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The Rise of the (Financial) Machines

Soulskill posted more than 5 years ago | from the come-with-me-if-you-want-a-loan dept.

The Almighty Buck 403

BartlebyScrivener writes "A New York Times Op-Ed quoting Freeman and George Dyson wonders if Wall Street geeks and 'quants' outsmarted themselves with computer algorithms to create the current financial debacle: 'Somehow the genius quants — the best and brightest geeks Wall Street firms could buy — fed $1 trillion in subprime mortgage debt into their supercomputers, added some derivatives, massaged the arrangements with computer algorithms and — poof! — created $62 trillion in imaginary wealth. It's not much of a stretch to imagine that all of that imaginary wealth is locked up somewhere inside the computers, and that we humans, led by the silverback males of the financial world, Ben Bernanke and Henry Paulson, are frantically beseeching the monolith for answers.'" The quoted essay from George Dyson is available at Edge.

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This American Life (5, Interesting)

eldavojohn (898314) | more than 5 years ago | (#25344895)

First, I think we briefly discussed the quants two years ago [slashdot.org] (and had a book review on it [slashdot.org]).

Second, I don't think the current financial problem world wide is the quants' fault. I think this credit crisis and market failure (although it might have a little to do with the quants) can be directly attributed to the world market investing heavily in the subprime mortgage bubble. Now, there's still software to blame, but it's not the quantitative analysis guys, it's the software in the hands of people who were in charge of buying bad loans and shipping them off to Wall Street to be sold to investors with a monthly mortgage check paying a huge return.

There was a This American Life episode on this sometime back that dealt with explaining the global subprime mortgage financial crisis (now known as a worldwide credit crisis). About 26 minutes into the first episode [thislife.org], you hear them talk about exactly this (you can stream the shows from these links or look at transcripts). Alex Blumberg & Adam Davidson are two producers of the show interviewing those involved. Enjoy this dialog from the show on the no doc loans these idiots were handing out like candy to anyone:

Alex Blumberg: But Glen didn't worry about whether the loans were good. That's someone else's problem. And this way of thinking thrived at every step of this mortgage security chain. A guy like Mike Francis, from Morgan Stanley, he told me he bought loans, lots of loans, from Glen's company, and he knew in his gut they were bad loans. Like these NINA loans.
Mike Francis: No income no asset loans. That's a liar's loan. We are telling you to lie to us. We're hoping you don't lie. Tell us what you make, tell us what you have in the bank, but we won't verify? Weâ(TM)re setting you up to lie. Something about that feels very wrong. It felt wrong way back when and I wish we had never done it. Unfortunately, what happened ... we did it because everyone else was doing it.
Alex Blumberg: It's easy to ignore your gut fear when you are making a fortune in commissions. But Mike had other help in rationalizing what he was doing. Technological help. Mike sat at a desk with six computer screens, connected to millions of dollars worth of fancy analytic software designed by brilliant Ivy league math geniuses hired by his firm, which analyzed all the loans in all the pools that he bought and then sold. And the software, the data ... didnâ(TM)t seem worried at all:
Mike Francis: All the data that we had to review, to look at, on loans in production that were years old, was positive. They performed very well. All those factors, when you look at the pieces and parts. A 90% NINA loan from 3 years ago is performing amazingly well. Has a little bit of risk. Instead of defaulting 1.5% of the time it defaults at 3.5% of the time. Thatâ(TM)s not so bad. If Iâ(TM)m an investor buying that, if I get a little bit of return, Iâ(TM)m fine.
Adam Davidson: Wait Alex. I want to step in for a moment because this is a very important piece of tape. A big part of this story, of this whole crisis, is that a lot of really smart people, people who knew better, fooled themselves with this data. It was the triumph of data over common sense. Can you play that tape again?
Mike Francis: All the data that we had to review to look at, on loans in production, that were years old, was positive.
Adam Davidson: As we now know, they were using the wrong data. They looked at the recent history of mortgages and saw that foreclosure rate is generally below 2 percent. So they figured, absolute worst-case scenario, the foreclosure rate may go to 8 or 10 or 12 percent. But the problem with is there were all these new kinds of mortgages, given out to people who never would have gotten them before. So the historical data was irrelevant. Some mortgage pools, today, are expected to go beyond 50 percent foreclosure rates.

I emboldened one of my favorite quotes from that show. If you haven't listened to that show, I heavily recommend it (no matter where you live, if you speak English). That one episode was so insanely popular that Ira Glass was pushed to do another on the same topic and that lead to last week's This American Life [thislife.org]. From credit default swaps to the paper market drying up to NINA loans, these two episodes gave me more information in two hours than I could gather watching every single major TV news show for weeks.

Re:This American Life (5, Insightful)

martyb (196687) | more than 5 years ago | (#25344969)

If you haven't listened to that show, I heavily recommend it (no matter where you live, if you speak English). That one episode was so insanely popular that Ira Glass was pushed to do another on the same topic and that lead to last week's This American Life. From credit default swaps to the paper market drying up to NINA loans, these two episodes gave me more information in two hours than I could gather watching every single major TV news show for weeks.

YES! I whole-heartedly agree. I do not claim to be a financial maven, but I have been following the markets for a number of years and have some familiarity with the terms that have been bandied about as of late. But, these two shows did an INCREDIBLE job of taking arcane financial products and bringing them into focus with concrete examples. They showed how this crisis built up and is now unwinding.

As painful as this is, I do take some comfort in the crisis happening now rather than a year or two from now when even more leverage would have been injected into the system. That would make things FAR WORSE. Don't believe me? Let me repeat the links that eldavojohn [slashdot.org] provided: The first episode [thislife.org] sets the stage extremely well and explains how the mortgage crisis got going. The second episode [thislife.org] built upon the first and so clearly explains how the leveraging of these financial instruments got us into the credit crisis we are in today.

Listen to those. If you do nothing else today, LISTEN TO THEM.

More Leverage.... (3, Informative)

mosch (204) | more than 5 years ago | (#25345431)

As painful as this is, I do take some comfort in the crisis happening now rather than a year or two from now when even more leverage would have been injected into the system.

I'm confused, and wondering what you're talking about.

The original leverage ratios were set by Basel, which pegged them at 8% (or 12.5:1). In 2004, this was updated. It's still 8%, but now assets are risk-weighted.

Claims on depository banks were were given the following risk weights:
AA- 0%
A- 20%
BBB- 50%
B- 100%
(worse) 150%
Unrated 100%

And to make matters worse, claims on securities firms were defined to be the same as claims on banks.

And the kicker, claims secured by residential mortgages were weighted at 35%.

As such, though the leverage ratio was officially 12.5, somebody who held nothing but mortgages could be levered up 35:1. And if you owned some bank issues, you could get nearly infinite.

But I'm wondering... what makes you think that these limits were going to be further increased?

Re:This American Life (3, Interesting)

complete loony (663508) | more than 5 years ago | (#25345013)

I certainly agree that sub-primes were a very bad idea, and they helped trigger this collapse. But they were only the tip of the iceberg. We've had more than 50 years where debt has grown faster than GDP. That trend was unsustainable and had to stop eventually. Without sub-prime loans, we may have lasted a bit longer, with a softer fall at the end. Take this quote from 18/12/2006 [marketoracle.co.uk] "These blind faithful will pay the price in not too distant a future", well before the sub-prime crisis came to light.

Anti-math/science witch hunt (4, Insightful)

2.7182 (819680) | more than 5 years ago | (#25345041)

This isn't the reason for what's happened. But a lot of people hate math.

Re:Anti-math/science witch hunt (1)

Anonymous Coward | more than 5 years ago | (#25345453)

Yep, those deviant math nerds fucked up all of us. Right. That's why the nerds take up all the CEO chairs at these banks.

Caribou Barbie say Math is Hard (-1, Troll)

Anonymous Coward | more than 5 years ago | (#25345533)

This will get worse if the Snowbilly take over after gramps kicks it.

Oh yeah let them eat Moose

Re:This American Life (1, Insightful)

Anonymous Coward | more than 5 years ago | (#25345389)

I think this credit crisis and market failure (although it might have a little to do with the quants) can be directly attributed to the world market investing heavily in the subprime mortgage bubble.

I'd go beyond that and say the basic problem is that subprime and interest-only mortgages are available at all.

Once financial institutions are required to make subprime and interest-only mortgages available and since they're going to have a higher default rate than conventionial mortgages, then it's a game of Hot Potato. How do you get rid of them before they default? Simple, bundle them with other mortgages and sell them to other financial institutions, last one to hold them when the bubble bursts is the loser.

Evils of subprime (5, Interesting)

alexhmit01 (104757) | more than 5 years ago | (#25345481)

Guess what, subprime defaults are still under 10%, and even if they rise to 25%, that still means that 75% of the people with subprime mortgages were able to buy houses that they weren't otherwise. So "blaming" subprime is silly... the problem is that the holders of the banks mistook the risks, but nobody cared because as long as prices went up, they WERE risk free.

The problem in the boom was people took 2/28 and 3/27 loans... these were priced at 30 year loans (for amortization), but after 2 or 3 years, they reset from the low "teaser" (often 1% - 2.5% higher than the prime mortgages) to a high rate that would be 10% - 11%... The people getting them often didn't know that if interest rates STAYED the same, their rate would go from 7% - 11%, and they were qualified at the 7%... they assumed that sure the loan rate would "reset," but if interest rates could go up, they could also go down...

Brokers, new in the field, said things like "prime rate is stable, long term rates shift," because you had a 2 year stretch without the Fed moving it's rates. If someone had a low credit score now, they weren't going to be better in 2 years, because new home owners underestimate the costs of owning a home... but on paper, if you had some blemishes on your report, in Fannie Mae conforming only REALLY looked back two years (looked at 4, but mostly at 2)...

