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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 problem is all you youngsters who don't realize how much we know that you don't.
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.
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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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
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.
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.
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.
The problem with some old people is that they don't realize how much they don't know.
The problem with most people is that they don't realize how much they don't know.
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.
We all have problems.
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.
... 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.
The problem with most people is that they don't realize how much they don't know.
Hmmm... I don't know about that.
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..
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!
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?
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
Hmm, I fail to see how that constitutes a troll. True, it's almost certainly untrue that the code was actually outsourced to India. At the same time, we know that the code was outputting the wrong rating from a previous story, and we also know that code from India is often subpar.
I believe the parent wasn't trolling as much as he was making an observation about how faulty code and outsourcing to india ultimately have the same root: that software development isn't given the resources that it so often deserves. When you're running a multi-billion dollar business and you need a program to help you with that business that's going to make decisions that have repercussions reaching towards trillions of dollars, there are methods to make sure that you get correct code. These methods almost certainly were not used, and they're certainly not used in over 90% of the programs released. In other words, software quality is sacrificed for short term profits almost all of the time, which is certainly pertinent to the issue at hand.
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.
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.
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!
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.
There's a simple reason for that. Apparently a lot of Indian companies use these low priced outsourced coding contracts as a training ground for new employees - hence the very high turnover of developers as they get promoted off your project. When you go for a bargain basement price and cede all control you get consequences. One of the many rules that has been completely forgotten over the last few years is that you need at least enough employees to be sure that the contractors are being honest. They do not actually work for you, they use you as a source of cash flow and will cut corners to increase that no matter where they are based.
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.
The problem is all you youngsters who don't realize how much we know that you don't.
Are you sure you didn't mean '... who don't realise how much we know we that you don't know that we know that we don't know'
like phosphorescent desert buttons singing one familiar song
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
"Fox guarding the hen house"... Like Anarchy? Or Government regulation? Both are remarkable for their efficiency infringing people's freedoms and rights.
The point of government regulation is to play corporations, who are equally rapacious to people's freedoms and rights, against the government.
Corporations don't benefit from government getting too big and taking over their markets. Government recognizes that risky and anti-consumer behavior by corporations may destroy the economy or incite revolution.
A balance of power between the two using smart regulations (as opposed to the often presented "more" or "none") is the way to go.
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Government centralizes power so that it can be more efficiently corrupted.
Buckle your ROFL belt, we're in for some LOLs.
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.
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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
Are you talking about the known unknowns? Or the unknown knowns? As long as it is not those dastardly unknown unknowns!
Ho! Haha! Guard! Turn! Parry! Dodge! Spin! Ha! Thrust!
Why do you think we can watch movies like "Erin Brockovich" and 'connect' with the notion of Big Corporation fucking with Small Town, and Small Town not even realising what is happening? [until the heroÃne with the impressive cleavage shows up, anyway]
There are so many basic assumptions in the Libertarian "belief collective" that are wrong that I think even the Amish are less naive.
Against money-creation, against government [regulation], against the corporations that fuck with them as soon as there is no regulation [which is a given, but it is somehow not seen as a basic fact, but as a 'special case' of corporation behavior], and if they don't believe in corporations in the first place they leave open what should take its place [I see amazingly few Libertarians espousing Hunter/Gatherer societies, and commie/feudal/communitarian setups are probably not what they're looking for either.
But yes, let's be "Against government". "the market [which in an earlier post here is equated with 'the community']" will regulate itself, create money [they just tried that, it didn't work out], and presumably now stone the culprits.
It isn't deregulation, but "Fannie and Freddie" caused the fact that it was legal for mortgage salesmen to give everyone loans without doing credit histories.
If you'd have had the (European) system where mortgage debt is personal debt, and you can't just give up on a house if you can't pay for the mortgage anymore, this shit would never have happened in the first place, because at least then you people would've been afraid of making a "bad choice".
But i guess that would've hampered "Consumer choice" as well, and thus the exploitation of the common man. Which would've been "unjust" because "everyone has to have the right to choose what he or she wants" and whatnot. Except children (aren't assumed to be able to deal with that)/don't have that right, and especially not when it comes to their sex life, because you have to protect Them, but not the average Joe with what, K-9 'education'? And if they're really dumb, (ie. mentally retarded) you chemically castrate them (well, until the '60s), but that wasn't even called regulation, or taking away the rights of people.
Dear Lord, what I would give to live in such a place.
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
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
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