Complexity a Common Culprit

From the Wall Street Journal:

Borders' Mr. D'Agostini said there are five titles that appear to most interest consumers. These include: Charles Morris's "The Trillion Dollar Meltdown," which Mr. D'Agostini says predicted market turmoil caused by subprime mortgages and Wall Street greed; David Smick's "The World is Curved," which cited the mortgage crisis as a early indicator of further problems ahead; George Soros's "The New Paradigm for Financial Markets," which looks at past crises and their significance for future events; Kevin Phillips's "Bad Money," which examines the state of the dollar, credit issues, and the world market, and Peter Schiff's "Crash Proof," which warned of a coming crisis and suggested how consumers could protect themselves.

In a crisis, everyone wants answers, now. So we have the following books and their explanation of America's ills:

Trillion Dollar Meltdown: Greenspan, deregulation, greed, over-the-counter derivatives, securitization, lack of public healthcare
World is Curved: globalization, financial complexity, reckless volatility
New Paradigm for Financial Markets: globalization, credit expansion, market fundamentalist beliefs, and deregulation
Bad Money: financial complexity, power in finance, market triumphalism, weak dollar, hubris
Crash Proof: weak dollar, inflation, US trade deficit

They all contain an obligatory mention of greed/hubris by those who got rich (funny from Soros), but also the focus on finance, as opposed to real causes (eg, productivity growth). There is a great distrust in the complexity in finance, in that the connection of a mortgage, to a derivative, is often not very transparent. But is anything these days? Computers, cars, my thermostat, all have evolved greater and greater complexity, so that 'fixing them' is now beyond the average user's ability. In the 'good old days', things were simpler, perforce, because they were just starting. Complexity happens to all fields, and it would be nice if everyone could fix their cars like the old '57 Chevy, or fix their computer by going in and adjusting the autoexec.bat file, but the greater functionality of these products requires greater complexity to their parts, and so only full-time professionals can fix things that your average proficient user could fix decades ago.

It is common to long for the old times when fields were completely understood, but forcing a field back to be transparent to the masses is not a solution, it is a stifling of productivity. Wouldn't it be great if we went back to a mathematics prior to non-Euclidean geometry, and calculus? Well, if your objective is to restrain all fields so that they be understood by your average man, I guess that would work. But when any field, industry, or product evolves it generally adds functionality, adding layers, and layers add complexity.

The problem in mortgages was not derivatives, or complexity. Lowering underwriting standards (no downpayment, lower credit score) is pretty straightforward, and affected bank-owned mortgages just as much as credit default swaps. That academics, community activists, Clinton, Bush, Congress, regulators, Wall Street, and investors, did not foresee the problems in lowering credit standards for new home buyers, was hardly caused by derivatives up the food chain. These mortgages were going to blow up eventually because a vast array of special interests under the banner of 'increasing home ownership' was going to put more and more people into houses until they proved they could not afford it, by which time the seeds were sown. Complexity of the derivatives that referred to these instruments were second order in this story.