Greenspan Tells Congress Bad Data Hurt Wall Street 496
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."
Outsourcing Their Decisions (Score:5, Insightful)
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.
Re:Outsourcing Their Decisions (Score:5, Funny)
...Bad Data Hurt Wall Street...
So Lore [google.com] is to blame?
Technically, it was the programmer's fault, so (Score:4, Funny)
Re:Outsourcing Their Decisions (Score:4, Insightful)
bingo! Greenspan did exactly what all the Republicans and Libertarians wanted... lowered the interest rate the Fed charged for money and kept their fingers out of market regulation. Wall Street spent and gambled like drunken sailors.. they deserve to have been shut down, their employees laid off without paychecks like all the manufacturing workers they sold out, but they're so big and tie up so much money it will put the honest people out of business too.
Too big to fail ... (Score:5, Interesting)
... 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.
Re:Too big to fail ... (Score:5, Insightful)
Trouble is....if they did all this and were playing within the rules laid forth by the SEC...there is no crime committed. There is nothing to be arrested for...
Re:Too big to fail ... (Score:5, Interesting)
That doesn't seem to have been much of a problem in the recent past, I say leave them in a hole for 5yrs and I reckon they would be ready to plead guilty to a retrospective law [wikipedia.org].
Re:Outsourcing Their Decisions (Score:5, Informative)
That comment proves your ignorance of this matter.
Libertarians did not 'want' a lowered interest rate or deregulation of the fundamentally corrupt banking system. Libertarians want NO socialized banking which means NO federal reserve which means NO federal control of interest rates.
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).
But please continue to let ignorance be your guide...
Not to mention Freddie Mac and Fannie Mae (Score:5, Informative)
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 [freerepublic.com] were opposed and called "ideological" [wsj.com]. And now the free marketers are being blamed! That's like blaming Slashdotters if voting machines failed to work right.
Re: (Score:3, Interesting)
Which are about as "capitalist' as the post office. Government-created monstrosities exempt from the law, which were leaned on by Barney Frank [wsj.com] (see also, Barney's Rubble [wsj.com]) and Chris Dodd to lend to poor people with bad credit.
I have to ask the question - if the Libertarian ideal of laissez-faire capitalism is so obviously the "correct" way for the fundamental economic idea of maximization of utility to manifest itself, why are there such problems creating a pure free market system in the U.S. instead of the quasi-socialist current system? I find it very difficult to believe that, given the power of American corporations, that somehow the Democrats could enforce such a system without their consent. The only conclusion I can dra
Re:Not to mention Freddie Mac and Fannie Mae (Score:5, Insightful)
There's an alternate conclusion: Corporations don't want a free "laissez-faire" market, because they want to be able to use government to block competitors. For example, Comcast uses government to grant it a guaranteed monopoly in various counties across the continent. Comcast certainly does *not* want a free market. Neither does Microsoft, or GE, or numerous other companies.
Oh one other thing:
It's a mistake to think corporations don't like Democrats. The TV corporations donated 74% of their funds to support Democrats, and just 26% to Republicans. Why? Well your guess is as good as mine, but I suspect it's because the TV media knows Democrats love to regulate, and the TV media is hoping the democrats will *protect* TV's business against internet competitors (like video-streaming Ipods).
Corporations don't want a free market. They want a socialized, closed market that protects their current standing. They want competition to be blocked.
Re:Not to mention Freddie Mac and Fannie Mae (Score:4, Interesting)
Frankly, at the heart of this problem, the markets massively over-priced these mortgages, and insurance companies under-priced default insurance. Under a free-market framework... this shouldn't have happened.
Did the government "force" AIG to underprice the risk of default on these risky loans? Did they "force" investment banks to make multi-trillion dollar CDS and CDO's that brought down the global financial system?
This issue has highlighted that systemic risk in our markets is pervasive, and that there seem to be externalizations associated with risk taking. And blindly shouting "Capitalism!1!" isn't very useful for solving it.
Re:Not to mention Freddie Mac and Fannie Mae (Score:4, Insightful)
That's a nice strawman argument. Blame the democrats for wanting to give mortgages to minorities and poor people. The numbers tell a different story. There are only $150 billion in total mortgages that are at risk of defaulting or going into forclosure. Out of those $150 billion, the land and homes still back the mortgage, so you can't expect a complete loss.
Then, take a look at the $62 trillion in credit default swaps. Compare $150 billion in bad mortgages (not all of them made to poor people or minorities) to $62 trillion in credit default swaps due to lax regulation.
It's not hard to see who is really at fault here, but go ahead, keep blaming the poor and minorities, like all of the conservatives do. You're just digging yourself into a bigger hole.