If you had a business or health failure, and took a LOT of hits on your credit score from not paying bills but nothing before/after, maybe you were better in two years. Most subprime people have a bunch of problems that are permanent. But, even if your score didn't improve, you could always refinance with another 2/28 in two years, giving the brokers your new equity in the house to try again...

So nobody worried, because with the market going up, if you couldn't make the payments, you could refinance out of trouble.

Re:This American Life (2, Interesting)

rugatero (1292060) | more than 5 years ago | (#25345429)

these two episodes gave me more information in two hours than I could gather watching every single major TV news show for weeks.

Couldn't agree more, and I've only listened to the first so far.

From a UK perspective, I've missed out on much of the information in this show - I knew of the sub-prime crisis, but had no idea of the reasons why so many bad investments were made. Most coverage here simply glosses over the fact that mortgages were given to people with bad credit and fails to delve any deeper.

I was also aware of how things were exacerbated because of the uncertainty of who owned which loans - the show was a huge eye-opener in this regard as I discovered not only how this came about, but also how massively more complex the situation is than I could have presumed.

These links are perhaps the most valuable ever posted on /., so thank you very much.

TFA perpetuates voodoo explanations (5, Insightful)

bigtallmofo (695287) | more than 5 years ago | (#25344897)

Somehow the genius quants -- the best and brightest geeks Wall Street firms could buy -- fed $1 trillion in subprime mortgage debt into their supercomputers, added some derivatives, massaged the arrangements with computer algorithms and -- poof! -- created $62 trillion in imaginary wealth.

Thanks, New York Times. Does your average reader have the reading comprehension of a 9 year old these days?

Here's what happened in simple English: investment banks invented various ways of packaging mortgages into securities. They then convinced ratings agencies to give these new securities AAA status even though the ratings agencies didn't understand them. This gave mortgage brokers a license to commit fraud because they could give a mortgage to anyone with or without a pulse and there was a sucker just dying to buy that new mortgage from them. With such easy money available, real estate agents were able to pump and dump properties (strong-arming housing appraisers was a favorite tactic) like there was no tomorrow and convince people that housing prices only go up in a straight line. In the final act of the play, the investment bankers, mortgage brokers and real estate agents that caused this retire in the Cayman Islands while taxpayers are left to clean up the mess while we hope our economy doesn't literally implode.

I don't see what's so complicated about any of this. It's pure and simple fraud on the most massive of scales.

VaR anybody? (0)

Anonymous Coward | more than 5 years ago | (#25344923)

So, what happened to the 'risk analysis' all these wall street firms do on daily basis to run their investment to multiple scenarios and try to figure out the chances that they will lose their investment on a given horizon (Check out "Value At Risk"). All of them have teams dedicated to come up with a number Y given situation X - there are farms crunching data to produce these numbers on daily basis. The precise reason they exist is to calculate risk. I have worked for one such team for a year and half, doing their IT for them. The quants were recruited from top schools, were paid shitload of money, and generated shit numbers to please their overloards, day in day out.

Re:VaR anybody? (4, Informative)

dnwq (910646) | more than 5 years ago | (#25345015)

An interesting article from Newsweek, The Monster That Ate Wall Street [newsweek.com]:

But what if JPMorgan could create a device that would protect it if those loans defaulted, and free up that capital?

What the bankers hit on [in the 1990s] was a sort of insurance policy: a third party would assume the risk of the debt going sour, and in exchange would receive regular payments from the bank, similar to insurance premiums. JPMorgan would then get to remove the risk from its books and free up the reserves. The scheme was called a "credit default swap," and it was a twist on something bankers had been doing for a while to hedge against fluctuations in interest rates and commodity prices... [JPMorgan] built up a "swaps" desk in the mid-'90s and hired young math and science grads from schools like MIT and Cambridge to create a market for the complex instruments. Within a few years, the credit default swap (CDS) became the hot financial instrument, the safest way to parse out risk while maintaining a steady return.

...

Before long, credit default swaps were being used to encourage investors to buy into risky emerging markets such as Latin America and Russia by insuring the debt of developing countries. Later, after corporate blowouts like Enron and WorldCom, it became clear there was a big need for protection against company implosions, and credit default swaps proved just the tool.

...

AIG's fatal flaw appears to have been applying traditional insurance methods to the CDS market. There is no correlation between traditional insurance events; if your neighbor gets into a car wreck, it doesn't necessarily increase your risk of getting into one. But with bonds, it's a different story: when one defaults, it starts a chain reaction that increases the risk of others going bust. Investors get skittish, worrying that the issues plaguing one big player will affect another. So they start to bail, the markets freak out and lenders pull back credit.

The problem was exacerbated by the fact that so many institutions were tethered to one another through these deals. For example, Lehman Brothers had itself made more than $700 billion worth of swaps, and many of them were backed by AIG.

Re:VaR anybody? (1)

dakameleon (1126377) | more than 5 years ago | (#25345081)

AIG's fatal flaw appears to have been applying traditional insurance methods to the CDS market. There is no correlation between traditional insurance events; if your neighbor gets into a car wreck, it doesn't necessarily increase your risk of getting into one. But with bonds, it's a different story: when one defaults, it starts a chain reaction that increases the risk of others going bust.

Is it just me, or does that sound more like fire insurance? :)

Re:VaR anybody? (4, Informative)

Anonymous Coward | more than 5 years ago | (#25345113)

I work with this as well, and I can tell you that the way VaR is run is somewhat flawed. What they basically do is to run various scenarios, changing different factors and calculate what the impact on the investor's position is.

Now, there are several ways you can do this. One is to run a massive monte-carlo simulation on all the input data, something that all financial software supports. There is a problem with this though, and that is that it requires some massive CPU power. Even a smaller bank would require many hundreds if not thousands of CPU's chugging away for 12 hours or more to come up with the proper numbers.

The solution they've come up with is called "historical VaR". What they do is to use the historical market data for the last year instead of random data which would be used otherwise.

The obvious problem with historical VaR is of course that it doesn't take unexpected market movements into account. If a drop such as the ones that we have seen recently haven't happened in the last year, VaR won't take such a scenario into account.

So, in short, VaR only really works in "normal" market conditions. It doesn't take extreme movements into account.

Re:VaR anybody? (0)

Anonymous Coward | more than 5 years ago | (#25345365)

You are absolutely right. And that's what my point was (shit numbers).

I remember asking the business guys that time about this (historical VaR and not scenario based VaR) - asking specifically the practicability of such a number because events like 9/11 would not have any say in those numbers.

Now at this particular bank, they used to do scenario based number crunching as well in parallel (with a grid of over 10000 machines), but it was not used for reporting. WTF? All that meant was they were just discarding some of the 'risks' from the calculations.

Of course, you can not blame the army of quants here, but it was their bosses and bosses of bosses who decided to ignore inconvenience and go with whatever worked for them.

BTW, Here [fooledbyrandomness.com] is another interesting (but old) read on the flaws of VaR approach.

Re:TFA perpetuates voodoo explanations (2, Insightful)

Anonymous Coward | more than 5 years ago | (#25344967)

Ohhh, the rating agencies understood them just as well as anybody else.

There was a big data hole, static pool loss curves. They didn't have any for exotic loans being pushed to lower credit people, since all of the exotic loans had original uses for high-credit obligors. Thus, their loss estimation was too low, the multiple was too low, and thus, the credit enhancement was too low.

Nobody is retiring to the cayman islands, I think you need to get that fantasy out of your head. They were just as caught up in this problem as anybody else, except for the very top.

I do love how OP, and the article, confuse the subprime mortgage market with the CDS market. The CDS market would have existed regardless of subprime mortgages.

Not to mention that the amount of crossing of CDS and the use of notional amounts, without taking into consideration netting and recoveries, results in not "wealth" being credit, but more or less shuffled. The amount shuffled will be far less than the outstanding notional amount.

Re:TFA perpetuates voodoo explanations (1, Troll)

AlXtreme (223728) | more than 5 years ago | (#25344971)

I don't see what's so complicated about any of this. It's pure and simple fraud on the most massive of scales.

And here is some NYT contributer who wants to blame computers and the nerds. Sure, blame the scary robotic overlords. The financial collapse can't be the fault of ordinary humans, no sir!

This is just some attention-whoring author trying to use the financial crisis in order to sell more books (even though his book has nothing to do with the crisis). Nothing to see here, please move along.

Re:TFA perpetuates voodoo explanations (2, Informative)

drooling-dog (189103) | more than 5 years ago | (#25345075)

Don't be so touchy. The point is not that the crisis is the fault of "the nerds", but that the risk was effectively masked by the conversion of mortgages into ill-understood derivatives. Everyone along the chain could ignore it because it would always be the next guy's problem. The models that evaluated the risk of default were based on historical data, and failed to take into account that both the quality of the mortgages and the nature of the housing market were changing rapidly.

Not unlike when I gambled in Venezuala (1)

spineboy (22918) | more than 5 years ago | (#25345441)

My wife and I went to Venezuela a few years ago for a vacation. Converted some money to Venezuelan Bolivares (about 3000 to a dollar - first layer of absraction). We then went gambling in a casino where they used credits instead of Bolivars. Asked my wife to convert $80 worth of Bolivars into credits (second layer of absraction).
Did really well and quadrupled our money, and cashed out.

When I counted the money, I thought they ripped us off.
Turned out my wife dropped a zero, and we only gambled with $8 dollars, and only won about $30, instead of 300.
Too many layers of converting, etc can make you lose sight of exactly how much you are dealing with, and its physical value. Granted it's not a perfect allegory, but the concept is there.

