their lesson, but sadly I know it isn't so. The only way of not repeating this mess is by stricter government regulation using a standardised risk analysis system.
Ugg, the banks were caught in the act, selling worthless mortgages to others, but it's not THEIR fault for making them to begin with, but some programmer's for not creating a model that told their company not to buy worthless mortgages?
Of course, exactly HOW worthless they are is still a question. They're not really liquid at the moment, but the holder gets all the payments until the person defaults, PLUS the house, so they aren't COMPLETELY hosed.
In the government buyout, what happens to the houses? Auctions? Section 8? Donated back to the financial company gets paid for the loan?
If auctions, who is eligible for them?
Heh, Milton Friedman said something like "Greenspan has the ability to speak for hours and say absolutely nothing". If anyone has the exact quote that'd be great. :-)
Send your spendthrift head of state this
Blaming your computer systems for your poor decisions seems to be the new fad of late - it's the second time in a month I've heard this excuse bandied about (was it the state of California that argued it the first time? I forget, but I definitely remember hearing it...)
I wonder whether this will help or hurt IT?
... and finds their stapler.
So, your definition of accountability is that hundreds of people make off with millions of dollars and serve no jail time? Everyone who "indulged in that binge" is on a beach somewhere in the Caribbean, trying to figure out where they can spend the hundreds of millions of dollars they just swindled. If that's your definition of justice, you can keep it.
If the government allowed those companies to fail, you'd just have more people out of work. The criminals are free in either of your scenarios. You may stop one generation of people from investing in the stock market again, but that's the only lesson that would be learned.
It's not as if the SEC wasn't warned about the possible catastrophic failure that could result from using computer modeling to rationalize the virtual elimination of the big banks' capital-on-hand requirements. This article http://www.nytimes.com/2008/10/03/business/03sec.html?hp=&pagewanted=print tells of Leonard Bole, a software consultant and risk management expert who adivses the SEC. In early 2004, when the heads of teh 5 big investment banks demanded that the SEC ease the capital requirements, Bole wrote a letter to the SEC commissioners saying that "the computer models run by the firms -- which the regulators would be relying on -- could not anticipate moments of severe market turbulence" -- not even tubulence on the order of the 1987 market crash (which now seems laughable, given current circumstances). Of course, Bole was ignored by the SEC commissioners. I know this is /. , but go ahead, rtfa. Btw, the big bank CEO leading the charge for easing captital requirements: Goldman-Sachs CEO henry paulson. Yeah, that henry paulson. Happy $700B + trillions to you, too.
--MK
Figures often beguile me, particularly when I have the arranging of them myself; in which case the remark attributed to Disraeli would often apply with justice and force: "There are three kinds of lies: lies, damned lies and statistics."
- Autobiography of Mark Twain
I work with PhD mathematicians all day and as I found out you can manipulate any number or formula you want and get the results you want, however, reality will come back and bite you in the female donkey sooner or later. This this case it was not computers that were the problem, it was the humans that found all of the loopholes that bypass set rules of the system that so none of output was real data.
This was similar to Air Canada 767 on July 23, 1983 (aka Gimli Glider) in which an technician found a way to bypass the Fuel Quantity Indicator System (FQIS), mistakes in converting metric to English Units and other safety mechanisms which they allow the 767 to fly without enough fuel. However the pilots couldn't tell they didn't have enough fuel since the FQIS was bypassed so they thought the plane had enough fuel to fly to Ottawa but they ran out of fuel over Red Lake, Ontario and then they had to glide to the former Gimli Air Base:
http://en.wikipedia.org/wiki/Gimli_Glider
http://threesixty360.wordpress.com/2008/02/09/math-mistakes-in-history-the-gimli-glider/
Even with many safety built into the 767 human found a way to bypass them to cause a near disaster. This this case of the financial system, it is full disaster.
BBC Super Rich documentary explained this - what was it called? structured financing? it wasn't bad software. it was a stupid human decision to implement that policy. Can't believe they try to blame it on IT. These superrich sure know how to make one-way bets!
Citation needed.
I don't think models were anywhere near that simple. The closest you could get to that is if you fed home appreciation data from a time period where house prices mostly went up, and had no examples of periods when they went significantly down. That's a plausible failure mode for many of these models (and it happens all the time with financial models, ugh, and the financiers don't seem to learn), but the models would have made different predictions with different data sets.
There's another assumption that people made that led to the problems with the ratings: the assumption that housing and mortgages from different parts of the country would have uncorrelated performance, so that packaging them all together would diversify risk away. The short catchy phrase for that was "all real estate is local": the assumption was that house prices can go down in some parts of the country at any given time, but that it was unlikely that they would go down in all of the country all at once. You can see how that one turned out, of course.
That one, again, turns out to be a recurring problem with financial modeling:
The financial model failures we're seeing now are remarkably similar to the crisis that led to the failure of LTCM 10 years ago. The industry doesn't seem to learn, which is a big problem.
More generally, there's a bigger problem here (and I'm paraphrasing Buffett in the following): it's not that the mathematical models of risk aren't valuable, it's that, by putting very precise-looking numbers to aggregates of thousands of highly uncertain estimates of future risks, they make it look like risk has been tamed. If you have a model that tells you that the current risk of your portfolio is, say, 15.72%, and you mechanically decide how to allocate your capital using a formula that doesn't build in a generous margin of safety against mistakes in that number, you're going to get burned by problems like this.