Re:Not to mention Freddie Mac and Fannie Mae (Score:4, Insightful)
What really pisses me off about this issue, is that there has been no substantive debate about what actually needs to be done to change financial regulations.
This episode has illustrated that our financial system is too delicate, with too many large firms that can take down the entire global economy if they fail.
The important thing to note, is that this systemic risk will not be minimized by the actions of the actions of self-interested agents, because they do not care about the welfare of other banks, only their own(And there is nothing wrong with that). So a perfectly free market will fail.
So the question is, what do we do about it? Do we place stricter leverage limits so that these firms are not allowed to take on risk? Do we forcibly break up the companies to create more redundancy?
Until your party drops it's tiresome and simplistic ideology( "Capital gains taxes! That will magically eliminate systemic risk!" ) in favor of realistic and sober policy proposals, it will continue to be relegated to the political wilderness.
Re:Outsourcing Their Decisions (Score:5, Interesting)
This whole mess is a failure of socialist banking policy NOT capitalism or free market ideas.
Horse poo. It's nothing to do with socialism. There are much more regulated (let's drop the "socialist" distraction) economies out there, and they just aren't doing as badly in this little mess as is the USA.
It was a property market bubble, and bubbles are a result of unreasonable investor optimism and confidence. There were a few extra contributors to this little problem, but let's not pretend that libertarianism is the answer when there are NO libertarian societies out there in the real world doing better.
Don't get the idea I don't like Americans or the USA. I do---I like you because you're all gooey, ambitious and optimistic, even if that makes you prone to economic bubbles. I hope you get through this problem just ducky. But you do have too much belief in money, and I hope this beats it out of you.
Re:Outsourcing Their Decisions (Score:5, Insightful)
Don't confuse the libertarian. They always seem to think all those regulations that controlled the excesses of capitalism mysteriously appeared on their own by accident. All those laws that were removed in the deregulation gold rush, were put in place as the direct result of failures resulting from unbridled capitalism, each failure and corrupt exploitation resulted in new laws to prevent their recurrence, of course those laws, as yet, could not ultimately prevent their removal.
The out of control lending was all about creating the illusion of profits and hence inflate the bonuses of grossly overpaid executives. It was all about a total disregard of the consequences, of people cashing in on other peoples savings, of management making millions while costing everyone else billions. It did not happen accidentally, it was inevitable and planned and executed by people who had no regard for the damage they caused, their sole interest was in how much in bonuses they could squeeze out before it all collapsed.
Re: (Score:3, Interesting)
Fractional reserve lending is a red herring; all currencies are fiat, including gold. The benefit of gold, when it was chosen, is that it:
1. Doesn't corrode.
2. Is dense and therefore doesn't take up a lot of space.
3. Had no value.
Read #3 again. Gold was too soft to be useful for anything. Now we use it as a conductor, but for the most part it is still useless. That is why it makes a go
Re: (Score:3, Interesting)
exactly, as soon as the first person loans their gold bars to another to build a bridge and pay workers, then they have just "created" fractional value because they still claim that gold loaned out as their property but somebody else is spending it, hence the problem magnified by millions doing it.
What the hell are you talking about? (Score:5, Informative)
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 [slashdot.org] 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 [slashdot.org] Fannie Mae or Freddie Mac either. They weren't the ones making the loans.
The government didn't [slashdot.org] 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 [slashdot.org]
Ironically, it was the repeal [wikipedia.org] 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.
Re:What the hell are you talking about? (Score:5, Informative)
As I've said before, I'm not against people financing the operations of others for profit, but they shouldn't be allowed to inject fictional currency into the money supply to do so. Only with government interference in the market or criminal activity is this possible.
Re:What the hell are you talking about? (Score:5, Interesting)
In an unregulated market fractional reserve lending should be prosecuted as fraud. It is fractional reserve lending that is the root cause of the collapse in the money supply.
No, re-read my post. It was pure greed and financial malfeasance which led to the "collapse" of the credit markets. (it's not a collapse either because the federal reserve still lends to financial institutions. Government interference prevents the economy from utterly collapsing in situations like this)
This is entirely due to government regulation.
"Regulation" is, fundamentally, government compelling a sector of private commerce to behave a specific way. The presence of the Fed does not compel a bank to engage in fractional reserve lending, in this case it merely allows it.
The banking industry has been structured upon fractional reserve lending since it arose. They don't make profits by simply holding the deposited assets. They loan out a fraction of what their patrons deposit to earn profits through interest. An (arguably beneficial) side effect of this is the "money multiplier" effect that makes the world go round. (It is arguable that the industrial revolution and our modern, technological age would not have arisen in the absence of this economic force.)
