Tuesday, March 17, 2009

Value at Risk, Credit Default Swaps, Copulas...Harvard MBAs!

In the ever expanding effort to get down to the root causes of this crisis, journalists are facing a very tough but exciting problem. Perhaps the solution is like an episode from 'House', where the patient is experiencing horrible symptoms, and at first the doctors think liver failure or cancer, but the real cause is a cat allergy combined with genetic inability to synthesize vitamin D from sunlight. The solution is obscure and highly specific. Wouldn't it be cool if the answer were like that to real important problems? We just have to add a parameter to capture leptokurtic deviations from the naive Gaussian assumption, and we can get back to talking about Britney's latest mental breakdown.

The latest is an attempt to blame this on the Harvard MBA program, because a disproportionate share of Harvard MBAs are in major financial positions...and even a a journalist knows that correlation is causation (except when talking about pathologies of the poor). Perhaps a follow up will isolate whether it is Harvard or the MBA degree as the prime mover, but clearly, pinning this on Harvard MBAs would not bother me. I say we humiliate them on a reality TV show, like the one where Paris Hilton tried to her hand at working class jobs.

The problem with all these highly specific accelerators is they neglect the fact that assuming housing prices would not fall was a necessary and sufficient mechanism for the explosion in credit to unworthy borrowers: if the collateral was not falling, it didn't matter the probability the borrower can afford the loan. This assumption was ubiquitous and understandable to everyone.


Anonymous said...

Haha, this is getting better by the day!

If we're now doing controversial single-factor explanations for the current shambles, why not start with China's one child policy?

After all, that singular piece of ham-fisted policy wiped out the old tried-and-true developing world retirement insurance model (have many children) in one fell swoop, arguably causing Chinese savings rates to skyrocket and swamping deveopled markets with cash. Absent that we probably wouldn't have needed mass securitisation would we?

Beats the Harvard explanation anyway.

Unknown said...

"even a a journalist knows that correlation is causation (except when talking about pathologies of the poor). "

Your qualification is extraneous because you got the perceived causation reversed. Journalists insist that poverty is the cause of all pathologies correlated therewith. i.e. "Studies show that if the poor weren't so poor, they would..."