Are you adequate?
Greenspan did exactly what all the [...] Libertarians wanted... lowered the interest rate the Fed charged for money
I call bullshit.
When the Federal Reserve prints (or equivalent) and loans out ANY money, the new money gets its value by diluting the value of ALL the money, thus stealing value from the money already out there.
Libertarians explicitly REJECT this sort of theft.
They believe that ALL money should consist of, or be 100% backed by, a valuable commodity. The value of the money would fluctuate ONLY according to the value of the commodity (and, in the case of "backed" tokens, by the perception of the reliability of the commodity warehousing operation). Thus it would be impossible for the government or its proxies to steal the value out of money already out there to give to its cronies.
So, no, libertarians did NOT want the Fed to lower interest rates.
Learn before you talk.
Bantam Dominique roosters crow a four-note song. Once you've heard it as "Happy BIRTHday" you can't NOT hear it that way
your kidding me. bad data? how about the intentional an orchestraed manipulation of the money supply desgined to create a bubble. Heres a couple links off the top of my head for you idiots out there: http://www.marketoracle.co.uk/Article6914.html http://www.rense.com/general83/they.htm
As Freddie Mac and Fannie Mae, when you are presented with two mortgages for purchase, it is impossible for you to tell if one is good and the other is bad, when the bad one contains totally phony information about the person the mortgage was given to. So you bundle the good mortgages (good data) with the -unbeknownst to you- bad ones (bad data) and you get AIG to insure the lot and rate them as AAA investment grade securities, then sell them off to the Wall Street thieves who 'derivativize' them and start trading them like shares of stock. Then the bad ones (bad data) go 'tits-up' and it spoils the whole 'package' and you're left with a worthless steaming turd. The rest of the story you know.
Sig this!
...for Libertarians. Libertarians stand for minimal government intervention. Printing money and manipulating interest rates is intervention as much as regulation. Libertarians would not stand for what the government did--manipulating interest rates despite the appearance of non-intervention from deregulation. People blame the fiasco on deregulation. The problem was not deregulaton itself, as if regulation itself is the solution. The solution is proper regulation (the socialist approach) or non-intervention (no regulations and no printing of money, the free market approach).
It let us down by not 'punishing' in an efficient and timely manner. If the market makes a massive correction its an obvious sign that the market hasn't been working properly.
If the original vendors had been stuck with the dubious loans then they'd have stopped issuing them and the bad debt wouldn't have spread.
Instead the market operated under some sort of collective delusion as these bad debts were sold on (and on) like a pig in a poke.
The 700-billion being handed out is the result of the market failing to take care of itself and the knock on effects of such a massive failure hurting too much to be left on it's own.
Capitalism and "The Market" are just tools. They are normally very good ones (by far the best we have) but they are not perfect.
Boffoonery - downloadable Comedy Benefit for Bletchley Park
If what you're telling us is true, then how come...
While I don't mean to suggest that the CRA is perfect, the recent criticism of it is opportunistic, agenda-driven, and not based on actual facts. The reason we have a CRA and non-discrimination laws for mortgage lending is that: (a) for decades, mortgage lenders refused to lend to some people, irrespective of their credit history, based on criteria like their race or the neighborhood they were looking to purchase in (redlining); (b) even today, minority borrowers have a harder time getting loans than white folks, even after you control for income and creditworthiness.
What policies like the CRA aim to achieve is to make lenders lend to minorities on the same terms. A black applicant looking to buy in certain neighborhoods has a lower chance of getting a loan compared to a white applicant with the same income and credit history, looking to buy in a different neighborhood. Policies like the CRA aren't aimed to forcing lenders to lend to that black guy. The point is that if a bank judges the black guy to be an unacceptable risk, then it should reach the same conclusion about the equivalent white guys that it gets applications from.
Not that this is terribly relevant, again, because the recent boom of subprime lending was due to institutions not subject to the CRA. The argument just fails to get off the ground because of this.
Finally, let me challenge this widespread assumption that your whole argument requires: subprime = poor folk = minorities. That just ain't so; being brown, black or poor doesn't automatically make you uncreditworthy (which is the whole damn point of programs like the CRA). To quote a really good blogger on this topic (Tanta from Calculated Risk):
The blog post in question is worth reading.
Greenspan doesn't know how things like rating systems work and especially when computer software is used to do the ratings. Think computer graphics benchmarking software. Even small companies were looking at the way the benchmarks were built and run and finding ways to optimize so they _game_ the benchmarks.
Does Greenspan really think it was a garbage in/garbage out situation? I would think that is just an easy way out of taking more blame for not speaking loudly against deregulation which let the banks play games with mortgages. IMO.
LoB
"Anyone who stands out in the middle of a road looks like roadkill to me." --Linus
... They just keep on doing what they're told..
Wisest is he who knows he does not know.
Most of the risk models are based on the Black-Scholes theory of options pricing. The assumptions of the model are basically small, normally-distributed perturbations. The "unseen hand" is guiding things.
What it can't model is boom-and-bust situations. The mathematics of boom-and-bust ran CRT-type TV sets for years. The horizontal sweep in a TV set is a sawtooth oscillator that builds up linearly and then collapses and starts over again. The math is non-linear, and has been studied.