Re:TFA perpetuates voodoo explanations (2, Insightful)

Anonymous Coward | more than 5 years ago | (#25344985)

It's an op-ed, not an editorial or a column. An op-ed is one step above a LTE, and is generally lightly edited. So it's hardly fair to blame the NYT for some specific stupidity of an op-ed or an LTE; their main concern is publishing a broad spectrum of well-written opinion.

Just about. (0)

Anonymous Coward | more than 5 years ago | (#25344989)

Does your average reader have the reading comprehension of a 9 year old these days?

The writing guidelines for just about all mass distributed print media here in the States specifies high school level (9th grade tops) writing for their publications.

Re:Just about. (0)

Anonymous Coward | more than 5 years ago | (#25345281)

Does your average reader have the reading comprehension of a 9 year old these days?

The writing guidelines for just about all mass distributed print media here in the States specifies high school level (9th grade tops) writing for their publications.

I think that's as much due to the rather lackluster abilities of their writers as well as the lackluster reading ability of their readers.

Slaves to Debt (1)

six025 (714064) | more than 5 years ago | (#25345047)

It is the same fraud that has been perpetrated by financial institutions for centuries. Money as most people understand it does not exist today except as 1's and 0's, the so called "gold standard" is long gone.

Money only exists because of debt, and we are slaves to that debt. The more debt created, the more money there is. Ever wondered why it is so easy to get credit?

http://video.google.com/videoplay?docid=-9050474362583451279 [google.com]

(an excellent 50 minute video explaining "where money comes from" - make time if you don't understand this concept already).

Peace,
Andy.

Re:Slaves to Debt (1)

DrSkwid (118965) | more than 5 years ago | (#25345121)

My colleague who stated he has an A Level in Economics asked where all the money came from for the bail outs?

Education is a waste of time.

Re:Slaves to Debt (2, Insightful)

aproposofwhat (1019098) | more than 5 years ago | (#25345197)

Simple - future tax income.

We'll all be paying for this for decades (unless we're among the hundreds of thousands in the UK, and probably millions worldwide, who will end up unemployed as a result of the bonus-chasing pinstriped bastards who caused all this), and the same situation will arise again when another bunch of fraudsters figures out a way to multiply money in a totally fictitious manner.

Re:TFA perpetuates voodoo explanations (4, Insightful)

snarkh (118018) | more than 5 years ago | (#25345051)

You forget the underlying problem: the bubble in housing prices. As long
as the house prices kept rising any idiot could take a 0% interest adjustable mortgage and make money 3 years later by reselling the house. Of course, analytical models showed the repayment rate on such mortgages to be high leading to lending more money.

Once the house prices started sliding the party was over.

Re:TFA perpetuates voodoo explanations (3, Insightful)

NormalVisual (565491) | more than 5 years ago | (#25345449)

And I think this points to the real underlying problem that started a lot of this - people assume and have been told for years that real estate will *always* increase in value. It's simply not true.

For better NYTimes coverage... (1)

ciaohound (118419) | more than 5 years ago | (#25345061)

This particular piece is pretty bad, but I heard one of the more lucid explanations of the whole mess and bailout response by NYTimes reporter Gretchen Morgenson on NPR's Fresh Air with Terry Gross. That was back on September 23. You can find the podcast here [npr.org]; it's a little stale now as the baleout has evolved since, but Gretchen Morgenson won me as a fan that day.

Re:TFA perpetuates voodoo explanations (1)

gbjbaanb (229885) | more than 5 years ago | (#25345105)

its more complicated than that when you sart to factor in how they got round the regulatorary rules. Banks must hold some liquid asset to cover themselves if their leveraged investments go wrong, and they used to count how much they had using a 'mark to market' approach - where you figured out how much you had by seeing how much it was worth on the open market right now. So they changed that to a 'mark to model' approach where you count what it might be worth in the future when you came to sell them.....

You can see where I'm going with this now... that just let them leverage up more and more, and their models said the investments were worth more... etc.

I think a windfall tax on all those banker's bonuses over the last few years would be a good idea. That, and asset siezures. We might only have to pay out $690bn instead of $700 to cover the fool's losses, but every little helps.

Re:TFA perpetuates voodoo explanations (0)

Anonymous Coward | more than 5 years ago | (#25345223)

It's fraud in two different scopes: 1) in the context of banking, 2) in the context of the U.S. government and the whole world. I mean, where the !#@$!#% were the U.S. banking regulators? Why didn't they step in YEARS ago and say "You aren't passing on the risk accurately." Or "You can't give out so many loans to people who can't pay." Or "You can't wrap crap in gold foil, sell the whole thing for $800 an ounce, and then insure the sale at $800 an ounce for $20, and assume you'll get your money back if anyone notices it's crap."

You're right it isn't complicated. It's fraud, but the damn police turned a blind eye to it as long as it was seemingly "good for the economy". FOR YEARS. Never mind that the resulting economy was false. Never mind that this gold plated crap was getting sold world-wide and has therefore precipitated problems around the world as people realize what they're actually holding. The U.S. government didn't just shirk its responsibilities to its own citizens, it allowed the entire world to get screwed over in a huge financial pyramid scheme. We're all a bunch of suckers.

Re:TFA perpetuates voodoo explanations (2, Interesting)

quarterbuck (1268694) | more than 5 years ago | (#25345333)

You missed one crucial point which seems to be the only one the article seems to hold culpable
While most securities are traded openly using an intermediary, market maker or a broker, in this case the banks originated and purchased these things hidden from the open markets. They also conveniently pushed them off the balance sheet onto strange accounting entities (SPVs etc) whose purpose was solely to hide what they were holding. They did this so as to avoid the fluctuation of prices on their balance sheet and to avoid the mark to market rules that exist on securities.
What this did is that these assets could not be priced in the market. Since market could not price them, the banks started using computer models to price these assets - In would go conditions like 1% default rates, 2% prepayment rates and assumptions on what your neighbor was pricing them at and out would come the prices for the securities
These assumptions were flawed and the increasing prices for these things led the assumptions being even more off-reality. This was supposed to start as mark-to-market , it deteriorated into mark-to-model and then what Warren Buffett (in his 2004 letter) called mark-to-myth.
As long as reality did not interfere with the computer predictions, it let the banks create trillions of non existing assets. What we are seeing now is ofcourse a hard dose of reality.
So in summary, while there was greed at the lowest levels it should have been caught earlier if that reality had trickled back up to the computer models. The people in charge of the computers turned out to be wrong about the assumptions they were feeding the computers.

Re:TFA perpetuates voodoo explanations (0)

Anonymous Coward | more than 5 years ago | (#25345363)

That's a symptom, not the cause. The root of the problem is the question how money is created and by whom. Market instabilities largely result from imbalances of supply and demand, especially money supply. There are two problems: 1) Money is created by the state, which has other motivations beside stable markets. 2) Even if the only motivation were stable markets, a wise control of the money supply requires an evaluation of the country's economic power, but that is uncertain and subjective. Once there is too much money, there is a risk of inflation. That increased risk of inflation requires the money to be invested, otherwise it loses value. With money looking for investment opportunities, people will start offering investment opportunities. Supply and demand. The result was that some people exploited the massive investment pressure and created these derivatives, which as you have assessed correctly, can only be described as fraudulent. Had the investment pressure been lower, the banks who bought the derivatives would have looked for less indirect and more transparent investments. The only way out now is to reduce the value of the money in the market, and that means massive inflation.

Re:TFA perpetuates voodoo explanations (1)

plalonde2 (527372) | more than 5 years ago | (#25345371)

You're missing the key part: so long as each individual packaged risk was an independent variable, this risk packaging made sense. The problem is that mortgage defaults are not independent variables: they are closely tied to not only to general economic performance but also to one-another. A defaulting mortgage in a poor economy tends to nearby property values down, leading to more defaults.

Bankers were fools and frauds to believe that "the fundamentals of the economy are strong". There are reasons for regulation in these markets.

It is amusing, though, to see the anti-socialist United States nationalizing its banks. If only they believed in socialism for anyone other than bankers.

Re:TFA perpetuates voodoo explanations (0)

Anonymous Coward | more than 5 years ago | (#25345395)

Now for the question none of you have asked. What caused normally cautious lenders to make subprime loans in the first place? (Hint - most of the fraud was on the part of the government) If and when you honestly answer that one question, you'll understand who to blame. It will be extremely painful for you liberals to admit the truth, but if you really do love this republic, you need to do it.

Ah, liberals are at fault. (2, Insightful)

bigtallmofo (695287) | more than 5 years ago | (#25345483)

What caused normally cautious lenders to make subprime loans in the first place?

I see where you're going with this. You're blaming the "Community Reinvestment Act" (CRA) that basically forces banks to lend to people they wouldn't otherwise lend to (i.e. people with bad credit) because they have to fulfill racial quotas.

I agree with you that this is part of the issue. But this whole problem is so far beyond liberal/conservative or Republican/Democrat. The problem is that we have a fairly corrupt system right now and everyone in power is culpable.

How about one of the reasons they made subprime loans was because they made money from them and they didn't have to bear the risk? You know, good old fashioned banker greed. So CRA was pushing them in that direction - but they were more than willing to go along!

Yes, let's blame the geeks (1, Insightful)

Anonymous Coward | more than 5 years ago | (#25344899)

It had absolutely nothing with the greedy executives telling them what numbers to put in, or the greedy people making the loans encouraging people to lie.

Re:Yes, let's blame the geeks (4, Interesting)

night_flyer (453866) | more than 5 years ago | (#25344957)

Or the Gov't and certain social engineering groups forcing the banks to make loans to people who wouldnt normally qualify under any circumstances...