Fiat money precludes the possibility of a free market and even with an ostensibly gold backed currency is in reality a fiat currency if the government allows fractional reserve lending.
Given that you agree that fractional reserve lending and the money multiplier effect mean that even gold based currency is equivalent to fiat money, then, given the history of banking, your assertion that fiat money precludes the possibility of a free market is refuted by centuries upon centuries of commerce.
In light of this, your whole rant here strikes me as incoherent.
There is some real irony here in your post.
If you believe fractional reserve lending is, in fact, fraud, then what you are advocating is...drumroll please.... a regulation prohibiting that practice.
In fact, the federal reserve system imposes a minimum required reserve on bank systems, which artificially decreases the quantity of money "fraudulently produced" through fractional reserve lending.
They used to take much greater risks in their lending because the first rule of the free market is profit. This resulted in a lot of people losing their savings when banks lost all their liquid assets in loan defaults during the depression.
Re: (Score:3, Informative)
Re: (Score:3, Informative)
No, They loan out a multiple of the deposits, this is the (alleged) problem with fractional reserve banking. If a bank has deposits of $10,000 they are allowed to loan out $100,000 if there is a 10% reserve requirement. They loan out money that they don't have.
I think you're conflating fractional reserve lending with the money multiplier effect. They can't lend capital they don't have. If the minimum reserve requirement is 10%, that means the other 90% of the deposit goes out.
In your example that would mean a deposit of $10,000 would result in $1,000 on hand and $9,000 in loans.
The money multiplier effect comes into play when this deposit->loan cycle happens many times.
That 9k loaned is deposited in the borrower's account, and 900 stays with that bank, while
The second great depression (Score:5, Informative)
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
Libertarians say Federal Reserve is Theft. (Score:5, Informative)
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.
Re:Libertarians say Federal Reserve is Theft. (Score:5, Insightful)
What commodity should money be backed by, then?
The answer all the libertarians seem to give is "gold". But this is nonsensical. Gold is not particularly valuable. It has some worth in certain industrial processes and such, but mostly its value comes because people are collectively nuts. In this way, the value of gold is not much different from the value of the un-backed $20 bills in my wallet.
Re:Libertarians say Federal Reserve is Theft. (Score:4, Interesting)
He did not say a limited commodity, he said a valuable commodity. If the only thing you need is for the supply to be limited then he should have said that. But he said "valuable", which gold really isn't, so I want to know what the proper backing is.
Re:Libertarians say Federal Reserve is Theft. (Score:5, Insightful)
Value is related to scarcity and utility. People are always forgetting about that second part.
For example, if I sculpt my shit into a likeness of Jimmy Carter and call it "art", we have something that is extremely scarce. It is quite literally a one-of-a-kind item. Total value? Essentially zero. It may be worth something as fertilizer, but it's probably not worth transporting it to where it could be useful.
On the other hand, air is quite valuable. (If you don't believe that because you don't pay for it, just try doing without it for a while.) It is also about as far from scarce as you can get.
Gold has very little utility. Before the modern age it had basically zero utility. This is, quite simply, because people are irrational and assigned a value to it which is beyond its inherent worth. Exactly what the gold-standard crowd says people do to $20 bills.
Re: (Score:3, Informative)
Agreed. There are several other reasons why we should avoid a gold standard, or any other similar arbitrary standard.
For one, a precious metals standard never stopped a country from playing loose with its own rules when it felt necessary. Major countries throughout history have bent or broke the rules in times of war to raise funds. Nixon didn't like the idea of raising taxes to pay for the Vietnam War, because he knew it would make the war even more unpopular. So, he printed money instead, despite the
Re:Libertarians say Federal Reserve is Theft. (Score:4, Informative)
The price of a good has nothing to do with rationality, but how much people pay for them. Heroin is not cheap. Beer is cheap, but never as cheap as I'd like. Cigarettes, Jesus, I'm just happy I don't live in Europe. Those are not 'rationally useful' products, they are basically ways to die in slow gear, but they are much more expensive than air, which is essential to life, but so abundant as to be free. Wouldn't be so cheap on a space station. Its utility didn't change though, its scarcity did.
My point is merely that gold is no different from the rest of these. It's all just "how much people pay for them". There's nothing magical about gold, even though people talk constantly about its "intrinsic value". It has no such thing. Gold is worth exactly what people are willing to pay for it.
Anyway, if gold is as useless as you say it is, then lets just trade. I got 300 new 1 dollar bills. Just get me two gold bars for them and we'll leave it at that.