But the "unseen hand" doesn't do booms and busts. It efficiently self-corrects. Real markets sometimes boom and bust. What got in the way of proper modeling was probably a combination of ideology and the common tendency to leave out of models the things that are not easily tractable.
That's all very well and good, but it's an oversimplification. Models contain variables, which are estimated from data. In this case, financial data is not always something objectively measurable, but rather represents the risk assessments made by human analysts. It's possible to extract the variability in the data, but that will only represent the variability of the assessments by the analysts, not any underlying objective variability in riskiness.
As an analogy, consider a dataset consisting of the marks on some test. Some teachers like to give generally high marks, while others like to spread marks a lot more broadly. The variability in two such datasets does not imply corresponding variability in the students' real abilities, yet it is unavoidable if those datasets are used in a subsequent computation.
And of course no-one really wants to say this: "No model can predict the future, because the data from the past does not necessarily follow in the future."
We have all sorts of very nice models built by very bright people who will try to convince anyone that their model can tell you how to trade, or what to invest in, or what this market or that market can do. There are several problems with this: Not only can a model not accurately predict future events, especially major, "abnormal" future events, but the model can't even take into account enough data to accurately model the past! You find that you overlooked a data point, that something was correlated that you think was not correlated; you find that things become correlated that were never correlated before.
Models have their place, but directing the overall flow of interest rates and investment and market direction is not that place. How many times do we have to have every single model proved absolutely and totally wrong by freak events before we say enough?
[ think ]
I listened to part of the congressional hearings on C-SPAN. I got the impression that they were actually blaming the top management at the ratings companies. The upper management applied pressure so what would have been a low rating became a high rating. This was because they regarded the companies selling bad financial instruments as being a customer (kickbacks?). Naturally the underlings, interested in keeping their jobs, either altered the programs or put in bad data. At the root of the ratings mess was top management.
Could it be that thinking people actually need to analize the data?
Wonder how they forgot that one?
Professional Politicians are not the solution, they ARE the problem.
Since when is changing your mind so bad? When presented with evidence that your original premise is wrong you should change your mind.
Ratings on securities are paid for by their issuers. The ratings agencies therefore had, and still have, clear incentives to over-rate securities to gather as much business as possible. I contend that the models worked exactly as they were intended to work. They spit out top ratings on paper that was paying hundreds of basis points above Treasuries of comparable duration, and by doing so allowed banks to gear up 20x or more on that paper. Instant profits for everyone! This wasn't a mistake. People were simply responding to the incentives they were given: money was cheap (free, really), everyone knew the government would backstop you if you stumbled, and in the worst case you could take home a few seven-figure bonuses before it all went to shit. You'd have done the same thing, and so would I. Each of us has his own native degree of integrity, so for some it would be more conscious than others, but the incentives are what they are and everyone responds to them.
The Taiwanese insurance regulator, however, has just stated that for regulatory capital purposes it will no longer recognise most ratings on mortgaged-backed securities, particulary US agency-insured paper. People are getting wise to the ratings game: all paper can go to zero, and leverage must be employed lightly and judiciously to manage risk, regardless of the assets being purchased. Worse, ratings paid for by the sell side are inherently dubious. If you want confidence in a rating, you'll have to pay for it yourself; better still, get familiar with the instruments and their issuers and come up with your own models. Trust no one and lever lightly, and you'll be profitable forever.
1. We all know this is the Treasury and the Fed playing the blame game. Obviously they aren't going to blame their former and future peers.
2. The financial securities system is optimized to run as efficiently as possible. Unlike the banking world, (ex. WaMu) contagion spreads swiftly and takes down many players all at once. It is **not** designed to fail gracefully. Chances are excellent it never will be robust given the tenor of the discussion at this point.
3. This is the downside of "leverage." Now people know it's ugly, will anyone actually change any of their consumption behavior? Will derivatives ever make it into a more transparent market?
I think it would have been more succinct if they just said, "My dog ate my homework"
http://www.maxineudall.com/2010/02/should-economists-be-sued-for-malpractice.html
Where near endless supply energy, combined with replicator technology, allowed humans to socially evolve beyond pursuit of wealth.
Blame Noonien Soong.
Slashdot "libertarians": Small government for me, big government for those I disagree with. -1, I disagree with you
It _was_ not a mistake at all. Think about it a bit more.
Printing money allows the US Gov to tax the rest of the world at will.
Commodities like oil, wheat, cooking oil, orange juice, milk, DRAM, CPUs are all traded in US dollars.
This means most of the countries in the world need to collectively hold trillions of US dollars to buy this stuff. I suspect there's more USD held by non-US entities than US entities.
If China or Japan do not have enough US dollars to buy oil, they sell stuff for them (it doesn't even have to be to the USA- other countries will buy them in USD). If China/Japan has more US dollars than they know what to do with, they often lend it to the USA and others (who promise to pay back in USD).
So what happens if the USA prints more money? The US Gov has more US dollars, the US citizens become poorer (boohoo), but more importantly, it means the rest of the world holding trillions of USD become poorer.
If you were Zimbabwe, and printed money, your citizens start having to use wheelbarrows to buy bread while the rest of the world just laughs at you or pities you.