NY Times praising the new program in 1999 [nytimes.com]

Bill Clinton admitted the democrats stopped any oversight of Fannie and Freddie: [newsbusters.org]
"CHRIS CUOMO, ABC NEWS: A little surprising for you to hear the Democrats saying, "This came out of nowhere, this is all about the Republicans. We had nothing to do with this." Nancy Pelosi saying it. She signed the '99 Gramm Bill. She knew what was going on with the SEC. They're all sophisticated people. Is that playing politics in this situation?

BILL CLINTON: Well, maybe everybody does that a little bit. I think the responsibility the Democrats have may rest more in resisting any efforts by Republicans in the Congress or by me when I was President to put some standards and tighten up a little on Fannie Mae and Freddie Mac."

Im not completely blaming the democrats, but they certainly set up the framework for the housing bubble and the subprime mess we are in now

Re:Yes, let's blame the geeks (1)

Jeppe Salvesen (101622) | more than 5 years ago | (#25345053)

To the best of my understanding, the current mess is the combination of two toxic factors:

Bad loans - at least partially stemming from political pressure.
Fancy financial instruments - which replaced sound risk management and created the current mess where nobody truly knows where the bad loans are.

That's my 2c.

Re:Yes, let's blame the geeks (2, Insightful)

night_flyer (453866) | more than 5 years ago | (#25345057)

Of course Im a troll... If you want to ignore the truth...

Democrats, Republicans, Banks, Home Builders, Brokers, Speculators, Greed all played a part in this, and if you want to ignore this then... how does that saying go...

"Those that fail to learn from history, are doomed to repeat it."

Re:Yes, let's blame the geeks (1)

the eric conspiracy (20178) | more than 5 years ago | (#25345157)

"Forcing the banks" is bull. There are many banks that didn't get caught up in the greed and are doing fine, thank you. Why weren't they "forced" into making bad loans too? Have you heard of mass Credit Union failures? These are the banks that are more exposed to the mortgage market than any.

This is all about greed and lack of regulation; assuming unsafe amounts of leverage and risk to chase increased returns on assets and a complete failure of free markets to make the right decisions.

Re:Yes, let's blame the geeks (4, Interesting)

night_flyer (453866) | more than 5 years ago | (#25345195)

from the 1999 NYT article above...

"Fannie Mae, the nation's biggest underwriter of home mortgages, has been under increasing pressure from the Clinton Administration to expand mortgage loans among low and moderate income people and felt pressure from stock holders to maintain its phenomenal growth in profits."

as you mentioned its not the small credit unions, or the smaller banks, its the large national banks that are having trouble, becasue they were afraid of politics from people like ACORN who would publicly deride them as racists if they didnt loan money to the poor...

Re:Yes, let's blame the geeks (3, Interesting)

nomadic (141991) | more than 5 years ago | (#25345285)

as you mentioned its not the small credit unions, or the smaller banks, its the large national banks that are having trouble, becasue they were afraid of politics from people like ACORN who would publicly deride them as racists if they didnt loan money to the poor...

Riiiiight, the large banks are such big pushovers that they would rather face bankruptcy than be publicly derided.

Sounds ridiculous when it's phrased like that, huh? The funny thing is the CRA loans you're all whining about tended to have lower interest rates and be safer investments than the other subprime mortgages. They were less likely to be packaged into the securities that actually caused the crisis.

I know you really would rather blame black people than admit the free market failed, but the free market failed.

Re:Yes, let's blame the geeks (2, Informative)

Anonymous Coward | more than 5 years ago | (#25345513)

Riiiiight, the large banks are such big pushovers that they would rather face bankruptcy than be publicly derided.

No, jackass.

The banks faced lawsuits.

From folks like ACORN.

Like this one [mediacircus.com]:

Case Name
Buycks-Roberson v. Citibank Fed. Sav. Bank Fair Housing/Lending/Insurance
Docket / Court 94 C 4094 ( N.D. Ill. ) FH-IL-0011
State/Territory Illinois
Case Summary
Plaintiffs filed their class action lawsuit on July 6, 1994, alleging that Citibank had engaged in redlining practices in the Chicago metropolitan area in violation of the Equal Credit Opportunity Act (ECOA), 15 U.S.C. 1691; the Fair Housing Act, 42 U.S.C. 3601-3619; the Thirteenth Amendment to the U.S. Constitution; and 42 U.S.C. 1981, 1982. 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. Plaintiffs sought injunctive relief, actual damages, and punitive damages.

U.S. District Court Judge Ruben Castillo certified the Plaintiffs suit as a class action on June 30, 1995. Buycks-Roberson v. Citibank Fed. Sav. Bank, 162 F.R.D. 322 (N.D. Ill. 1995). Also on June 30, Judge Castillo granted Plaintiffs motion to compel discovery of a sample of Defendant-banks loan application files. Buycks-Roberson v. Citibank Fed. Sav. Bank, 162 F.R.D. 338 (N.D. Ill. 1995).

The parties voluntarily dismissed the case on May 12, 1998, pursuant to a settlement agreement.
Plaintiffs Lawyers Alexis, Hilary I. (Illinois)
FH-IL-0011-7500 | FH-IL-0011-7501 | FH-IL-0011-9000
Childers, Michael Allen (Illinois)
FH-IL-0011-7500 | FH-IL-0011-7501 | FH-IL-0011-9000
Clayton, Fay (Illinois)
FH-IL-0011-7500 | FH-IL-0011-7501 | FH-IL-0011-9000
Cummings, Jeffrey Irvine (Illinois)
FH-IL-0011-7500 | FH-IL-0011-7501 | FH-IL-0011-9000
Love, Sara Norris (Virginia)
FH-IL-0011-9000
Miner, Judson Hirsch (Illinois)
FH-IL-0011-7500 | FH-IL-0011-9000
Obama, Barack H. (Illinois)
FH-IL-0011-7500 | FH-IL-0011-7501 | FH-IL-0011-9000
Wickert, John Henry (Illinois)
FH-IL-0011-9000

Yeah, THAT fucking Barack Obama.

I guess we now know what "community organizers" do, eh?

Greed was the problem, not poor people (1)

spineboy (22918) | more than 5 years ago | (#25345491)

The housing crisis basically turned into a big Ponzi scheme, not unlike the Dutch tulip mania that hit in the 1600s where certain tulips went for as much as 1 million dollars for 40 bulbs. Everyone got into the act, then, and just like today. Regular people started to "flip" tulips, but contracts, etc.
Many of the people defaulting are house flippers, real estate agents, etc, because they had some money - enough to invest and "flip". FLippers tended not to be poor, since they didn't have enough capitol to start.

Re:Yes, let's blame the geeks (4, Insightful)

the eric conspiracy (20178) | more than 5 years ago | (#25345497)

Quite a few of the larger banks avoided this mess too. JP Morgan, Bank of America and Wells Fargo are among the most notable. It is clearly a case that badly managed banks who ignored historically proven risk management practices to chase increased returns got burnt. NOBODY WAS FORCING THESE BANKS TO DO THIS.

Yes, it was public policy to encourage lending into inner cities. But NINAs, interest-only, HELOCs and ARMs? I DON'T THINK SO, and the fact is that these wacky loans are the biggest part of this.

Re:Yes, let's blame the geeks (0)

Anonymous Coward | more than 5 years ago | (#25345151)

Ironically, the fact you received a "troll" in moderation, shows that same social engineering in effect here at slashdot. Is it just youth? Vanity? Pride? Or a dangerous combination inherent in Democrats, which some seem to routinely inject those traits back into the blood stream of their subconscious, hoping that their past indiscretions will be ignored by the historians? It won't. An older, humble President Clinton already alluded to it.

It is the death of the Western financial world. Ironically, much like the ancient Roman empire collapsing amidst a staggering reduction in birth rate, eventually falling to barbarian hordes and uprisings from afar and within, America and the remnants of Europe suffer the same by their own hands of Liberalism. A choking collapse where the Barbarians have influence, and soon leadership. When personal responsibility is supplanted by bureaucratic preservation in protectorate, you have the locks of self indulgence unleashed in those which never owned the key.

Its the Economists, Stupid! (2, Insightful)

Baldrson (78598) | more than 5 years ago | (#25344919)

When you have huge, systemic, macroeconomic catastrophes resulting from the actions of large numbers of trustees of wealth, you have to start looking for the culprit in the "science" of economics.

If civil engineers refused to back up their calculations with formulas derived from physics, they'd be liable when their structures fail. That's why they are lucky physicists -- at least the classical physicists upon which they base their calculations -- were fundamentally competent. The "quant geeks" are similarly limited -- but their problem is that their "physicists" are better than Court Astrologers -- but not by much.

The creation and transfer of funny money (3, Insightful)

defile39 (592628) | more than 5 years ago | (#25344951)

This all started in the 80's and 90's. The original problem: the consolidation of money. With the advent of the 401k, vast amounts of money were being consolidated into the hands of institutional investors. Between the 401k and pension plans, we have collectively been handing our REAL wealth over to a small number of firms. And what do we want them to do with the money? Well, grow it, of course. But when we see our neighbors' retirement accounts growing at crazy rates (think: late '90s tech boom), we want OUR retirement accounts to do the same. So we demand our institutional investors take the same kind of risky investments that just CAN'T lose . . .

But they can. They did. The '90s tech bubble burst. The funny money that was created in the run up was promptly transferred into real estate. Lenders, overcome by a similar greed that overcame retirement investors, lent to people they knew they shouldn't have (or should have known). And voila. We have a horrible mess - basically, we think we have a lot more money than we actually do. The only viable solution? We need to realize the loss. It was never our money in the first place.

Re:The creation and transfer of funny money (0)

Anonymous Coward | more than 5 years ago | (#25344965)

There is no REAL wealth. Not since the gold standard was dropped and fractional banking was introduced and floating currencies was introduced.