Let's do the reverse. If paper money is so worthless, why don't you give me enough $100 bills to fill a suitcase and I will give you an ounce of gold in return. I'm sure that the gold will be more than enough to pay for the cotton and ink.
Re: (Score:3, Interesting)
My point is merely that gold is no different from the rest of these. It's all just "how much people pay for them". There's nothing magical about gold, even though people talk constantly about its "intrinsic value". It has no such thing. Gold is worth exactly what people are willing to pay for it.
Yea you're totally right. I could argue that in the end that's what 'intrinsic value' boils down to. What can you get for it, or how much money.
Let's do the reverse. If paper money is so worthless, why don't you give me enough $100 bills to fill a suitcase and I will give you an ounce of gold in return. I'm sure that the gold will be more than enough to pay for the cotton and ink.
Ohh, I'd be crazy, unless you would take 7 hundreds and a twenty for that ounce. :)
The dollar is not worthless. Yet. But it's purchasing power has gone nowhere but down since the Fed and later the severing of the gold link. Gold serves as a safe store of value because the government cannot steal the value of your gold by magically making more.
If we had God as
Re: (Score:3, Informative)
The extremely thin oxide/sulfide layer has little effect on the overall effectiveness of the heat sink (and silver and copper are better at conducting heat than gold in the first place). The effect of dust collecting on the heat sink surface probably exceeds it by orders of magnitude, so if you don't clean the heat sink religiously, the effect of the oxide layer gets lost in the noise.
If it wasn't so expensive, it w
Re: (Score:3, Interesting)
Many people like gold for its beauty. This is a utility, and one people are ready to pay a huge lot for.
So the value of gold as a currency would depend entirely on enough people thinking "Ohhh shiny!"? Beauty is highly subjective.
I'd rather base a currency on something that has more objective utility. Stored energy would be a good example, though I think people would object to enriched uranium coins.
Re:Libertarians say Federal Reserve is Theft. (Score:5, Insightful)
The problem is that there is not enough of any commodity to support the actual amount of productivity in the US, much less the world. I agree the Fed reserve printing money at will is a crock, but money doesn't have to be backed by anything as long as everyone agrees that it can be used as an exchange of goods and services.
And yes, printing money right now is a horrible mistake. 1 trillion there another trillion here. I hope everyone is ready for the upcoming hyper inflation and 15%+ interest rates!
Not a mistake (Score:5, Interesting)
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.
Re:Outsourcing Their Decisions (Score:5, Insightful)
Libertarians don't want the Fed to exist at all. The market can set interest rates just fine on its own. In fact, that's what it's been doing for the past several weeks. Had that been allowed to continue, you would have gotten your wish: most companies on Wall Street would have failed, because no one can afford to pay a paltry 4% any longer. They're too highly leveraged and every asset on the market yields too little. That's the legacy of two decades worth of artificially low interest rates, courtesy of the central banking cartel. Had the market been allowed to set its own interest rates along the way, we would never have gotten here. For that matter, without the Fed and its paper money we'd still have circulating gold and silver, and the "dollar" would simply be another name for 1/20.67 ounce of gold. You could buy a house with a small purse full of coins, and the money in your savings account would never lose value. That's the libertarian way. Any claim to the contrary is a damned lie.
You can blame the Republicans if you want (I do!) but don't forget to blame the Democrats as well. FNM and FDE are well-known homes for aged Democrats and their lobbyist friends seeking sinecures, and they like anyone else benefited from the easy profits to be had when money was free to all comers. And while we're there, don't forget the political imperative to push home ownership rates as high as possible and then much higher still: that was a Democrat-led, Republican-approved move. Again, artificially low interest rates made that possible.
Blame all the politicians in office, blame the career bureaucrats, and blame the greedy bankers. But never forget, either, that every transaction has two sides. So blame the borrowers, too, and the shareholders who collected their dividends - several times what bank deposits paid, by the way - without asking questions about the assets that provided them. And blame yourself, if you're anything like the typical American: indebted up to his eyeballs, with a comfy McMansion in the 'burbs, a brace of SUVs in the garage, and a plasma TV in every room. You can't afford that crap, but you bought it anyway - maybe you believed you could pay back all that debt, maybe you believed the boom would never end, maybe you just wanted to keep up with the Joneses or feel special. But you had to know you couldn't afford it, yet you borrowed and spent anyway. Now I hope you die in the fire you set while trying to collect an insurance payout. It's people like you - and all the others I just mentioned - who make this world a shitty place to live. So please, FOADIAF already. And in the meantime, take some goddamned responsibility for yourself.
bad code or bad summary? (Score:5, Informative)
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.