Whereas if you were the US Gov and printed money the rest of the world is living in your "Zimbabwe" and using your currency. The US Gov hands some of the printed money to the US citizens (cronies) so that they will continue to help prop it up.
Thus overall it does not hurt the USA as much as printing money hurts a country like Zimbabwe. As long as the US Gov (Mugabe) hands over a cut to the citizens (cronies), the USA as a whole does OK.
Now the thing is Iran is selling oil in Euros. This undermines things a bit for the USA.
It's no fun printing money and having the rest of the world just laugh at you, instead of getting poorer.
BTW Iraq switched to selling oil in Euros before they got invaded. Naturally after they got invaded they switched to selling oil in US dollars.
Not saying that's _the_ reason why they were invaded. As they said, there were many reasons for invading Iraq.
Now the US citizens (cronies) have to be vigilant and see if their "Mugabe" is "cutting" them out from their share of the printed money. So they should regularly remind "Mugabe" that he needs them to stay in power (but is that still true?).
It would be bad for them after all, if it turns out that "Mugabe" has new cronies and has cut them out completely.
Which are about as "capitalist' as the post office. Government-created monstrosities exempt from the law, which were leaned on by Barney Frank (see also, Barney's Rubble) and Chris Dodd to lend to poor people with bad credit.
The great irony is that you had an essentially government-forced-lending program created and protected by Democrats, while calls by Republicans to regulate it were opposed and called "ideological". And now the free marketers are being blamed! That's like blaming Slashdotters if voting machines failed to work right.
Slashdot "libertarians": Small government for me, big government for those I disagree with. -1, I disagree with you
From your own article: "Plaintiffs alleged that the Defendant bank rejected loan applications of minority applicants while approving loan applications filed by white applicants with similar financial characteristics and credit histories. Plaintiffs sought injunctive relief, actual damages, and punitive damages."
In plain english, the banks were (allegedly) already approving loans of a given quality (good or bad, it doesn't say and it doesn't matter) to white people.
The lawsuit says *nothing* about forcing banks to make bad loans. What it says is, if the bank makes loans (good or bad), it must make them to everyone of a given economic status regardless of race.
No bank will lose a suit for denying loans to poor blacks as long as that bank is also denying loans to poor whites. Unfortunately, in many areas, being black even with good credit isn't enough to get a loan, while being white with bad credit doesn't matter much.
at least it meant well.
When Kerry would flip flop on the same day, like when he told one group of greenies that he didn't own SUVs, then on the same day told UAW group that he owned several.
Or on a larger level, in 1974, when it was popular to call Vietnam vets baby killers, Kerry besmirched their reputation for political purposes, calling them "Ghengis Khans" in senate hearings. 30 years later, when the country felt differently about Vietnam service, Kerry ran on his military record. His first words at the Dem convention: "John Kerry reporting for duty!"
And there were a lot more, like the famous, "I voted for it before I voted against it," which was emblematic of a spineless legislator with no real core values other than ambition, and it rightfully stuck.
So yeah, flip-flopper was an apt term for a guy who repeatedly switched positions not due to enlightenment, but for raw, cynical political purposes. And calling Kerry on it didn't make us any dumber.
Now, If only the media would vet Obama a little.
Slashdot "libertarians": Small government for me, big government for those I disagree with. -1, I disagree with you
Myron Scholes was given a Nobel prize for his formula in 1997. In 1998 the hedge fund he (and Robert Merton) worked for as a partner, Long Term Capital Management, lost 4.6 billion in 4 months. It was bailed out by a group of private banks at the request of the Fed.
There has grown up in the minds of certain groups in this country the notion that because a man or corporation has made a profit out of the public for a number of years, the government and the courts are charged with the duty of guaranteeing such profit in the future, even in the face of changing circumstances and contrary to public interest. This strange doctrine is not supported by stature nor common law.
- R.A.H.
Help stamp out iliturcy.
In this case, financial data is not always something objectively measurable, but rather represents the risk assessments made by human analysts. It's possible to extract the variability in the data, but that will only represent the variability of the assessments by the analysts, not any underlying objective variability in riskiness.
Mmmm.... not an excuse. If you can't quantify the uncertainty in a value, you have no business pretending to make a quantitative model. It really is as simple as that, and any modeller who pretends otherwise is dishonest. Any analyst who gives a number without the associated uncertainty is dishonest.
It may be the case that the analyst risk assessments (rather than masses of numerical computer code) are the true model. It might not be the fault of the person writing the code or designing the program. But I doubt it. Anybody who uses numbers without working out their uncertainty is irresponsible.
Think of numbers as being a language that lots of people don't properly understand. It is the responsibility of those who understand the language to ensure that there are no misunderstandings. It is the responsibility of management to ensure that people who act on the basis of a model fully understand its proper interpretation. Hopefully, they speak the language themselves.
Models have their place, but directing the overall flow of interest rates and investment and market direction is not that place.
No reason to be so prescriptive. A good model will summarise the available knowledge. It will always be useful, for any decision---for example, if you can't get the model to tell you to make an investment, then you probably don't have the knowledge to make the decision you thought you did.
Of course, such models are rarely complex numerical ones.