You NEED the gold standard. Period. You do not need central banks. They are private banks that governments borrow from at interest and inflate the supply.

Read your history.

Re:The creation and transfer of funny money (4, Interesting)

the eric conspiracy (20178) | more than 5 years ago | (#25345117)

I've read my history. The gold standard places a dangerous deflationary bias in place on economies, often turning recessions into much more dangerous depressions. Anyone advocating such a policy has NOT read any history worth reading.

I'd suggest the following:

Golden Fetters: The Gold Standard and the Great Depression, 1919-1939 (NBER Series on Long-Term Factors in Economic Development), Barry Eichengreen, 1996, ISBN 0195101138

If only people had listened to Ron Paul (-1, Flamebait)

Anonymous Coward | more than 5 years ago | (#25344953)

He's been on this situation since the 70s. When money is backed by nothing, it can be created out of thin air, and therefore can easily destroy itself with situations like we are seeing now.

Re:If only people had listened to Ron Paul (4, Insightful)

iamwahoo2 (594922) | more than 5 years ago | (#25345027)

The subprime money was backed by property. Adding shiny metals into the equation does not fix the problem.

backed by property (1)

zogger (617870) | more than 5 years ago | (#25345261)

It stops being "backed by property" when they count that property x-times more via leveraging with sliced up diced and blended derivatives. 100-1 or 200-1 does not make 200 more magical properties. The notion that literally 10 to 20 more sets of mega profits could be built on top of one mortgage payment going upstream and changing hands constantly is insane. And a lot of contrarian/austrian school economists kept pointing this out while it was happening, but see, we let the same guys who profit from this run the oversight, look who gets hired to run the central bank money creation system and the US treasury-the same fools from the same firms who need bailing out now. The old phrase letting the foxes guard the henhouse comes to mind. They knew this would happen, but as long as "their guys" are in charge, they can issue scary decrees and threaten to collapse the financial system unless they get trillions more money "backed" by tax payer labor, ie, perpetual debt of the people to the overlords.

It's a conjob and has always been a conjob. It is the highest of stakes protection racket among other high level crimes.

layoff already (0)

Anonymous Coward | more than 5 years ago | (#25345201)

had listened to Ron Paul

Is it a requirement that before you can enter the temple of sacraments that a Ronulan has to post this refrain and something about the gold standard to a forum? This has been rammed up the collective butt of the internet so often you'd think Dr. Paul was a proctologist.

Pure speculation, your honour. (2, Insightful)

Threni (635302) | more than 5 years ago | (#25344975)

This might make an interesting defence for the crooks and gamblers who caused the problem through their greed and incompetence, but I'm not sure it deserves a place on what is generally a science/IT website.

The Inventor(s) of Mortgage Backed Securities (1)

Apple Acolyte (517892) | more than 5 years ago | (#25344987)

Should be found and put on trial immediately. Whichever financial guru thought Mortgage Backed Securities and Credit Default Swaps were good ideas for people to invest was either a moron or crook, most likely the latter. I encourage you to RTFA, though, it's a fun read (and I'm no fan of the NY Times).

The new Pledge (1)

transporter_ii (986545) | more than 5 years ago | (#25345093)

I pledge allegiance to Goldman Sachs, and to the conspiracy for which it stands, one racket under Paulson, Communist and indivisible, with eviction and poverty for all.

Re:The Inventor(s) of Mortgage Backed Securities (0)

Anonymous Coward | more than 5 years ago | (#25345139)

Spoon inventor should also be sued for allowing millions of honest and hardworking Americans to slip into obesity.That bastard.

Re:The Inventor(s) of Mortgage Backed Securities (1)

Xonstantine (947614) | more than 5 years ago | (#25345145)

The Inventor(s) of Mortgage Backed Securities Should be found and put on trial immediately.

What legal offense are you going to try them with? Or is this to be a Stalin-esque show trial where the verdict and sentence is known beforehand?

Re:The Inventor(s) of Mortgage Backed Securities (1)

russotto (537200) | more than 5 years ago | (#25345433)

The Inventor(s) of Mortgage Backed Securities [...] Should be found and put on trial immediately. ]

They were invented in 1938... by the US government, which created an agency called the National Mortgage Association of Washington (later the Federal National Mortgage Association -- Fannie Mae) to issue them. I think you'll find the actual people who came up with them are mostly dead or in their dotage by now. In any case, there's nothing wrong with the concept of a mortgage-backed security. Problems occur when the mortgages backing them are crap, and yet the security is still rated as high quality.

This is ridiculous (3, Insightful)

andy1307 (656570) | more than 5 years ago | (#25344997)

The guys running the big investment banks and financial institutions believed what they wanted to believe..or believed whatever they had to believe that would give them multi-million $$ bonuses. If the computer models had predicted doom, they would have stopped relying on the models. The models were like magic mirrors that made them seem much bigger than they were.

Risk analysis of property lending (5, Funny)

philwebs (704989) | more than 5 years ago | (#25345007)

1. House prices and property keep on rising. If you buy a house now you can sell it next year for say 15% more. Gear up, buy and then let out your property to make even more money. Look at all the TV proggys on making money from houses to prove this point. Whatever price you pay is not an issue. Borrow at 7 times your earnings and 125% of the said value of the property is no problem. Fill your boots and make a ton of money, guaranteed. No risk.

(Don't listed to those old type bank managers who were so unhelpful and whom banks fired years ago in favour of salesmen selling whatever they could. They knew nothing).

If in the unlikely event someone could not pay their mortgage (very rare event) the property would absolutely be worth more than their mortgage arrears. Even better sell the loans to some other sucker. No risk here.

2. As you all know interest rates are undeniably under control and will never significantly rise as our central banks are such clever chaps (and chapesses) and have everything under control. So we will see a low interest rate environment for many years, so no risk here.

3. Inflation is absolutely under control and will never get out of hand, again thanks to the geniuses managing our economy. So no worries here.

4. Gearing is good and isn't risky, if you are really clever. Gear up as much as you want and to make even more money at little risk. Better still borrow in say Yen at very low rates. The Yen will never rise against the $/£ to any degree, so no risk here.

5. Banks and bankers are very clever people and know what they are doing. Look at their pay and bonus packages to see how astute they are. Shareholders would never allow incompetents to have such large pay packages if they were not undoubtedly geniuses. With the bankers at the helm nothing can go wrong, obviously. No risk here.

Risk Calcs = 1 + 2 + 3 + 4 + 5 = naff all risk so fill your boots.

What could possibly go wrong?

Risk of property lending = Pyramid Scheme? (0)

Anonymous Coward | more than 5 years ago | (#25345527)

The way you explain point 1, it highlights how the housing market (and everyone saying its a good idea) sounds something like a Pyramid Scheme?. Each new buyer is taking more risk than the ones before them, as its pushing the whole system towards a tipping point under which the scheme will collapse. As each new property investor takes on ever more debt, they expose themselves to ever more risk if the market implodes but as the house prices go up it also makes it ever more likely it will implode. Take on a house, sell it, buy 2 houses, sell them, buy 4 houses, sell them, everyone buys 16 houses and ah.. hang on, no one wants to buy any more houses... hmm.. so err... I now have to pay the rent on 16 houses!... ahHHH!!!
http://en.wikipedia.org/wiki/Pyramid_scheme [wikipedia.org]

With so many people "investing" in property these days, plus so much dept, I wonder how much of this $62 trillion is really imaginary wealth? ... if even just 2% of that $62 trillion is imaginary, then the $700 billion isn't going to make a difference, to hold back this avalanche of collapsing stock values and even some banks. If its more than 2%, then the markets are very likely to implode a lot further than we have already seen, as they fall back to earth... Its a scary thought if these "financial initiatives" etc.. are so far just hiding how much imaginary wealth is in the system?. The whole thing sounds criminally corrupt in how much its all got out of hand.
 

bullsht (0)

Anonymous Coward | more than 5 years ago | (#25345031)

It's not the fault of the quants. Look to the bank managers and politicans, Obi-Wan, and find your missing planet you will...

why blame the computer geeks (0)

Anonymous Coward | more than 5 years ago | (#25345043)

Why blame the computer geeks? More likely a 27 year MBA with a spreadsheet that somehow shows the expected industry revenue for something like network browsers exceeds the existing computer software market. And NO-ONE questions these numbers.

Douglas Adams gets it right AGAIN! (4, Interesting)

itsdapead (734413) | more than 5 years ago | (#25345045)

They've obviously been using Reason - no, not the virtual synth package, but the one described in Dirk Gently's Holistic Detective Agency:

Gordon's great insight was to design a program which allowed you to specify in advance what decision you wished to reach, and only then give it all the facts. The program's task, which it was able to accomplish with connsumate ease, was simply to construct a plausible series of logical-sounding steps to connect the premises with the conclusion...
...The entire project was bought up, lock, stock and barrel, by the Pentagon.

Douglas Adams

Shesh... and the guy also predicted Wikipedia and Microsoft (or did he *cause* them?)

(Since DGHDA also contained a fair bit about computer music, I assume that the name of the synth package is no coincidence).

Ever wonder where 'money' comes from? (5, Informative)

mrbill1234 (715607) | more than 5 years ago | (#25345071)

Check out this 47 minute video for a very easy to understand and clear explanation.

http://video.google.com/videoplay?docid=-9050474362583451279 [google.com]

Unless you've been through university on some Economics degree - you were probably unaware of this.

Re:Ever wonder where 'money' comes from? (4, Insightful)

unixfan (571579) | more than 5 years ago | (#25345275)

Exactly, that's how one can easily arrive at 62 times the original amount. Truth be told it's probably worse. If you look at some basic numbers; the world production is measured to be about $50 trillion.
The secondary money market (known as derivatives) in the US, is $500 trillion. This means that the primary lending source (banks) sells the loans to someone else. Who incidentally, unlike banks, are totally unregulated. Who in turn then sells it too, and so it goes...