Re:bad code or bad summary? (Score:4, Insightful)
Coders would spot that
Re: (Score:3, Insightful)
Is Open Source the Answer for Risk Models?
By agreeing to rely on Wall Street's computer models to gauge investment risks, the SEC essentially outsourced that part of its regulatory duties to the systems of financial services firms, says Erik Gerding, an assistant professor of law at the University of New Mexico who does research on securities law.
Gerding's proposed fix: Make the software code that underlies the risk models open source -- a step that he claims would boost the transparency of risk calculations and potentially improve their accuracy.
"Just as with open-source software, other users would be able to copy and modify these models for their own use," Gerding said. And by looking at the code, business partners as well as credit-rating agencies could get a better picture of how financial services firms assess the transaction risks, he said.
Many Wall Street firms are already major users of open-source software. But Lisa Cash, executive vice president of sales and marketing at DFA Capital Management Inc., a vendor of risk management tools, said she thinks it would be difficult to get high-quality risk models into the market on an open-source basis.
Cash said that a better option for increasing transparency as well as confidence in risk models would be for U.S. regulators to emulate their counterparts in Europe, where watchdog agencies audit financial firms' risk models.
Peter Teuten, president of Keane Business Risk Management Solutions LLC, also questioned the wisdom of using open-source approaches in risk modeling. But he said that he does expect some modeling standards to emerge from the crisis.
Insurance (Score:4, Informative)
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!"
My impression after watching C-SPAN. (Score:3, Insightful)
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 mes
Of course the code was bad. (Score:3, Insightful)
"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.
Re:Of course the code was bad. (Score:5, Informative)
The ratings were based on the idea that house prices only ever go up, and that they could always foreclose and get their money back. The model didn't take into consideration that in places like Detroit, you might find that you can't even sell the foreclosed houses in some of the worst areas for $1.
[Citation needed] (Score:5, Insightful)
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 [wikipedia.org] 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.
Re:Of course the code was bad. (Score:5, Insightful)
If we hadn't had things like CRA and community activist groups painting banks that didn't paint lots of bad loans into 'underserved' areas as racists, then we might not have had quite so many bad loans.
This wasn't the only cause, but definitely a big factor.
No, it was a relatively small factor. 50-80% of subprime loans were made by companies to which CRA didn't apply. [lohud.com] In fact, CRA only applied to 1 of the top 25 subprime lenders. [mcclatchydc.com] Furthermore, less than a third of CRA loans are in the category of subprime - most of them have fixed interest rates better than subprime and consequently default rates are below average too.
Re:Of course the code was bad. (Score:4, Insightful)
In a Neural Network Design course I took ~ 3 years ago (which consisted of a number of financial type folk), they were using incomplete training datasets to decide whether or not to give mortgages. They didn't have enough data on failed loans - why? because most home loans in the US up until then had not failed. People bought homes to live in, instead of as a risky investment which they intended to flip before their ARM reset. The model changed in the real world - and the computer models the analysts made didn't. But the models are not to blame here in my view. It is the fact that they depended solely on these models. If they had some consistency checks with the real world and actual people looking at the data, perhaps they wouldn't have just been stamped AAA without any real thought.
Re: (Score:3, Interesting)
Re:Of course the code was bad. (Score:5, Insightful)
Blaming computers and code? In this case, don't blame the game, blame the players. If they are truly the smartest guys in the rules, they would have known the practices (not tech) put in place were just plain wrong, or at least high risk involved. They saw tech as something to apply their new theories, without acknowledging the risk. Just because I bent the nail doesn't mean it was the hammer's fault!
If they are not the smartest guys in the room, then the emperor is without his clothes and these guys, along with all of Wall Street, do not deserve the rich payouts they're going to get in the next year, seriously...they are going to ask for more cash to put in their pockets.
This Is NOT News For Nerds (Score:2, Insightful)
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.
Greenspan's hubris (Score:5, Insightful)
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.
Re:Greenspan's hubris (Score:5, Insightful)
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.
That seems to be an oversimplification. The most reasonable thing I've seen is that we deregulated the credit derivatives market, and told the crooks to "regulate themselves." When the government advocates more people to have homes, and ties that to a banks ability to expand, that's not necessarily a bad thing, unless the originating lender can hand off hot potatoes, rake in cash, and not face consequences. If full disclosure was part of that market by law, then we simply wouldn't be where we are today. Originating lenders would be unable to sell bad loans, and when they started suffering the consequences, the game would have ended early and not been nearly as bad.