This mess wasn't an accident, it is a planned series of overlapping crimes, designed to bamboozle the people and steal theur real wealth and replace it with worthless pieces of paper and put them into economic serfdom to "them" forever, for all the generations to come, by force of law at the point of the state's drooling mercenary gunslingers. When it started to unravel on them, like all crimes do eventually, because they went overboard thieving from other important and powerful thieves around the planet, they used hyper scare tactics via their official politician and bureaucratic flunkies and TV media shills to further get "emergency" legislation passed to entrench themselves in power and to be assured of a perpetual continuation of these crimes. This was an economic coup that went hand in hand with the "security-terrorism!" coup they pulled off, using the exact same "emergency!! we need more powers!! and more money!!" type tactics they used for the homeland security BS and the patriot act BS. Just more "enabling laws".
It had nothing to do with computer GIGO, that's typical smoke and mirrors lies, as always. the entire banking system as it is run today, along with the other various "markets" with fiat money and a roomful of fatcats "setting rates" and huge insider trades and paying off every aspect of government and so on and then on down the economic food chain is one big fat lying thieving scam and congame, EVERYTHING they do is designed to make a very small subset of the population incredibly rich and perpetually powerful, and if they have to screw over some of their lesser princelings on the way, they don't care, part of the bread and circuses gambit the elite always use. Throw a few fatcats to the lions, they don't care. And as to the "people", they could give a crap, does anyone REALLY believe they give shit one about joe and josephine sixpack past how much they can screw out of them and determining what is the minimum they need to do to stay in power?
"Beware of geeks bearing formulas", W. Buffett
This whole mess is a failure of socialist banking policy NOT capitalism or free market ideas. The banking system in America is NOT free market and has not been free market since 1913 (The Federal Reserve Act).
What the hell are you talking about?
Don't blame the CRA, it only prohibited red-lining (denying a loan based on geographic area rather than individual credit rating), and only applied to banks, not independent mortgage companies.
Don't blame Fannie Mae or Freddie Mac either. They weren't the ones making the loans.
The government didn't force these independent mortgage firms to push sub-prime loans, along with predatory rate structures, at high credit risks, nor did anybody force private investment firms to snatch up securitized mortgage bundles made from them.
Nobody forced the financial institutions to horribly over-leverage their assets on incomprehensibly complex securities
Ironically, it was the repeal of the section of the Glass-Steagall Act (passed in response to the depression) which strictly separated banks from securities firms (to help assure the stability of banks) which exacerbated this mess and resulted in such massive failures.
TLDR version:
Deregulation under the notion the "free market" and "competition" would result produce stability allowed financial officers to engage in horrendous risks (pursuing increased revenue like any company should).
The federal reserve and FDIC are the unsung saving grace of this crisis. Without the guarantees on deposits, main street would have long ago run the banks, resulting in economic devastation which would have made the depression look like a quiet, happy picnic.
VLC FOR MAC IS DYING! IF YOU DEVELOP, PLEASE SAVE IT!!
And there I was thinking risk assessment was completely flawed. And that as in most mediocre quality systems all actions from all partners in a systems are scrutinized. And that credibility of partners is assessed. And....
But I was wrong.
Of course, it was the data. Or perhaps something else. But clearly not something the best payed people on the planet could foresee or do something about.
When running a shop that potentially affects the lives of 2/3 of the world population you have to continuously relieve yourself from stress and thinking clearly simply isn't an option.
Just blame something else than yourself. This is a deeply rooted instinct and hence absolutely valid. In fact, even my wife adopts this frequently on me. Every month she has all the qualities to join the top bankers of the world.
Pillocks...
I hadn't the slightest objection to his spending his time planning massacres for the bourgeoisie... (P.G. Wodehouse)
The code above, and a lot of code like it, is actually used in production work at Wall Street. K actually has a lot of great merits, being a very efficient APL descendant, but it is still kind of fun that Wall Street does use a language far less readable than Perl as a core computation language for a lot of these kinds of models :)
Whomever thinks self-regulation will ever work for the benefit of the public needs their head examined.
Does the phrase "Fox guarding the hen house" ring a bell to anyone?
Tell me, being that the root of this whole mess are subprime loans, were you this concerned when some Congressmen tried to enact new regulations on Fannie and Freddie, and others blocked it, citing such economic justifications as "racism" and "fairness"? Because it's in the Constitution that everyone gets a house, you know.
Life is hard, and the world is cruel
If these people did not know what was going on, they are not professionals, they are just a schmuck who is being paid too much. To say that the computer models did not anticipate their stupidity is just denial.
Why not question their competence? After all, economists don't seem to know what the hell they're doing lately. All of the bailout solutions that were demanded have flopped thus far. Perhaps one good thing will come out of this... people will realize economists, of all stripes, are vastly overrated in their ability to actually understand how this massive world economy works. Because you've got hundreds of PhD's, some with Nobels, that can't agree on jack shit.
Life is hard, and the world is cruel
I met him at a local Perl Mongers meeting, but he switched from Perl to Java for this code in the late 1990s. His reason was because at the time Java had better support for XML, especially for entities.
Based on what he told me he was doing, I expected a mortgage disaster like this for years - it finally happened.
"So, no, libertarians did NOT want the Fed to lower interest rates."