This is done with loans so many times over that we 10X the worlds total production. Think about that. A country's currency is really worth what the country produces. Just like any persons worth is what he has made. Countries used to say they are worth their weight in gold but that fact is only in history books. (Don't tell those who speculate because they make money on other people's work by driving it up and down.) Not gold on hand or anything like that. Which the Fed has all but lost anyway. The dollar is so overrated at this point it's not going to be pretty once the world starts looking closer.

My guess it's going to occur right around the time gold starts its climb back up. Gold has been going down for a long time. As I see it, all stocks and bonds are going to be worthless soon, and gold will be the only thing not only retaining value, but with currencies going down gold will go up.

Increase the score for mrbill1234 for the above link. Congress would do well to see it too. Too few people bother to learn what is going on, and now we pay the price for our ignorance.

If you have paid attention last week to the news a representative of the Federal Reserve actually came out and said it. For every dollar the bank has - 10 is lent out. His point was that removing 700 Billion means they lost 7 Trillion. Which is not correct because they just make more for each loan. It has nothing to do with Congress, that's just how the banking industry works.

With some simple research you can discover how the international banking world caused the -29 crash, and the two leading up to it as a business move. A move that let them come in as the saviors and start the Federal Reserve. This they said will stop it from happening again. You'll find for example that Pres. Woodrow Wilson on his death bed declared that he had sold out his country when he signed it into law. (Federal Reserve.)

Everybody figures that someone else is keeping an eye on things. As it was, our Sec of Treasury, and the Federal Reserve, went out and significantly lowered the requirements to get a home loan. Allowing people who could never afford it, to get a house loan. That's what I call creating a problem.

Re:Ever wonder where 'money' comes from? (1)

TheRaven64 (641858) | more than 5 years ago | (#25345383)

Ugh. I'm about half way through this and it's incredibly patronising, doesn't tell me anything I didn't already know, and oversimplifies a lot of things to push an agenda based on a flawed economic model. Does it actually get in to discussing the concept of liquidity ever, or does it just cover kindergarten economics?

Re:Ever wonder where 'money' comes from? (1)

francium de neobie (590783) | more than 5 years ago | (#25345471)

Sounds a little biased to conspiracy theories to me - the amount of money that bankers can create is nevertheless limited by the government's monetary policies. So, bankers are not so all-powerful as the video depicts.

What I'm worried about is the so-called shadow banking system [wikipedia.org]. I can understand the basics of the standard fractional reserve system, but the shadow banking system is unregulated and I don't understand one single bit of how money is created from it. Where are the balances and controls?

Nahh, it was the US Government (0)

Anonymous Coward | more than 5 years ago | (#25345077)

Check out the inflation rate chart for the last 20 years at inflationdata.com. The Fed drastically lowered the prime, creating the housing bubble to advert potential RUN-AWAY DEFLATION from anti-inflation policies set back in the '70's. It exposed flaws in the financial system of the US, notable changes to the Community Reinvestment Act by Clinton who forced banks to accept more sub-prime loans. At Clintons time the economy was looking good and he thought it wouldn't hurt to stimulate the economy, but inflation was heading to below zero inflation when Bush took office. So the Fed had to act by lowing the prime.

In 2003 the Bush admin tried to get the Treasury to take over Freddie and Fannie, but couldn't get it past Congress. Again in 2005 under S190 was the warning called about the two GSE's "Socializing risk and privatizing the profit". But Congress failed again to get the job done. The bad paper wound up on Wall Street and the rest of the world economy suffered as a result.

So who is really responsible? Those who SOCIALIZED SUB-PRIME MORTGAGES and brought 100 year old companies to their knees. Only inept socialist agenda in government can do this.
Obama received over $125,000 from the GSE's, Hillary $75,000 and Dodd received over $165,000.

"Deregulation" as it has been demonized by the lefties, was really designed to streamline the HUGE mess of many government organizations watching the system. Not to take the controls off, but to make government and more efficient, cost effective. Against everything the Dems want, which is MORE control and MORE government.

But a lot of people took chances and gambled with real estate, they are to blame as well. But the Government ENCOURAGED IT as a desperate attempt to avoid run-away deflation. It exposed flaws in government that should have been corrected with SMARTER government, not necessarily bigger government.

Economy is Fundamentally Buggered (4, Insightful)

panda (10044) | more than 5 years ago | (#25345101)

The real problem is that Greenspan and Bernanke seem to have failed both basic economics and remedial math. Also, they must have been absent on the day that Keynesian monetary policy was explained.

As unpopular as it may be with some people, what you are seeing today are the fruits of Reagan-era economic policy, "Reaganomics" or as G.H.W. Bush called it "Voodoo Economics."

Basically, the Fed. has kept their lending rates artificially low for the past 20+ years. They have kept this rate well below the rate of inflation. Banks are paying and charging interest using this rate as the basis, since this rate essentially determines the "cost" of money.

Keeping this rate below the inflation rate encourages spending and borrowing rather than savings. After all, why save at 1% when inflation is 8% and you can borrow at 6%? By borrowing now, you can increase your buying power immediately, and get more for the same amount of money, instead of losing money in a savings account.

That's all fine, assuming your wages increase along with the inflation rate, but for most people, they haven't. When wages are not increasing to match the rate of inflation, then people are effectively getting a cut in pay and can afford to buy less stuff. (Obvious, right, but many people need this simple fact explained to them.)

So, as mentioned above, the low Fed. rates encourage borrowing, and even with the modest income increases most people can afford to keep on borrowing, but only for so long. Unless wages make a dramatic increase, borrowing consumers reach the point where they have borrowed all that they can afford to borrow. They reach the point where they are making minimum payments on their loans, paying bills, and for food, energy and other essentials, and there is no money left over. Upon reaching this point, even the most obtuse consumers will cut back on spending and borrowing. Those who don't will default and go bankrupt, whether they file papers to seek bankruptcy protection or not, they will for all intents and purposes be bankrupt.

This is, essentially, what has happened to the U.S. economy. The orgy of spending and borrowing has ended because the sun has come up and all the drunkards are staggering home after the party with massive hangovers.

This is also why injecting $700 billion to buy "bad" debt won't solve a thing. Even if the gov't buys the debt, the consumers will still owe that debt, and the conscientious ones will still try to pay it. As long as the consumers have to pay that debt, spending in the short term will be curtailed.

In the short term, there is no easy fix. In fact, many would think the cure to be worse than the disease. The long term cure is to return to the days of higher interest rates, less spending and more saving. Quite simply, Greenspan's little experiment on the American people has failed to produce the endless growth that he promised.

Wrong diagnosis but right fix. (2, Insightful)

tjstork (137384) | more than 5 years ago | (#25345209)

As unpopular as it may be with some people, what you are seeing today are the fruits of Reagan-era economic policy, "Reaganomics" or as G.H.W. Bush called it "Voodoo Economics."

This has nothing to do with Reagonomics. The idea behind Reagonomics was to lower the upper tax brackets from 70% down to a flatter rate so that people would be encouraged invest to invest their money and thus create a greater supply of consumer goods. This did exactly what it was supposed to do, as a whole the prices of consumer goods and commodities alike have largely been low, as investors sought the cheapest means of production. The essence of Reaganomics is that, we all have lots of stuff, and well, we do. So this aspect of Republican economics totally worked. Even Barrack Obama concedes, in his book, that in the USA, poor people have lots of stuff.

The critique of Reaganomics is, that, with its focus on investment, wage earners get screwed. You'll never see Democrats complain about having lots of stuff, and indeed, some will quitely condemn having so much stuff. Instead, you'll see them bemoan the social instability caused by Reaganomics. When you have investors able to shift their money around rapidly, you can leave social problems both when the money comes in and when it leaves. For every Silicon Valley or Shanghai or Dubai there is a Detroit. SO, the socialist retort is to not allow capital movement at all except via the will of the people, and, as a consequence, you can have a stabler society, except that, everyone has less stuff. North Korea is very stable, just like dead people are, and no one really has anything.

So now onto interest rates. Whether or not the Fed flooded people with low interest rates is not really the problem. You have low interest rates and low inflation because you need low inflation to have savings.

I do agree with you, though, that debt repayment by consumers will suppress economic growth in the short term, however, falling fuel prices will mitigate this somewhat. The problem is that everyone has borrowed too much. I've not seen too many figures indicating how much credit people are seeking, and, a ready indication of that figure would be a good tool for the fed to have and the people to see. I do believe that we shall public indebtedness decline and perhaps sharply. Just from my own perspective I've paid down about 30k worth of debt this year and I certainly have no plans to borrow soon, if ever. Like, I don't know that I'll ever take out another expensive car loan again...

But, if this happens, you see, people will need to save their money somewhere and it turns out that this savings can only go into precious few places. It can go under the mattress, which is stupid, it can go into commodities, which, I've argued might not be a bad move, or it can go into federal debt (treasuries), bank savings instruments, or securities, but all of those instruments are available to businesses as a means of obtaining cash for expansion and, you guessed it, the production of additional supply.

So, the moral of the story is, whether consumers choose to borrow and repay or save and buy, doesn't effect the overall course of Reaganomics all that much. All Reaganomics says is that investors are allowed to move their money about, just like consumers. The greatest irony of Reaganomics, we have achieved a sort of genuine sort of defacto socialism with it. There's a large percentage of the population that already does own stock of some kind, so much so, that one might well said that we as a people collectively do already own all the means to production.