Exacerbating the situation is the removal of important firewalls between investment houses, banks, and insurance companies that happened at the same time. Companies that had been only banks or only insurance providers are now in deep trouble, though their original departments weren't involved. So, I agree with you about "diversification models." One of the downsides of free markets is the inevitability of boom and bust cycles, which is why every successful economy has a powerful governing authority to regulate a relatively open market. It helps calm the highs and the lows, which restricts growth but also prevents everyone from losing their shirt at the same time.
Accountability is what's missing from capitalism. In my opinion, everyone who was aware of the risks they were handing off to others should be stripped of every penny they made off of those transactions, and if found breaking any laws, should be serving as much time as petty thieves who steal thousands instead of millions. Similarly, any company that intentionally and illegally pollutes should have to pay clean up costs and matching punitive damages that fund land trusts.
The difference in treatment of those two types of criminals is indicative of another problem at the foundations of modern western capitalism: privatized profit and socialized risk.
Re:Greenspan's hubris (Score:5, Interesting)
One of the downsides of free markets is the inevitability of boom and bust cycles
That is NOT a downside of free markets. That is a downside of having a central bank issuing fiat currency at essentially arbitrary interest rates that do not necessarily reflect current savings and consumer preferences.
F.A. Hayek won an Economics 'Nobel' on that work [nobelprize.org], by the way.
People fail and succeed all the time in a free market, that's good and healthy for the economy, but when everyone fails at once, you can be sure there's a central bank and an Alan Greenspan fucking everything from up on his planner's high tower.
What's wrong with your argument is that you're focusing on the symptoms and ignoring the cause. Companies DO have accountability, Lehman Brothers went bankrupt, AIG is broke on Federal life support, everybody who indulged in that binge is now dead or dying. Except the government isn't allowing the failures to fail, and in doing so they're rewarding idiocy and punishing competence. I say it is government that needs accountability.
Accountability? (Score:4, Insightful)
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.
Re:Greenspan's hubris (Score:4, Interesting)
Well I'll just stop asking leading questions and cut to the chase.
My understanding of economic history is that there have always been economic cycles. Cycles are inherent to any system with complex feedback loops. You seem to be blaming cycles on fiat currency, paper money, or fractional reserve banking, which just makes no sense in that context.
Re: (Score:3, Interesting)
Well, you're right. Economic activity is dynamic, and is subject to the real world. I'd expect to see a big boom in the agricultural sector if crops start failing all over the world. But that is not a speculative boom created by an expansion of credit, but it's a redirection of resources to an area where a demand has shown to be increased by a rise in prices.
The point I'm trying to make is that the boom and bust cycle, like we're seeing now in which dozens of companies fail at the same time, is caused by
Re: (Score:3, Interesting)
I don't buy it at all. You don't need central banks to get boom and bust cycles. All you need is a system which contains feedback and lag. Booms and busts simply fall out of the differential equations which describe such systems. There were probably boom and bust cycles in ancient greece involving wine and pottery and statues, long before anyone ever invented central banks.
They may make it worse, I don't know. But they certainly aren't the sole cause.
Re: (Score:3, Insightful)
So the multiple bank panics and recessions in the United States between 1837 and 1913, when there was no central bank, did not happen? Interesting....
Re:Greenspan's hubris (Score:4, Interesting)
That seems to be an oversimplification. The most reasonable thing I've seen is that we deregulated the credit derivatives market, and told the crooks to "regulate themselves."
I don't necessarily disagree with your analysis above, but quite honestly it IS simple. The reason for this clusterf**k doesn't require a PhD in finance to figure out, that's what kills me. Basic supply-and-demand analysis suggests there will be a problem. The issues you raise are absolutely important, but to me they just determined how big the problem would be, not whether there would be one.
I would look at it this way - the deregulated derivatives and swaps (and other not-so-transparent assets) made it easier to hide the problem for longer, but credit that was just too easy to get was the fuel for the fire.
I'm looking it from a pure supply-and-demand standpoint - historically, whenever credit is too easy to get and stays that way for too long, Bad Shit happens. Funds get greedy, overleverage, and make insane bets. Then, when the bad assets start getting sold off, their leverage screws them because they have to sell good assets to pay off depreciating leveraged debt. If too many people are too leveraged, you get a chain reaction where selling depreciates even good assets, which cascades and leads to a market crash because you don't have any buyers. It would be one thing if this were the first time that cycle has happened, but it happens frequently. 1929, a smaller one I believe after WWII, 1987, 1998, 2002, and now. The degree varies, but all owed a lot to overspeculation, which depends in large part on credit that's too easy to get.
If full disclosure was part of that market by law, then we simply wouldn't be where we are today. Originating lenders would be unable to sell bad loans, and when they started suffering the consequences, the game would have ended early and not been nearly as bad.