First, I am not a Libertarian; I'm a Republican, but I've gotta defend you here. You're right. Just an hour down the road from me at Auburn University sits the Ludwig Von Mises Institute, a think tank for the Austrian School, and home of Lew Rockwell. Outside of the Daily Kos, you won't find anyone that hates George Bush more. So both his "anti-state" and his "free-market" ideology cred is solid. And this guy has been screaming for years about the Fed policy, as has the rest of the Mises Institute, as have most Libertarians. They're pretty consistent on the "no fiat money" stand, and thought the whole interest rate philosophy was insane. Ron Paul has made great hay lately about "the day the Austrian School predicted has arrived".
Life is hard, and the world is cruel
I'm so surprised by this turn of events. It seems that greenspan is even now willing to take such a risk contradicting himself. It exposes his loyalties through him attempting to draw attention from the real problem of faulty "insurance" on the pieces of nothing they piled together. Desperate times, maybe they're afraid we'll take our money back.
What he actually said was that he has discovered flaws in the ideology that he followed, which is a much more fundamental thing. This is from BBC (http://news.bbc.co.uk/1/hi/business/7687101.stm):
... the former bank boss said he had made a "partially" wrong decision in thinking that relying on banks to use their self-interest would be enough to protect shareholders and their equity.
In other words, the assumption underlying the idea that unregulated market will end up making the best decisions, is wrong, at least "partially".
The fundamental failure of the financial modelers is that they did not incorporate data reliability into their models. In a system where people have strong financial incentives to falsify data, you need to expect that there is going to be a certain amount of "garbage in". If you incorporate that into the model, you can down play the contribution of unreliable data appropriately. If you do not, garbage in leads to garbage out.
Similarly, when bond rating services compete with each other to be paid by a bond issuer to rate the bond, you have to anticipate that ratings will be systematically biased to overvalue the bond, i.e. to under estimate risk.
These concerns were known well in advance of the financial melt down, but there were too many financial incentives for banks to keep on using the same naive models so that they could continue collecting commissions.
Statesman
However, to continue the point, it is sometimes literally impossible to provide uncertainties for datapoints, since this may require knowledge nobody has.
For example, nobody has a model of the world economy that works, so any uncertainty associated with a risk assessment is meaningless. The risk might be a clearly defined function of known possibilities, such as payment default, seasonal fluctuations etc, which are understood provided the economy remains stable, but what is the probability that the economy goes nuts?
Bad Data is Bad!
There are things we know we know.
We also know
There are known unknowns.
That is to say
We know there are some things
We do not know.
But there are also unknown unknowns,
The ones we don't know
We don't know.
©Dr Strangelove 2002
One swallow does not a fellatrix make
"would simply mean prices (and incomes) would have to DECREASE over time"
The trouble with that is:
1) It means the commodity used would become relatively more expensive.
If you use gold as the commodity, it will make it very expensive. But gold is so useful for practical stuff. Not being able to afford to use it in practical ways would be a pain.
2) See my other post above[1]. The USA can't print its way out of trouble. Governments wouldn't be able to tax citizens via printing money.
3) Psychologically people always want a higher salary. It's harder to reduce people's pay (in some countries the laws make it hard too). Try explaining it to the Unions that people have to take a pay cut- everyone worked hard and that's why everything is cheaper and that's why they're going to have to take a slight pay cut (not as much as in the companies that didn't do as well).
[1] http://slashdot.org/comments.pl?sid=1006095&cid=25493341
Forecasting the future is tricky business
Indeed, I find it at least as hard as forecasting the past.
Ok course, he set down the rates and he blame the code for allowing subprimes... If you only didn't settled the rates so low...
ghostbar page.
.. it couldn't have been greed or incompetence. The dog ate their homework and the check's in the mail.
"Not enough of any commodity" is simply not true. Any commodity in limited supply is sufficient to serve as a monetary base for exchange, it's simply a question of what the exchange ratio will be in relation to all other goods. If there were only two gold coins in the whole world, it would be sufficient to back however much currency we want, but each unit of currency would only represent a very small fraction of ownership in those two coins. As long as the fraction that each unit of currency represents remains fixed and the claims on ownership don't exceed the actual amount of the commodity, then you have a sound and honest monetary system. But a commodity which is desired for it's own use, e.g., for making your wife or girlfriend happy (rational or not) and which is present in sufficient quantity to make redemption practical and desireable will be preferred by free people as a monetary base to something that is so scarce that the fractional units are tiny and redemption is pointless.
blame the IT guys.
Having money that increases in value encourages people to save, rather than spend. Real savings are the only thing which makes sound lending for investment possible. A huge factor in the crises is that interest rates were artificially divorced from savings, so we had a bunch of malinvestment (mostly in real estate) when our real savings were dropping to all time lows.
I could probably make a long post refuting all sorts of dogmatic blame statements made in this thread from one side of the political spectrum or the other with various forms of mildly informative evidence. Fact is there is plenty of blame to go around.
Models - That didn't account for data reliability (the frequentist/objectivist problem)
"Risk Management" - Modern approaches to risk management are naive in their requirements of what creates "risk" and what risk factors are most important to measure.
Decision Makers & Traders - The models weren't non-informative, but decision makers who decided to accept risk are motivated by short-term results, and didn't really seek information about the CDO's.
Regulators - Cox & the SEC allowed "creative" risk taking. Greenspan screwed up. Congress screwed up.
Consumers - Being duped by the "there is no bubble" nonsense spouted by mortgage givers.