Everyone misunderstands Voodoo Economics... (4, Interesting)

alexhmit01 (104757) | more than 5 years ago | (#25345439)

The Voodoo Economics attack was at the Laffer Curve, which claimed that there is a ideal point of taxation that maximizes government revenue, and above that, people don't do economic activity and therefore taxes decline. Reagan predicted that his tax cuts would increase revenue, which was NOT the case, but it did free up capital, got the economy going, and tax revenues DID increase in time. Also, we have really cut taxes... I'd like them lower and flatter, but we can't do that without cutting the government. Taxes are running around 17% of GDP and governments expenditures at 20% of GDP... I'd like to see those both around 10% or less.

The real thing that Reagan cutting taxes did was:
A) transfer wealth to current savers (money in 401k and tax deferred annuity programs) had deferred 70% (or 90% at some point) taxes, and could now take it out at 30% in the early days
B) allow middle class people to build wealth... middle class people get paid a wage/salary, whether that wage/salary is 20k or 250k, they pay taxes on their labor, and if the rates are high, they can't build wealth, if they are low, they can work overtime/part-time second job, and use that extra money to build wealth, at 70% - 90% taxes, they can't
C) stopped the real estate only system... the tax code HEAVILY favors real estate investors -- you can tax defer the capital gains forever by buying a new property (important when Capital Gains rate was 40%, where Obama wants it, less important at the 15% it is now -- and you can depreciate property... if you can buy a building for 3M, and depreciate it over 30 years, you have 100k in "losses," so if you are making 100k/year in profits renting it out, it's tax free... sure your depreciation gets paid back when you sell the property as a capital gain (so you convert ordinary income, taxed at 40% with FICA into capital gains at 15%), and can be deferred on an exchange

The problem is Obamanomics is that it is NOT Clinton-style populism and fiscal conservatism (at least when paired with a GOP Congress), it is NOT FDR/LBJ New Deal/Great Society program heavy, it is European style socialism... heavy on regulation, income redistribution, etc... capitalism produces more gains/growth, but also downturns... Americans suffer more in economic downturns, but we benefit more in upturns... You can't have the upside without the downside, which is what people apparently want.

Re:Economy is Fundamentally Buggered (2, Interesting)

quarterbuck (1268694) | more than 5 years ago | (#25345359)

A lot of what you said is correct, but I am not sure The orgy of spending and borrowing has ended

Usually when a government goes bankrupt (or significantly loses money) , no one would buy their bonds . This means that no one is willing to lend them any more money - this should cause them to pay a higher interest rate. In the case of the U.S.A, it is the exact opposite. When US government announced that it was going to print $700 bn more of money and use it on an dubious plan, the rest of the world should have seen that US cannot reasonably pay back this amount and panicked. But on the other hand , the yields on the treasuries actually went down, i.e the interest rates the US govt has to pay is less than inflation.
This is due to the unique nature of US currency in the world economy - In fact the exact opposite happened to the Euro when the panic hit.
If the world wants to lend money to USA while knowing perfectly well that they are going to get papers not backed by economic production, why should the US not take the money? It is the rest of the world that is being stupid in stockpiling the money, not USA.
Whenever this "orgy" as you called it ends, the US dollar has to depreciate atleast by 50% against the yen (If I use the simple Big Mac index of prices) and more against lot of other currencies. Until this happens, enjoy it while it lasts.

Re:Economy is Fundamentally Buggered (1)

wrook (134116) | more than 5 years ago | (#25345403)

What I find interesting is the role of Greenspan in all of this. During the late 90s and the beginning of the 2000s I listened to his little speeches every time he changed (or not) monetary policy. And at the time I thought he was saying, "OK, I've lowered interest rates again. You know I can't keep doing this. We have to change how we're dealing with this. This is just a temporary measure."

By about 2003 I stopped listening because I figured he was being thwarted by other people. When the disaster happened I was actually very surprised to hear blame placed on him. I thought, "Hey, he's been telling you guys there's a problem for a decade. Why was nobody listening?".

But, when I read what he's written now in retrospect, I see nothing of what I thought I heard him say. I can't decide if I just misunderstood him at the time, or if he's just being political. I guess it doesn't matter. But then I also thought the same thing about Colin Powell...

Am I alone in this?

Market Forces (0)

MassiveForces (991813) | more than 5 years ago | (#25345131)

Market forces are not to blame here, it is government intervention - the stipulation given to Fannie to provide all with housing no matter their ability to pay, government bailouts in the 90s and early 00s leading to risky financial behaviour, the treasury's printing of fiat money allowing debts to accrue that could not possibly have accrued in the free makrets and manipulation of interest rates.

One would think either congressmen know nothing at all about economics or are being manipulated to make the Amero easier to foist on the American public

Computer models do what they are told. (4, Insightful)

tjstork (137384) | more than 5 years ago | (#25345135)

Look, if you live in an environment where you are under pressure to sell loans regardless of the risk, then you are likely going to wind up with computer models that tell you that it is going to work.

Computer models always carry the assumptions of the authors and those assumptions can be altered to suit climate. In the case of Wall Street, the assumption was likely the number of defaults on an M.B.S. as a function of credit score... and the thing is, that I bet that is spooking everyone is, that, credit score may not be a good predictor of repayment. I bet a lot of people had a decent credit score, right up until they mailed in the keys to their house.

Re:Computer models do what they are told. (2, Insightful)

TubeSteak (669689) | more than 5 years ago | (#25345319)

Look, if you live in an environment where you are under pressure to sell loans regardless of the risk, then you are likely going to wind up with computer models that tell you that it is going to work.

The problem is not that individuals were given ARM & NINJA loans/mortgages.
The problem is not that the individuals were unaware of the exact nature of the loan terms they were receiving.
The problem is not even that the housing market collapsed and fucked over those individuals.
The problem is not that, instead of holding onto those loans, banks bundled that shit up and sold it.

The problem is that Moody's, Standard & Poor's, Fitch, and other financial rating agencies said "we rate these high-risk bundles of shit as if they are actually low-risk bundles of gold, act accordingly." And the markets did.

Credit Ratings Agencies do a lot by computer, but ultimately there is some analyst whose name goes on the report that says "this is AAA quality".

Because the markets had bad information, a grenade in the USA mortgage industry grew into a cluster bomb of global proportions.

Re:Computer models do what they are told. (1)

analog_line (465182) | more than 5 years ago | (#25345323)

In the case of Wall Street, the assumption was likely the number of defaults on an M.B.S. as a function of credit score... and the thing is, that I bet that is spooking everyone is, that, credit score may not be a good predictor of repayment.

No fucking duh. That's why this is called a credit crisis. The normal measures of who will be able to repay a loan and who won't have totally broken down. Car dealers can't buy cars to put on the lot, because they can't get any credit, because the banks are afraid no one will be able to pay them back. House prices are dropping like rocks, forclosures mount up, and banks won't lend people with good credit any money, because the banks have no reliable measure of credit worthiness for normal people anymore. Banks refuse to lend to each other because they are afraid that ANYONE they loan to won't be around to pay back the loan tomorrow.

Re:Computer models do what they are told. (1)

tjstork (137384) | more than 5 years ago | (#25345419)

The normal measures of who will be able to repay a loan and who won't have totally broken down.

Well, FICO is stupid. It bases its decisions on how much to lend based on whether or not you are paying the debt you already have, based on the hope that this asymptotic borrowing curve is the same as knowing one's ration of income to indebtedness, and it just isn't.

Not us, them ! (0)

Anonymous Coward | more than 5 years ago | (#25345149)

It's the IT guy's fault!

It' the F(y,(nerds,geeks)) fault!

What a novelty. Never heard that one before.

Administrations, markets, brokers, shareholders, media, and governments at all levels were all responsibly doing their part with ultimate honesty, dilligence and care.

No-one (absolutely) was engaged in generalized mindless near-sighted greed, omission, outright connivance and cumplity, had absolutely nothing to do with it.

It was those evil super-intelligent (therefore dubious, supercilious, arrogant - undoubtedly liberal leftist - bastards) incomprehensible (therefore evil, q.e.d.) nerds' fault! _They_ fooled everyone! Them and their damn computers. There was just no defense against them, none. (Except, maybe raucous songbirds and Roy Orbison all-out on a ghetto-blaster). They were too intelligent for us!

We had wealth. Wealth is good. (Actually, it's "glorious". :-? ) Doubting wealth is anti-american! And apple pies only taste good when sprinkled with greenbacks. Everybody knows that! Nothing wrong with that. That _couldn't_ be wrong.

That's why important stuff - like the economy, markets and nuculere power, ought to be left to "people like us", who wouldn't use our brains constructively if you paid us to.

There, there's a load off my chest! :-p

Geeks are not to blame (2, Interesting)

Arthur B. (806360) | more than 5 years ago | (#25345175)

I am a quantitative analyst. True, there were many modeling flaws with the way ABS and MBS were priced, which made it appear that they were very safe and had good returns. Now when that happens what do you do ? You borrow short at a low rate, and invest in that secure product which produces a higher rate.

On a free market, this will quickly rise the short term interest rate (demand increase and the supply of saving is finite) and slowly drive down the return on mortgages as more house are being built.

On the US market it will not rise the short term interest rate because it is set by the FOMC, it will instead create inflation. Thus, the money used to invest in those mortgages will not be lended by someone, it will be printed. There is no direct mechanism by which the lending dry itself out... the guys at the FOMC have to figure there's going to be inflation.

So yes, there have been many mistakes in modeling, but such mistakes are bound to happen, in any industry, and they will have bad consequences (they're mistakes!)
The problem is the federal reserve system which magnifies the effect of financial mistakes by a few order of magnitude by disconnecting the interest rate market from reality.

Re:Geeks are not to blame (0, Troll)

nomadic (141991) | more than 5 years ago | (#25345529)

I am a quantitative analyst.