That's not a bad start, but Wall Street will always find an angle. Your approach, while necessary, is sort of like how we beefed up airline screening after 9/11, even though the next attack will be different. Preventing the last problem isn't bad, but it won't solve the next problem. Same on Wall Street - the next financial crisis will have a different cause, be it foreign currency speculation, bond speculation, housing speculation, venture capital overspeculation, whatever. Note we've had minor to major crashes due to all *five* of those just in the last 20 years, a couple of them multiple times. What's next? I don't know, neither does anybody, and that's the point. Bottom line, you can't legislate away all the holes because you can't out-think the cleverest schemers on Wall Street - but you can eliminate the easy credit that lets the morons do it.
As an example - so why housing this time? Mortgage securitization was the flavor of the month for the "can't fail" risk diversification crowd. As I've said, it's just one in a chain. The pet theory of risk diversification suggested that, based on woefully limited data, that mortgages across different socioeconomic backgrounds and different regions won't all go south simultaneously. That worked until easy credit and a clever scheme let mortgage brokers and investment banks game the system. Here's the game: while everybody knew banks were giving houses to people who couldn't afford them, and that it was happening everywhere, the mortgages were built so they didn't implode immediately. How? The balloon ARM. Everybody with a functioning brain knew these balloon ARMs that were sold to get people in houses were ticking time bombs. But the fuse on that bomb was a couple years long, by which point the people who packaged those securities had sold them. Just like the dot-bomb economy, when the vulture capitalist clowns backed IPOs that anyone knew were retarded, but they made their money up front. Some other sucker would find out later these companies had no business model.
One of the of the downsides of free markets
Re:Greenspan's hubris (Score:4, Insightful)
Low rates do not, themselves, motivate banks to write bad paper on behalf of the risky blokes who suddenly think they can afford a house. Banks were pushed. Banks were even sued [mediacircus.com] to extend home ownership to those who, frankly, can't handle it.
Low rates accellerated the process, but cannot indepedently cause this problem. You almost said it yourself in your first sentence, before tripping over your own politics and blaming Greenspan.
Greenspan did oppose CDO regulation [gata.org], an error which he has since admitted. But the unregulated state of CDOs also could not cause the crisis. CDOs arose to collect the bad mortgages, and the ratings agencies performed whatever evil was necessary to keep the music playing. Whether they too were strongarmed, or simply cashing in on banks' willingness to pay annual "maintenance fees" for AAA ratings, is not yet known.
Re:Greenspan's hubris (Score:5, Informative)
Banks were pushed. Banks were even sued [mediacircus.com] to extend home ownership to those who, frankly, can't handle it.
According to the docket in your linked article, the banks were sued for the following reason:
Plaintiffs alleged that the Defendant-bank rejected loan applications of minority applicants while approving loan applications filed by white applicants with similar financial characteristics and credit histories.
Your position appears to be that plaintiffs lied -- that in fact loan applications were denied purely based on the financial and credit characteristics of the applicants. Is there any evidence to support and/or disprove this position? I've read your links but I have not been able to find statistics that provide any confirmation of the claim that "Obama Sued Citibank Under CRA to Force it to Make Bad Loans"
Without evidence that the banks were (or were not) denying loan applications based on ethnic origin, I don't see how I -- or anyone else -- can reasonably assess whether lawsuits like this one had a significant impact on the current banking crises.
I have found The Color of Money [powerreporting.com], a series of articles on lender's avoidance of middle-income black neighborhoods. The article series won the author, Bill Dedman, the Pulitzer Prize[1]. I'll be adding the articles to my reading queue -- my expectation is that the truth behind these loans is quite a bit more complex than has been presented here.
[1] Bill Dedman's MSNBC bio [msn.com]
Comment removed (Score:5, Funny)
More than data (Score:3, Insightful)
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.
I blame ACORN! (Score:5, Funny)
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.
Re:I blame ACORN! (Score:5, Insightful)
It didn't. It punished everyone who made bad decisions - the people who loaned money, the people who borrowed money to buy a home they could never afford and the people who invested in companies that loaned the money.
Of course, it is not the free-market that is giving 700-billion to the people who made reckless loans. Maybe you can figure who that is...
Re:I blame ACORN! (Score:5, Insightful)
Bull. The majority of those executives who made the horrible decisions were riding high on ridiculously, fraudulently inflated stock prices, and got their huge bonuses and golden parachutes, leaving before the crash.
Re: (Score:3, Insightful)
Do you have any numbers to back that statement up?