Like all significant events, there is rarely one "big" cause, there are many causes (long-tail events are driven by multiple factors, not simple causes). And we simply don't have enough information to create wisdom concerning the situation at this point. Anyone to be dogmatic about a specific "why" is simply a fool.
"oohhh... I didn't know Schopenhauer was a philosopher!"
The root cause of the problem was the states that required lenders to offer only non-recourse loans. Supposedly, the regulators thought this would make the lenders more prudent, but in fact it only introduced a positive feedback loop that triggered once house prices dropped enough to give borrowers negative equity.
Real problem with "bad" data is the feedback.
If you publish bad results, it gets even worse for the company than expected (except if you calculate negative market reaction into results, and at that point you are already using computer models).
Same for good results.
Financial market is all about creating hype. He said well that it helped US economy grow faster. And this is mostly because it creates impression of a healthy and vibrant economy and attracts a lot of money from the world (apparently world has recently accumulated money due to huge raw material/energy prices and due to globalisation, US needed something to get that money invested back into US, not elsewhere). So, if you choose right computer models, you can pump the value quite well while people believe you. When they realize artificial inflation of share prices, they will panic and sell their stuff and shares will bottom at more realistic prices.
So, I'm not very optimistic that US economy will have all that stock market hype of recent decades happening soon. People with money will learn a lesson.
If it was a truly free market we would be in the second great depression as people would have no guarantee that there money will still be there when their bank closes. After all there would be no FDIC insurance on their accounts in a truly free market right?
No government bailouts would mean your account would vanish if you used wamu or wachovia. Also no credit to businesses which will cycle to many more lost jobs which in turn means more bank failures and even tighter credit ... etc.
Massive withdrawls and runs on the bank would have happened by now and we would be in a situation much much worse economically than today.
The problem with market purist idealogies is that the assumption is the market is always perfect %100 of the time. It assumes people are rational and educated which includes investors and consumers. The market can not regulate itself unfortunate and this is the third time since 1929 that bad loans and banking failures caused economic recessions. H
http://saveie6.com/
The problem isn't Socialist or Libertarian. The problem is the fox guards the hen house. With so many dollars in the system there's always an angle for bullshit to get your hand in the till. Increasing the dollar flow may be enough.
This is similar to when we tell schools your funding will now depend on your test scores and find that the teachers make the students cheat.
So fox gets caught, now we're reading his dodge. Aw shucks! A computer, you don't say, sounds awfully copmlicated. Why that sounds like a Deus Ex Machina, nothing to do with foxes. No problem, here's $70,000,000 in executive bonuses and we'll make some of the bank bailout details secret.
Agreed, but as a fellow modeller, I know that my boss would then think
I am incompetent and perhaps fire me if I said that. In other words you
have to be willing to be a martyr . . .
'The bottom line is that modellers who don't turn around and say "sorry, boss, the model can't tell you that" and insist on it are largely responsible.'
Interesting essay here on statistics and risk taking by Taleb Nassim who seems to been saying for the past couple of years something bad was going to happen.
http://www.edge.org/3rd_culture/taleb08/taleb08_index.html
People look back on what they did, and can't accept that emotions like greed trumped logic and common sense. This happens after every bubble. As Nietszche famously said: "I have done this," says my memory. "I cannot have done this,", says my pride, and remains steadfast. Eventually, memory gives way. Alejo
Am I the only one who, upon reading a meaningful post by a low-UIDer, immediately changes my relationship to friend or foe, depending on how I feel about what they said (in this case, friend)?
They're like rare, ancient Pokemon, and I want to catch them all!
"As soon as the elections are complete, there will be criminal investigations into the fraud and illegal practices that lead to the financial crisis."
Not when both parties and the president elect are getting more than 30% of contributions from the financial sector. Expect a Dog-n-Pony show at best.
resist propaganda
The only garbage that went in, was the Ayn Rand garbage Greenspan used to justify his "Lord of the Flies" economic policies that have led us all to economic ruin.
The "computer bug" is a convenient excuse for the fact that Greenspan's extended lowering of interest rates in 2003 was nothing more than a cheap mechanism to finance George Bush's fake war (and subsequent looting of the US treasury through war-profiteering and massive fraudulent defense contracts).
So now, they got their money, and now they're going to high-tail it out of Dodge and leave the poor taxpayers holding the bag.
Well - the joke's on the Grover Norquist tax revolt crowd, because even though they got their tax cuts - they're still screwed because all their wealth is going to evaporate now that they've crashed the stock and equity markets. The only ones who are going to have any wealth in this new economy, are George Bush's close friends - the ones who FINANCED 9/11. The ones who trained the terrorists. The ones who hate America. The ones who are sitting on all the oil - which they will now use to destroy the west.
And when that happens - remember, in the 1970's, during the Saudi oil embargo, and the Iran hostage crisis, we warned you this was going to happen. Y'all wouldn't listen. You wanted your guns and tax cuts.
These are my friends, See how they glisten. See this one shine, how he smiles in the light.
Hopefully we as a species can move beyond needing to push little pieces of paper around to accomplish anything, before we run out of some resource we require and our civilization collapses like the house of cards that it is, and before we manage to extinct ourselves fighting over those resources, and before our sun explodes.
I use Windows... like a two dollar wh.. why don't I just go ahead and not finish that sentence.
