tag:blogger.com,1999:blog-7905515.post4198172454634164667..comments2024-03-14T11:09:32.759-05:00Comments on Falkenblog: Complexity a Common CulpritEric Falkensteinhttp://www.blogger.com/profile/07243687157322033496noreply@blogger.comBlogger9125tag:blogger.com,1999:blog-7905515.post-23689013961679443532008-10-17T12:15:00.000-05:002008-10-17T12:15:00.000-05:00Anonymous sums up the negligence and dependency cu...Anonymous sums up the negligence and dependency culture that permeated the system. Why would anybody bet their career on Moody's being able to understand an instrument? That's the trader's job, and if he or she abdicates that responsibility by relying on rating agencies then unemployment is a just reward.reTiredhttps://www.blogger.com/profile/05764489915234661599noreply@blogger.comtag:blogger.com,1999:blog-7905515.post-91072907515919095912008-10-16T21:34:00.000-05:002008-10-16T21:34:00.000-05:00Erik, I think it was Prof. Mokyr at Northwestern t...Erik, I think it was Prof. Mokyr at Northwestern that drove home the difference between the history of *physical* science and *social* science. Your car and computer analogies are flawed in that they are physical sciences, where experiments (and mistakes) can be repeated ad infinitum in a "sandbox" to create risk controls.<BR/><BR/>In a social science like economics or investing (and I hesitate to call it a science, maybe an art), we don't have the benefit of trying out multiple theories and actions multiple times with the same initial conditions. And we have a dynamic opponent altering his strategy. Heisenberg uncertainty and chaos theory aside, the physical sciences generally don't change their laws of nature in mid-experiment.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-7905515.post-58291191261669902662008-10-16T18:20:00.001-05:002008-10-16T18:20:00.001-05:00We don't have to understand the instruments. ...We don't have to understand the instruments. S&P and Moody's do, so they can rate them. And they couldn't. <BR/>Are complex financial instruments more like a car or a PC? I hope it's a car. I don't want to fix my car. But I want my mechanic to be able to, and they usually can. <BR/>New cars work reliably; new computers don't. I wish you could just adjust your autoexec.bat file to fix your computer: nobody can fix Windows problems. That's why they give you a bootable restore DVD, that scrubs your hard drives and your data. And every once and a while, for no reason at all, you've got to unplug your computer to reboot -- because the thing is so screwed up the on/off button won't even work.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-7905515.post-74461611977449497162008-10-16T18:20:00.000-05:002008-10-16T18:20:00.000-05:00We don't have to understand the instruments. ...We don't have to understand the instruments. S&P and Moody's do, so they can rate them. And they couldn't. <BR/>Are complex financial instruments more like a car or a PC? I hope it's a car. I don't want to fix my car. But I want my mechanic to be able to, and they usually can. <BR/>New cars work reliably; new computers don't. I wish you could just adjust your autoexec.bat file to fix your computer: nobody can fix Windows problems. That's why they give you a bootable restore DVD, that scrubs your hard drives and your data. And every once and a while, for no reason at all, you've got to unplug your computer to reboot -- because the thing is so screwed up the on/off button won't even work.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-7905515.post-70074573297738216522008-10-16T17:36:00.000-05:002008-10-16T17:36:00.000-05:00Eric, this is a unique perspective, thank you. Al...Eric, this is a unique perspective, thank you. <BR/><BR/>Also you brought back fine memories of autoexec.bat, how quickly I'd forgotten it...Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-7905515.post-62830173273217281852008-10-16T15:28:00.000-05:002008-10-16T15:28:00.000-05:00Maybe some of the crappy underwriting was politica...Maybe some of the crappy underwriting was politically motivated, but you really can't blame the reds under the bed for all the problems. <BR/>Here's an old story: back in the late 80s the Lloyd's insurance market had a prototype mess which we called the spiral. All the same stuff happened - risk was parcelled up and sold on and there was a saying at the time "he takes in a bucket of shit thinking it's a bucket of apples and passes it on as a bucket of oranges." At the front end underwriting standards went to hell because the underwriters thought they were not running any risk. And nobody further back in the mix had any clue how to price the business, for the simple reason that they didn't know what it was they were pricing. With risk being wrongly equated to premium (=revenue) people were taking on multiples of their stated risk appetite without realising it. The whole thing blew and nearly took our 300 year old institution down.<BR/>So when it all started happening in identical fashion in the banking sector we just had to laugh, until it got beyond a laughing matter.reTiredhttps://www.blogger.com/profile/05764489915234661599noreply@blogger.comtag:blogger.com,1999:blog-7905515.post-14941367345054001452008-10-16T14:43:00.000-05:002008-10-16T14:43:00.000-05:00People shouldn't borrow money they can't pay back....People shouldn't borrow money they can't pay back. But still, 4% of home loans in foreclosure and 6-7% are late: Our financial system should be able to withstand that without collapsing. Something else was also VERY VERY wrong. Some of these things seem to be (a) undercapitalized banks, (b) opaque bond isntruments that are difficult to value, and (c) derivatives that were supposed to reduce risk, but had no capital behind them (making the bond prices even more suspect).Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-7905515.post-46171828522778905062008-10-16T13:39:00.000-05:002008-10-16T13:39:00.000-05:00hey, soros is my dawg. he justified his greed by b...hey, soros is my dawg. he justified his greed by being a 'participant' in the system if i recall correctly. i think now he lays the blame on greed unchecked by regulators, same view as CM, the tatane of them all, which is all i need to know.<BR/>everyone was acting rationally and not refusing free money, as far as i could tell.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-7905515.post-1434463574042434422008-10-16T13:23:00.000-05:002008-10-16T13:23:00.000-05:00???????Things are complex yet there is one simple ...???????<BR/>Things are complex yet there is one simple explanation for the sub-prime mess???? yea, that makes a lot of sense. It wasn't lower interest rates, it wasn't financial innovation it was the government. There is absolutely no convincing evidence of this. What percentage of the sub-prime loans were forced on by the CRA? Did they have lower standards than loans that were not forced, did they have higher default rates? Is this mess contained to sub-prime? Why was there a house bubble in Europe, did they force banks to give crappy loans as well? Is there any evidence or do people seek explanations that fit their ideology? I don't understand how a person can criticise other established people and yet do the same within the same paragraph. I guess consistency is not always a virtue.Anonymousnoreply@blogger.com