Who do you blame for the financial crisis

[fencerchica]

I just found a fantastic article that provides a succinct intro to the three most significant proximate causes of the current recession. I think it might be very helpful to the discussion here.

MBS, CDO's and CDS's In Layman's Terms

[jeff]

Very nice, concise summary - good find, fencerchica!

As to why other countries without Glass Steagall haven't done worse: well, sometimes they have. Or they have regulations that are supposed to have similar effect.

Look at Iceland, which is foundering in debt denominated in other currencies while their own currency decreases in value (in other words: just sit their and as Icelands krona decreases in value, the debtor owes more pounds or Euros). Or the UK, which is more leveraged than the US. The Bank of England disbursed money to the banks without seeing that it was being used in a bankerly way.

Or the Swedish housing bubble of the mid-1990s. They recovered from it, but why did they get into it in the first place? http://www.nytimes.com/2008/09/23/bu...s/23krona.html "Financial deregulation in the 1980s fed a frenzy of real estate lending by Sweden’s banks, which did not worry enough about whether the value of their collateral might evaporate in tougher times. Property prices imploded. The bubble deflated fast in 1991 and 1992. A vain effort to defend Sweden’s currency, the krona, caused overnight interest rates to spike at one point to 500 percent. The Swedish economy contracted for two consecutive years after a long expansion, and unemployment, at 3 percent in 1990, quadrupled in three years."

Time to reflect that in a bull market with low interest rates and easy money it is a temporarily smart way to make money by buying assets that are growing in value, leveraged by borrowing vigorously and repaying with inflated asset values. Until the bubble bursts of course.

Who's at fault? Look at who pushed the instruments, pulled millions of dollars in bonuses at every stage of the game (look at fencerchica's example - the brokers made fantastic money selling each of those tranches), and then wound up with banks leveraged 33:1. That's a lot more leverage than the typical homebuyer. Add to that the Fed (hello, Alan G) that kept interest rates low.

[I_luv_saber]

Law and theory are jargon. They're don't mean exactly what you would think. Laws can be wrong, for instance.

"The main difference between a scientific law and a theory is that a law does not include a model or explanation; it is simply an observation . . . As such, a law, although useful for engineering purposes, is a lesser achievement than a full theory. For example, the fact of biological evolution was first described in William Smith's principle of faunal succession, but was not felt to be properly understood until the development of the theory of evolution."

Understood, but regardless, it is a finer point on the matter than the general point I was making. I wasn't exactly trying to argue the laws vs. theories thing. However, improper jargon on my part, too true!

I think the bolded section is the problem. Where can you (or anyone) draw the line between being openminded and indecisive?

I think there is a fairly clear difference between indecisive and open-minded. Or rather, there is a clear difference between arrogance and decisiveness. Arrogance is the feeling that you know it all and can't be wrong. Decisive is drawing your conclusion from the facts before you. My beef is when certain information is ignored or written off because it's inconvenient for the idea of the month.

Besides, scientists are people too and just as open to flaws in logic or hubris as anyone else.

Very true, and I don't hold them to a higher standard than I would hold others. Of course it's to happen now and again. My point is I observe this amongst the community as a whole. It seems to be the rule, not the exception, and that shouldn't be. Once they've accepted one idea, they seem to become rather reluctant to consider another. Now, this obviously is not a representation of everyone, but it is my observation of the whole.

If you know that many scientific "facts" have been overturned a few decades later, you need to accept the fact that it's possible it could be the case with other ideas and theories as well. If you are not open to the possibility, that is, to me, the definition of arrogance.

[I_luv_saber]

This seems a general refrain - and is really my point of irritation

Sorry?

The problem here is how you evaluate which ideas to test. Since General Relativity came up; the first experimental evidence in support of it was not generated until 1919 and we still haven't found gravity waves.

That's the decision of those professionals who are in the field. I surely can't make that choice. But that choice needs to be made as objectively as possible. Of course, scientists are humans like the rest of us, and that obviously does not always happen, but when the community on the whole is suffering from a lack of objectivity and open-mindedness, you have a problem.

I'll agree that when arguments are based on statistical models designed to replicated known correlations, things can get a little dicey. So if you want to be dubious of the black boxes that make the predictions I don't blame you.