I've read most all the posts to this thread and have yet to find anyone positing that this entire fiasco was
allowed to happen because, in the end, those in the know were fully aware of what would happen and either
didn't care, or worse, wanted it to happen knowing they would side-step the fallout.
Like the S-n-L crimes, there will be some scape-goats, but most of those who plundered will emerge
unscathed. We're talking about the 1%'ers here. Hell, even the 5%'ers won't be leaping from their offices
any time soon. They and their wealth are safely ensconced.
Considering that the contributions to both political parties from financial sector account for 30% (roughly
100 million to obama and mccain each) can we really expect anything more than a dog-n-pony show instead of putting
these criminals in the dock?
And how is what's happening to us 'joe the plumber'(s) any different from what was foisted on S. American countries
or worse, S. Asian countries in the 80s and 90s?
As cited repeatedly in Naiomi Klein's book, this is just another instance of "Disaster Capitalism" that
the elites will profit from while the pundits scratch their heads and the likes of Jeffery Sachs back-steps over.
(Tip of the hat to Chalmers Johnson)
resist propaganda
We basically told the investment companies to regulate themselves? Well duh, no wonder we are in financial trouble, who was the numbnuts who made that decision? Thats like giving someone a key to the bank, firing all the police then trusting that person to not steal from the bank. What an administration he have, oh well we voted them in so I guess we get what we deserve.
Quick question: are Republicans for or against market regulation?
Against. But once government tinkers with the market by creating mortgage ATMs, Republicans would like a little oversight. Again, Fannie Mae and Freddie Mac are artificial government creations. Thus Republican calls to "regulate" or reign them in isn't exactly increasing "market regulation." The market has already been messed with. Asking that the FM's follow the rules private corporations already have to follow is hardly being inconsistent.
Slashdot "libertarians": Small government for me, big government for those I disagree with. -1, I disagree with you
What am I referring too?
No other definitive source than the Colbert Report, of course!
See, Steven was interviewing this lady last week on the financial melt-down. Specifically he asked her why now? She responded that every year Wall Street came up with bigger and more sophisticated data models to obscure the problems of the previous derivative models. So Steven followed up with the question of "why now, why not just keep inventing bigger and badder data models? What went bust?"
The answer? The bankers, in their infinite wisdom, fired the tech workers.
To which Steven replied, "can't we just hire them back?"
To which she replied, "Nope, they've since moved on to find other work."
To wit, management is covering their a*ses by blaming no-longer-employeed workers. Just great.
It is weak and pathetic. But then what do you expect from management. Hire tech workers to build something. Fire/lay off said tech workers. If the tech works, great take credit! If tech fails, blame the techies. It worked in California when Lockheed failed to deliver on the new DMV system, completely.
Always blame the techie for implementing what business asked for when the tech fails.
A CFO is interviewing candidates for an accounting position. He asks each of them the same question:
CFO: What does 2 + 2 equal?
Candidate1: That's easy, 2 + 2 equals 4
CFO: Thank you, you may leave.
CFO: What does 2 + 2 equal?
Candidate2: Well, it's obviously 4.
CFO: Thank you, we'll be in touch.
CFO: What does 2 + 2 equal?
Candidate3: What do you want it to equal?
CFO: You're hired!
In all probability (heh), the geniuses involved simply assumed that each credit default probability was independent from the next. So they summed the probabilities, packaged them as AAA and sold them.
p1= (probability of joe-nodoc defaulting = 1/2) Sum 2 million Joe-nodocs and the odds become 1 in 4 million as long as none of the joes work in construction, none %)
has been known as one of the seven deadly sins since humans left the caves. And even though this is somewhat religious, it also is true with no gods.
Just like power corrupts, greed destroys.
Checks and balances are not just important to protect citizens from governments but are also very useful in controlling humans desire to be greedy.
Everyone of us can look at Scrooge McDuck swimming around in his vault full of riches and get a warm fuzzy. That image is nice to almost all of us and always will be.
Greed caused this and lack of oversight allowed it.
Time to go spend my next months paycheck on lottery tickets. But that at least only affects me and my family. /endsarcasm
The people who run big companies are greedy bastards. They want money for themselves. It doesn't matter to them if they bankrupt the company in the process, as long as they get theirs. They are willing to lie, cheat, steal, and sell their own mothers for a buck. If the computer model tells them something they don't like, they change the inputs, or change the model, or change the geeks who refused to change the model.
Computers couldn't count the dollars right - but no need to worry, I'm sure they're counting the votes right. sheesh.
Wow, eye opening.
Yes, I'm a modeller. To the extent that our opinions guide decisions (what is a model if not a collection of opinions?) we need a professional code of ethics, just like engineers, lawyers, doctors, etc
You are? You sound so intelligent, the code of ethics better start with not letting you walk down a runway.
Know your pads. One time pad: good for cryptography. Two timing pad: where to take your mistress.
Greenspan is only protecting his own reputation by finding blame in the work of someone else. Greenspan is well known for his 'less regulation' approach which was the cause for great wealth over many years, but now is the cause of much misery. Over the last several years, profits have been generated by extending credit to risky firms and individuals. So much so, that risky firms and individuals were allowed to be way over extended, leading to mass defaults. After all of the bad decisions, Greenspan just wants someone to share the blame with. Maybe drunk drivers should get to blame the onboard computer when they hit somebody, too.