
I've watched the economy for 30 years. Now I'm truly scared - nreece
http://www.guardian.co.uk/commentisfree/2008/sep/28/globaleconomy.creditcrunch
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rgrieselhuber
In order to make this post a hacker-relevant discussion (I enjoyed the
article, by the way) how about this quote:

"Everybody tries to 'game' the system on their route to vast personal fortunes
- whether short-selling, packaging up dud mortgages as prime mortgages or
telling lies about their financial viability - and the result is that the
system is getting wise. The best course today in any financial transaction is
to presume zero integrity. Credit is drying up and with it the very lifeblood
of the economy."

When I read this, the first thing I thought of were the inevitable
enhancements to the credit rating systems at personal and corporate levels
which will arise in the next few years as a result of all of this.

If we're going to continue to abandon trust and integrity for their own sake
and only include them as features of self-serving transactions, then it seems
natural that we will have to push our current credit-rating systems much
further to the (temporal and relational) edges than where they currently are.

~~~
DaniFong
I've been doing some thinking along the lines of using statistical mechanics
and information theory to produce a self-consistent measure of risk (unlike
the current rating systems). Does anyone know if there's been any work in the
area?

~~~
hugh
What would it mean, in this context, for a measure of risk to be "self-
consistent"?

~~~
DaniFong
At the first pass, it would mean that possibilities would add up correctly.

Here's one example: give every investment, stocks, bonds, cash, commodities,
etc. a distribution of possible returns. Then, every holding company also has
a distribution of possible returns, obtained by adding up and scaling the
distributions of the stock respectively held. So long as the market changes at
a rate substantially faster than the holdings change, this is a self-
consistent model of stocks in that the total amount of expected stock value
remains the same. One can then examine the distribution of possible returns of
a given investment and assess one's own position of risk.

The problem with this is how limited it is. It does not, for example, account
for hedge fund pricing well at all, since in hedge funds the holdings change
nearly as fast as the market does. It doesn't account well for the wiles of
any particular, fast trading investor. It does, however, lend itself to a
fairly simple model for static futures, forwards, options, and swaps.

Why is this line of reasoning interesting? The credit systems we used to have
couldn't handle the complexity of the derivatives that were being created. By
one method or another, bad investments, especially mortgages, were being added
up, and in the process the market found it difficult to track how risky the
summed investments were. Credit rating agencies don't even make publicly known
what their credit ratings represent! An investor is compelled to then blindly
believe them, which, in this case, spectacularly failed.

~~~
menloparkbum
How does this concept differ from the stochastic calculus based
implementations of VaR?

~~~
DaniFong
I don't know. Maybe it doesn't differ from it at all. I'm not a domain expert
by any means...

Thanks for the tip.

------
Tichy
I am tired of hearing "we need more decency and trust, it was just the greed
of a few people that got us into this mess". I'd prefer transparency to trust,
because then we could actually see if somebody is behaving badly, and decide
to distrust that somebody.

Apart from that, it was everybody's greed that is to blame, not just a few bad
bosses. If you put your savings into an investment you don't understand,
because you have been promised high interests, you and your greed are to
blame.

Also, there is the possibility that things simply went wrong. Shit happens.
Why does there always have to be a scapegoat?

What the state should do is prevent fraud, that would probably be sufficient.

~~~
DougBTX
Unfortunately, it isn't clear that even the people selling these mortgage-
backed securities knew how risky they were.

~~~
Tichy
One more reason not to blame "bad morals" for the crisis. I guess most
"securities" had a long chain of other investments behind them, and one or
more chain elements where risky. Of course the guy selling the thing ten steps
down has no idea anymore how risky it is. But that is where transparency could
help a bit, maybe?

------
davidw
One of the things that crept up in reddit as it went downhill was a propensity
for "doom! gloom!" headlines. There's certainly a lot to worry about with the
current crisis, but let's be careful.

~~~
Retric
Bankers don't create wealth they gather it from other people. There are a lot
of people going nuts because their ability to do this is breaking down.

So, investment banks might fail, but as long as people don't pull money out of
their checking or savings account I don't think the system is losing money.
What I expect is happening is a lot of "fake" wealth is being destroyed but I
don't think it's a good idea to buy up fake wealth with cash the government is
borrowing. Because, as soon as we borrow money people will take money out of
the system to buy our bonds which necessitates our buying assets to
compensate.

~~~
DabAsteroid
_Bankers don't create wealth_

This is a common fallacy. Bankers manage risk in lending, reducing overall
risk. This is valuable, i.e. it creates wealth.

If any given Bankers were _not_ performing risk-reduction service for society,
they would be outcompeted in the market by their competitors. Therefore, to
say that bankers do not create wealth, would be to imply that bankers are in
conspiracy to distort the lending market.

~~~
preview
But is that what happened here? Financial institutions lent money to borrowers
who could not afford the loan they were given. The financial institutions
packaged up those extremely risky loans to pass the buck on to another
institution.