Well, again, this is simply an example of what I'm talking about. There is no reason in hell the scientific community should have been pushing such an alarmist agenda ("the debate is over") and presenting it as a fact when they knew damn well that that isn't the case. Possible, yes. Strong possiblilty, hell maybe even that. But this has been presented to people as FACT simply because that's their best guess with some loose evidence supporting it. That's not right and is an abuse of power, IMHO.

It's like they've completely forgotten about the fact we were going through a global cooling not long ago!

"Didn't you guys say a few decades ago we were going through global cooling?"

"Well, yes, but that was completely different. We're REALLY sure this time! You must stop global warming or we'll all die!!!"

This is the attitude I find funny. If they think this is what's happening, fine, I accept it's possible, but why present it as fact when it isn't?

The root of this is the arrogance I was talking about, so this is simply one example.

However, your example, like green house gas release from arctic ecosystems, is an example of a positive feed back loop. As such it tells you little about what started things rolling.

Maybe, but these are all finer points and tangents of the point I was trying to make, which is that science isn't always right "out of the gate", and to treat it like it is is folly. I know I could be wrong. I know it could very well be that we are indeed causing global warming. But I'm open to other possibilities as well, especially when evidence does not yet point in a clear direction.

[keith]

That's the decision of those professionals who are in the field. I surely can't make that choice. But that choice needs to be made as objectively as possible. Of course, scientists are humans like the rest of us, and that obviously does not always happen, but when the community on the whole is suffering from a lack of objectivity and open-mindedness, you have a problem.

...so on the one hand you are unable to make the decision to choose which theories are tested, on the other you reserve the right to refuse to accept the choice of those you acknowledge have the skills to so choose?

Well, again, this is simply an example of what I'm talking about. There is no reason in hell the scientific community should have been pushing such an alarmist agenda ("the debate is over") and presenting it as a fact when they knew damn well that that isn't the case. Possible, yes. Strong possiblilty, hell maybe even that. But this has been presented to people as FACT simply because that's their best guess with some loose evidence supporting it. That's not right and is an abuse of power, IMHO.

Once a strong possibility shows statistical significance the debate is over.

It's like they've completely forgotten about the fact we were going through a global cooling not long ago!

"Didn't you guys say a few decades ago we were going through global cooling?"

"Well, yes, but that was completely different. We're REALLY sure this time! You must stop global warming or we'll all die!!!"

This is the attitude I find funny. If they think this is what's happening, fine, I accept it's possible, but why present it as fact when it isn't?

They all said global cooling? This gets said a lot in many places and mostly only ever gets cited back to studies on geological timescale suggesting the next climate cycle was a cooling one. Now when that reaches the New York Times it becomes; Climatologists predict new ice age.

Maybe, but these are all finer points and tangents of the point I was trying to make.....

Never get distracted by details that interfere with you arguement, you've been taking lessons from Inq.

But I'm open to other possibilities as well, especially when evidence does not yet point in a clear direction.

Allow me to rephrase; Your understanding of the data leads you to conclude that it does not point in a clear direction.

[I_luv_saber]

...so on the one hand you are unable to make the decision to choose which theories are tested, on the other you reserve the right to refuse to accept the choice of those you acknowledge have the skills to so choose?

No, I simply call bull**** when I see it. I made quite clear that I feel it should be those professionals making the choices, but it needs to be done with a fair amount of objectivity and with an open mind.

I obviously cannot be an expert in every field. In this society, we work off of specialization and cooperation. But that doesn't mean that simply because you are a professional in a field you can go calling things facts because it's your best guess.

Complete trust unchecked in professionals is part of what got us into our current financial problem. People trusted the people setting them up with loans because they were professionals and were supposed to be helping them. And now the thread has come full circle!

Once a strong possibility shows statistical significance the debate is over.

That strong possibility was not based on fact however, it was based off of "hmm, that can't be good for the environment, let's find out how", and that's not the right way to go about it. When the problem is approached from a different starting question (an objective one) which is, "The Earth is in a warming trend... let's find out why", then the evidence is not so clear cut. It's funny, but the point of view from which you interpret facts can make a big difference. It you start to interpret from the position of looking for something wring, you'll find something wrong.