And you've managed to come up with an explanation that says quantitative analysts are not to blame. That is an extremely surprising thing for you to do.

Democrats stole it with racism (0)

Anonymous Coward | more than 5 years ago | (#25345193)

No, the crisis is due to the risky mortgages which Democrats forced banks to issue [wikipedia.org] with threats of racism. ACORN and others got paid to find such mortgages, and Fannie Mae and Freddie Mac were required to buy them from banks.

Unfortunately (4, Insightful)

Dunbal (464142) | more than 5 years ago | (#25345203)

The author has a fundamental disregard for the actual underlying causes of the current economic crisis - the housing bubble. It cannot be that housing prices inflate over 300% (yes THREE HUNDRED PERCENT) in a mere ten years, while real inflation adjusted income remains the same. Sub-prime mortgages don't exist because there's a new generation of people out there who suddenly decided to default on their loans. They exist simply because no one can afford a house anymore.

    Whoever you want to blame: "greedy" banks who made "irresponsible" loans (yeah, who ELSE were they going to loan the money to? There were no more buyers able to afford homes at those prices), the Fed for continuing to mismanage monetary policy (but the Federal Reserve has a history of doing this, dating back to its inception in the early 20th century), or creative accountants who tried as hard as they could to hide the shortcomings in these new "structured investment vehicles", the driving force behind today's (and tomorrow's!) economic woes is the pop of the biggest housing bubble in history.

      The interesting thing is that the government has opted to print money to try to "save" the financial system and keep housing prices artificially inflated - as if anyone cares. The only person who cares about the price of their home is the person who wants to sell it. If you wanted to buy a house this year and sell it in 2 years for near 100% profit, well, welcome back to the real world again. This move on the part of the government will soon result in a collapse of the dollar.

      But I was laughed at by some in July [slashdot.org] when the market was close to what many thought was a "market bottom" for saying the stock market was going to plunge lower. Guess what folks - we're still not at the bottom, despite being very near post-dot com bust lows. As a trader I watched the Dow drop 700 points in 5 minutes on Friday, only to bounce back positive, and then plunge again. This kind of volatility is NOT indicative of a bottom, it's indicative of a move to NEW lows. Housing prices should (if past bubbles are any guide) drop around 50%, which means they still have another 30% to go. Government interference in this correction will only serve to bankrupt an already insolvent US government, and destroy the US dollar's desirability on world markets.

      The only people who are to blame are the greedy individuals who thought that the path to riches lay in buying real estate and "flipping" it a year or two later, with minor renovations - as well as a monetary system that is designed to spend today and pay tomorrow.

Re:Unfortunately (1)

russotto (537200) | more than 5 years ago | (#25345517)

Whoever you want to blame: "greedy" banks who made "irresponsible" loans (yeah, who ELSE were they going to loan the money to? There were no more buyers able to afford homes at those prices),

If they hadn't loaned the money, the prices would not have stayed high, because there would have been no buyers. If other bankers had loaned the money, it is those other bankers who would have been left holding the bag when the bubble burst. (in fact, this is what happened -- not every bank made these bad loans; you don't hear much about the ones which didn't, because they're not failing).

The housing bubble was largely caused by the availability of these subprime mortgages. One can argue all day about which came first, but the fact of the matter is that if house asking prices had risen to unaffordable levels and banks had not made these crazy loans available, simple supply and demand would have pushed housing prices right back down.

Guess what folks - we're still not at the bottom, despite being very near post-dot com bust lows. As a trader I watched the Dow drop 700 points in 5 minutes on Friday, only to bounce back positive, and then plunge again. [...]Government interference in this correction will only serve to bankrupt an already insolvent US government, and destroy the US dollar's desirability on world markets.

I'm buying in now. If what you say is true, it doesn't matter whether I buy into stocks or keep the money in cash, after all; both will be equally worthless. Buying Euros, Pounds, CAD, NZD, AUD, Yen, R.O.K Won, Indian rupees, or Chinese Yuan won't help either because the economies of those countries are too tied into the US. Perhaps P.R.K Won and the Russian Ruble are the currencies of choice (but I doubt it)...

Another lame attemp to shift the blame (1)

Laxator2 (973549) | more than 5 years ago | (#25345233)

The entire debacle would not have happened if the rating agencies had done their jobs an not put an "AAA" rating on securities backed by the crappy mortgages, securities that should have been graded a lot lower. So much revolves around this "credit rating" that financial institutions just take the ratings without thinking and move on from there. Somehow, nobody points the finger at the rating agencies, now it's the quants who are to blame.

Rules and Regulations (1)

unity100 (970058) | more than 5 years ago | (#25345273)

Its that simple. this is a new setting, and we didnt have the rules and regulations to prevent such juggling of assets.

there was noone to tell them 'hey you cant create new assets out of those assets', because the rules to judge and act were not there and set.

as a result these people simply did what they did. its not the fault of computer systems. after all they are just tools. they could have done that with black ink and paper too, through the books.

a stretch (1)

sacrilicious (316896) | more than 5 years ago | (#25345293)

It's not much of a stretch to imagine that all of that imaginary wealth is locked up somewhere inside the computers, and that we humans, led by the silverback males of the financial world, Ben Bernanke and Henry Paulson, are frantically beseeching the monolith for answers

Um, yes it is a stretch. Word to the wise: prefacing any statement with "it's not much of a stretch to imagine..." does NOT mean the ensuing statement automatically becomes valid. (Related concept, illustrated in Talladega Nights: prefacing any statement with "with all due respect" does not warrant the rest of the statement as respectful.)

Roll Model (-1)

Anonymous Coward | more than 5 years ago | (#25345299)

A model for life...expected returns...the only way we can see best to use our funds...what a shame the brains go to working out how to maximise profit and not how to maximise human gain...

This system with its cyclical boom and bust, in it we place all our trust. Is there another way...More models more smarts...find out where the good time starts...

Or choose a different approach...one beyond reproach...Focused on humans..not on profit..it's the only way to ensure we have all these toys to play with...

return ( G_INT_MESSEDUP );

Get Connected

www.realityinfo.org [realityinfo.org]

The million dollar question is... (1)

newyank (1207054) | more than 5 years ago | (#25345355)

Where did these sub-prime loans, that the quant-shops traded, originate in the first place? Google "Community Reinvestment Act" Whenever something bad happens to our economy, you'll find the government's fingerprints on it somewhere along the line.

Quants can't code? (0)

Anonymous Coward | more than 5 years ago | (#25345437)

No big surprise, anyone has had to work with the cobbled together mess-ball of code that Quants produce would know this. Most of it is badly typed copies of numerical recipes in C, with some guess work, lots of magic numbers hardcoded throughout, and a big bonus at the end.

Money isnt what used to be (1)

gmuslera (3436) | more than 5 years ago | (#25345447)

Originally was a way to translate the worth of something into the terms of something else. A cow, an apple, an hour of specialized work, etc. There was a limited amount of money because there was a limited amount of things to trade for, had no meaning to have $10 more than the amount of goods and services.

A lot happened in the middle, but somewhat money got detached from physical things and got its own life. And got a way to spread, fast. Main production of markets is more money, and the fuel they run on is human faith. With it you build your castles in the sky, your giant bubbles, and make/destroy millons/billons/trillons of it in a day with a bit more of changes of faith of a lot of people.

I know that this is the simplified version of how i got all wrong, but seems that the real core of the problem (if there is really one, not one of the possible consequences of something that we can't redefine) could be in the root of what money means.

No. (1)

afabbro (33948) | more than 5 years ago | (#25345455)

A huge point is completely missing: all of the houses were appraised at the values the mortgages were offered. These appraisals were done at market value and were accurate - if you can sell your house for $500,000 today, then it should be appraised at $500,000 today. It's obviously not the appraisers' job to peer into a crystal ball and say "tomorrow, the bubble will pop and this house will only be worth $300,000."

Presented with a house appraised by a third party at $500,000, the banks financed it at that amount. Again, that is their job.

The argument being thrown around is that by lowering credit standards (partly mandated by the government's misguided "give houses to poor people" programs), they inflated demand, which created the bubble. I think that's unproven. There ere real estate bubbles long before the current lending practices.

You may be able to make a case that cheap money (low interest rates) stimulated demand and allowed people to get into houses more affordably...but of course, it's not Wall Street that sets the fundamental rates. And gee, rates haven't gone up, so...

This is not a simple "banks lent to people they shouldn't have" equation.

Does anyone still take talking heads seriosly? (1)

alexmin (938677) | more than 5 years ago | (#25345523)

They are only entertainers after all.
Uncontrolled greed of CxOs and mortgage brokers, focus on quarterly bonus instead of long-term business success - that's where roots of CDO/CDS debacle lies.
SEC tried to indirectly blame equity market participants by banning 'short-sellers' - and learned it fast that speculators reduce market volatility, not increase it. At least SEC had guts to acknowledge that by not extending short-sell ban further or not going back to tick-test (which previously was proven to have no impact whatsoever).

NY Times Op-ed? Really? (1)

bugeaterr (836984) | more than 5 years ago | (#25345525)

Where are all the people trashing the source, like when anything is posted from Fox News?
NYT is at least as biased, only pointing out the blame that wall street (and their thikin' machines) surely deserves, while leaving out the equally responsible and beloved federal government.
No mention of Barney Frank and Chris Dodd pushing bad (NO money down, NO documentation of income required) loans to "help" poor people who can't afford them, while taking campaign contributions from Fannie and Freddie. (And in Barney's case, having an affair with a senior exec at Fannie)

You should have posted only the essay from Freeman Dyson instead of shooting it through the sh*t stained lens of the NYT op-ed page.
Here's equal time:
http://www.youtube.com/watch?v=_MGT_cSi7Rs [youtube.com]

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