Lehman Brothers was handing out billions in bonuses even as the company was going under. Sure, the shares held by these executives might be worthless - but they still got paid millions and walk away with millions more via golden parachutes.
And btw, for those who blame the crash on deregulation, the regulations in the financial sector only grew in the last 20 years.
And what color is the sky on your planet?
We seem to be passing the buck on Mortgage crisis. (Score:2, Informative)
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's a muppet. (Score:4, Insightful)
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 [amazon.com]
Re:Greenspan's a muppet. (Score:4, Insightful)
He's not inept, he's actually a pretty bright fella. The thing is: nobody can see _all_ the consequences of, say, arbitrarily changing the interest rates.
The reason the Fed fails is the same reason the U.R.S.S. failed; Central planning _does not work_, socialism _does not work_, price fixing ( including the price of money, i.e. interest rates ) _does not work_.
To paraphrase Mises, if a God would descend from the heavens and take the economy's leash to guide us, then socialism would work under such an omniscient leadership, but since that's not likely to happen anytime soon, the free market is the only rational mechanism we have to direct economic activity.
Re: (Score:3, Insightful)
Flip-flopping? It's worse than that. The Federal Reserve pretty much destroyed our economy by causing the housing bubble, dot com bubble, snl crisis, etc etc. Their actions are more than just a bit criminal if you ask me.
Re:Greenspan's a muppet. (Score:5, Insightful)
Yeah, the last thing you want is someone who changes their mind in the light of new information.
I think the world got dumber the day the term "flip-flopper" began being used in public discourse.
It's about data quality (Score:5, Interesting)
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.
As the saying goes (Score:5, Insightful)
Keep Changing Assumptions Until the Right Answer (Score:5, Interesting)
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.
Re:Keep Changing Assumptions Until the Right Answe (Score:5, Insightful)
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..
Two different issues - (Score:5, Insightful)
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.
The Great Pretenders (Score:5, Insightful)
GIGO (Score:5, Interesting)
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.
Computers cannot replace common sense (Score:5, Insightful)
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.
Ask Alan Greenspan and HAL 9000 (Score:4, Insightful)
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.
Bullshit. total televised shitting (Score:5, Insightful)
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.
Bad Data Hurt Wall Street??? (Score:3, Interesting)
Impossible to tell good from bad. (Score:4, Informative)
Bad data, no. Bad modeling assumptions, yes. (Score:5, Interesting)
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.
Re: (Score:2, Insightful)
The problem is all you youngsters who don't realize how much we know that you don't.
Re: (Score:3, Interesting)
Who is the fox, and what is the henhouse? (Score:5, Insightful)
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.
Re:Who is the fox, and what is the henhouse? (Score:5, Insightful)
That's the whole point of TFA - that the repackaged debt was given AAA ratings despite being obviously toxic.
Of course the decision to force institutions to make these loans was stupid, but it's the subsequent repackaging and reselling of the debt, disguising its lack of real value, that was the cause of this crisis, and the methods used to create that false valuation that are the subject of Greenspan's criticism.
Re: (Score:3, Insightful)
These two statements aren't at odds with each other. Fannie Mae and Freddie Mac did increase their already significant lobbying efforts in response to administration calls for increased regulation after their accounting scandals in 2003. But that didn't stop the debate dead in it's tracks of course, it's in the ensuing debate that issues of
Re:Alan Greenspan (Score:5, Insightful)
"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.
Re:Alan Greenspan (Score:4, Insightful)
Government centralizes power so that it can be more efficiently corrupted.
Re: (Score:3, Funny)
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'
Re: (Score:3, Funny)
Are you talking about the known unknowns? Or the unknown knowns? As long as it is not those dastardly unknown unknowns!
Oblig. Rummy Quote (Score:4, Funny)
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
Re:Alan Greenspan (Score:5, Insightful)
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.
Re: (Score:3, Funny)
Re: (Score:3, Funny)
The problem with most people is that they don't realize how much they don't know.
Hmmm... I don't know about that.
Re:700B mistake (Score:4, Insightful)
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.
Re:700B mistake (Score:5, Interesting)
Re: (Score:3, Interesting)
Yes, if only we'd had a computer to tell us that creating money out of thin air has negative economic consequences.
Ridiculous! Everyone knows that when you trade [stocks|houses|tulip bulbs] back and forth until their "value" is 5 to 10 times what you started with, that's all real money.
Seriously, why is it that people can't see the fact that there's 50 people and only 10 chairs, and when the music stops, 40 of them are gonna be standing? Do they think they'll be one of the lucky 10? Or are they just dumb? And more importantly, why do they get bailed out, when sensible folks like me who waited until now to buy propert