They all said global cooling? This gets said a lot in many places and mostly only ever gets cited back to studies on geological timescale suggesting the next climate cycle was a cooling one. Now when that reaches the New York Times it becomes; Climatologists predict new ice age.

lol, true enough that the media does blow things out of proportion. But if you wish another example, I give you the current situation. Just a few years ago the community was fairly unified on the global warming front. You are now getting scientists who are saying, "Well, we aren't helping, but it may not be us after all". Do you really need me to cite examples of science being wrong and changing it's mind? They do all the time! And this is the problem I have. If closely held ideas were proven wrong before, why could it not happen again? I tell you, I've sat there and spoken with scientists who canNOT comprehend the idea that something they believed to be right just could possibly be wrong. It's amazing.

Never get distracted by details that interfere with you arguement, you've been taking lessons from Inq.

The details don't interfere with my argument, it is irrelevant to my point. If you wish to have a discussion regarding global warming, then we may, but that's not the point I was making in this case. To rephrase: I'm not making the case humans aren't causing global warming, I'm making the case we MAY not be.

Allow me to rephrase; Your understanding of the data leads you to conclude that it does not point in a clear direction.

All I'm saying is, we don't know yet with any amount of certainty, IMO, what is causing global warming. And to say that you do know, and present that as a fact, is quite silly, IMO. When you aren't sure of an answer, you should be open to the possible answers others are giving you. Not writing them off because they are unpopular at the time.

[keith]

No, I simply call bull**** when I see it. I made quite clear that I feel it should be those professionals making the choices, but it needs to be done with a fair amount of objectivity and with an open mind.

... but your assessment of whether or not minds are open is to what degree they match your opinions.

But that doesn't mean that simply because you are a professional in a field you can go calling things facts because it's your best guess.

You seem to be confusing Fox/CNN/MSNBC facts with the scientific sort.

Complete trust unchecked in professionals is part of what got us into our current financial problem. People trusted the people setting them up with loans because they were professionals and were supposed to be helping them. And now the thread has come full circle!

Oh I'd agree that the intersection of science and public policy is always tricky.

Just a few years ago the community was fairly unified on the global warming front. You are now getting scientists who are saying, "Well, we aren't helping, but it may not be us after all".

Hang on, I thought discussion of positive feedback loops had been discarded as finer points and tangents.

Do you really need me to cite examples of science being wrong and changing it's mind? They do all the time!

Well that is the difference between science and religion.

To make it even more unnerving; you do realise that in due course Einstein's General Theory of Relativity will be consigned to the dustbin of history along with Newtonian Physics?

The issue here is whether the root cause or the consequence is under debate. Now plenty of folks have looked to knock holes in Anthropogenic Climate Change (fame and fortune beckons for the one who does), but last I saw there really wasn't any standing 'other' explanation.

There are certainly plenty of what if's, but those come two a penny.

I tell you, I've sat there and spoken with scientists who canNOT comprehend the idea that something they believed to be right just could possibly be wrong. It's amazing.

Well I can assure you this is true for most people. The question is what they could not comprehend being wrong.

Did you know that Britney Spears doesn't use an auto-tune?

[Fencer X and Y]

Well that is the difference between science and religion.

Religion admits it's wrong also
http://en.wikipedia.org/wiki/Apologi...e_John_Paul_II

[I_luv_saber]

... but your assessment of whether or not minds are open is to what degree they match your opinions.

No it isn't, and I'm not sure where you are getting that from. This is simply one example of it. If there were string evidence supporting it, and they stepped forward saying "Hey, we think this is what's happening", I'd be fine with that. That's not what has been happening. They've taken "evidence" from computer models and blown it out of proportion in order to match their personal feelings and beliefs. This is not right, regardless of how you slice it. There have been other explanation proposed with no weaker evidence than the mainstream community had put forth, but those ideas are written off because it doesn't match the agenda at hand.

Seemingly, it's finally starting to move away from that.

You seem to be confusing Fox/CNN/MSNBC facts with the scientific sort.

Nearly all of the evidence pointing to global warming is nothing but computer models. There is no conclusive proof that this is the explanation over others that were put forth. Yet we still hear, and God knows heard in the past few years, that the sky is falling.

Hang on, I thought discussion of positive feedback loops had been discarded as finer points and tangents.

The argument of global warming itself is a tangent to the point I was making. The point I was making has less to do with global warming and more to do with the scientific communities attitudes.

Well that is the difference between science and religion.