It seems that the institutions did not manage risk. In a very generic view,
bankers may have value. But as far as this financial crisis goes, they failed
miserably.

~~~
anamax
That's not the complete story. Financial institutions were "encouraged" by the
US govt to make those loans.

The other organizations expected to make money buying these loan packages
knowing what was in them, so it's hard to see why bankers are to blame.

~~~
preview
I agree that the US government is not blameless, but I disagree that bankers
should not be blamed for their role. If a banker's value is "managing risk in
lending, reducing overall risk," then the banks still failed to supply this
value add.

It may also be a fair statement that the institutions did not know the value
of what they were buying because of the way they were packaged. I thought that
was one of the obstacles facing the bailout--how to value some/most/all of the
troubled financial instruments involved. This lack of clarity seems to add to
the risk.

~~~
anamax
A banker's job is packaging risk, which they did.

> It may also be a fair statement that the institutions did not know the value
> of what they were buying because of the way they were packaged.

Are you suggesting that banks lied or that the buyers assumed that the risk
was acceptable? If the latter, why shouldn't they take the loss? After all,
they were willing to take the gain.

The bailout is occurring under different assumptions - we're insisting on
looking under the hood more.

~~~
DougBTX
> A banker's job is packaging risk, which they did.

It seems as if they hid the risk, and may even have increased it, along these
lines: [http://unqualified-
reservations.blogspot.com/2008/01/straigh...](http://unqualified-
reservations.blogspot.com/2008/01/straightforward-explanation-of-present.html)

~~~
anamax
There's nothing at that link to suggest anything about what bankers in this
universe did or didn't do.

Note that some of the slicing and dicing was intended to turn a pile of
mortgages into two financial instruments, one with less risk than the original
pile and the other with more risk. The two instruments would then sell for
different prices.

And, are the buyers actually the financial illiterates that the "buyers didn't
know" argument requires? I wouldn't call Merrill Lynch naive about money.

------
esja
While I agree with much of what he says (despite working in derivatives), and
while I realise the message is what should be addressed, and not the
messenger, I think it's worth noting that Will Hutton's wife profited very
nicely from the debt explosion here in the UK, as part owner of a company
called First Premise, a buy-to-let landlord, and that this may be why his
increasingly shrill rants never place any blame on the greedy "man on the
street" who was only too happy to sign up for a fraudulent loan and thereby
contribute to this mess.

For the last ten or more years of my life (in Australia and the UK), I've been
living in a strange world where every single social conversation eventually
converges on property prices, property investment, buy to let, negative
gearing, renovations, decking, auctions... I'm willing to suffer some hard
times if it means all of that will disappear and we can go back to being
normal humans again.

At least until the next bubble. :-(

~~~
michaelneale
>I've been living in a strange world where every single social conversation
eventually converges on property prices

Its really tiring isn't it. well it is good that is over, its just the other
crap I don't want. But if we can get back to doing stuff rather then
speculating, then great.

------
peakok
_[Hank Paulson's plan] made no demands that any financial executives sacrifice
pay or bonuses despite having driven their firms and wider economy to the
point of bankruptcy. He does not want the government to provide new bank
capital to help recapitalise a bust banking system. Instead, he wants the
government to buy their toxic debt and so leave the banks unreformed. On top
he wanted complete discretion to act as he chose without any oversight._

And this is the man who originaly designed the bailout plan ? This guy
obviously doesn't want to save the US & world economy, he wants to save Wall
Street first and go on like nothing happened. Why him ?!

~~~
anamax
Since we're not going after the politicans who "encouraged" the no-money-down
loans and took campaign contributions from Fannie and Freddie, it's unclear
why you're upset that the financial execs aren't taking a hit.

If you're renting because you couldn't afford to buy or you bought what you
could afford, should you pay to keep people in houses that they can't afford?

~~~
adrianwaj
They should be out of their houses. They are lucky to have lived in such
houses in the first place. Also, those that acted improperly should be brought
to justice. New rules should be in place to stop this from happening again.
The greed and vice that led to this won't go away with the bail out. Power is
all too abused.

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quasimojo
good! good! everyone under forty should be cheering this on. if you finally
want to be able to afford a house, you need people who currently own houses to
go through some degree of hell. the "bailout" is about making sure those who
had money yesterday have it tomorrow. i say let the power change hands. LET IT
SHATTER. i will buy the pieces on sale.

~~~
ConradHex
I take it you aren't a homeowner, then?

~~~
quasimojo
yes, a home OWNER, as in i hold no mortgage. i have zero debt. i have cash to
buy distressed assets. i just wish people would stop trying to "save" things.

~~~
michaelneale
I am in similar boat. But what worries me is if this means much more then
that... what if you suddenly don't have cash, or its worth nothing. What does
it matter if you own lots of houses and no one can rent them. Well, its
unlikely it would ever be as bad as that ;) but heck, hard not to worry about
unlikely events.

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robak
I'm so bored of listening to this! just let them go bankrupt! Is this
capitalism or what???? Nationalize insurance industry, finance industry,
automotive industry. Let the Market clean up the excesses as it has been doing
for hundreds of years! This time is NO DIFFERENT.