I think the distinction is sometimes not as great as you believe it to be.

To make it even more unnerving; you do realise that in due course Einstein's General Theory of Relativity will be consigned to the dustbin of history along with Newtonian Physics?

The issue here is whether the root cause or the consequence is under debate. Now plenty of folks have looked to knock holes in Anthropogenic Climate Change (fame and fortune beckons for the one who does), but last I saw there really wasn't any standing 'other' explanation.

There are certainly plenty of what if's, but those come two a penny.

Just because you come up with a hypothesis for why the Earth is warming, you don't go calling it fact because you haven't thought up anything else yet! Especially when there is no strong evidence supporting it! As I said, there are other valid theories that this is a natural warming cycle. The Earth goes through such warming and cooling periods all the time.

Again, I'm not saying we are NOT the cause... I am saying there is not enough evidence to say so confidently, and surely not enough to adopt the alarmist attitudes that are being adopted now.

Well I can assure you this is true for most people. The question is what they could not comprehend being wrong.

In this particualr example I was reffering to human induced global warming, but it's not the only occasion.

[keith]

Nearly all of the evidence pointing to global warming is nothing but computer models. There is no conclusive proof that this is the explanation over others that were put forth. Yet we still hear, and God knows heard in the past few years, that the sky is falling.

If your wish to hold to an all i's dotted and t's crossed standard all well and good but your list of things you have problems with goes well beyond global warming.

I suggest a yurt and yak farming.


Also if it was so easy to make a model fit data do you think that someone wouldn't have published a model demonstrating that it was the interatmospheric farts of flatulent quantum monkeys intersecting with the the earths position as they swing from superstring to superstring?

Just because you come up with a hypothesis for why the Earth is warming, you don't go calling it fact because you haven't thought up anything else yet! Especially when there is no strong evidence supporting it! As I said, there are other valid theories that this is a natural warming cycle. The Earth goes through such warming and cooling periods all the time.

See flatulent quantum monkeys above. Do you think the normal geological scale effects have not been used to challenge the current models? You seem to be stuck on your opinion of the process, which is fair enough, it does involve uncertainty.

But as a final thought. The best description of the scientific process I have heard is as follows.

Your theories are like your children, except you get to kill them.

[I_luv_saber]

........

I'm pretty sure we're having two completely different conversations, my friend

[keith]

........

I'm pretty sure we're having two completely different conversations, my friend

Perhaps.

...but to drift the thread drift back to the thread,

While it is easy to indulge in all sorts of navel gazing about which exact three letter acronym was responsible for the financial crises, they were not themselves the cause.

All financial bubbles have the same root cause, the worry that the free lunch will be finished before we get to the table.

[fencerchica]

Perhaps.

...but to drift the thread drift back to the thread,

While it is easy to indulge in all sorts of navel gazing about which exact three letter acronym was responsible for the financial crises, they were not themselves the cause.

Keith, are you seriously proposing that understanding the sequence of cause and effect which caused the recession is "navel gazing"? These market activities are as tangible as the stresses and structural failures that cause bridge collapses, and having at least a basic understanding of them is just as important. Heck, even more important for people like us, considering that the failure of our financial system is also a political issue and one that reponsible voters need to get a real handle on in order to move forward in the future.

All financial bubbles have the same root cause, the worry that the free lunch will be finished before we get to the table.

Exactly, and this is the reason why realistic regulatory systems are necessary. As I stated before, the abuse of leveraged investment vehicles was the proximate cause of the recession; the ultimate cause was deregulation plus the human drive towards selfish means of profit and/or self-preservation.

[keith]

Keith, are you seriously proposing that understanding the sequence of cause and effect which caused the recession is "navel gazing"? These market activities are as tangible as the stresses and structural failures that cause bridge collapses, and having at least a basic understanding of them is just as important. Heck, even more important for people like us, considering that the failure of our financial system is also a political issue and one that reponsible voters need to get a real handle on in order to move forward in the future.

Well, I am never anything but serious.

Bear in mind that responsible voters, of pretty much every denomination, were very happy with 10+% a year asset appreciation (of every asset). It allowed all boats, oxes and axes to be lifted equally.

However,

Exactly, and this is the reason why realistic regulatory systems are necessary. As I stated before, the abuse of leveraged investment vehicles was the proximate cause of the recession; the ultimate cause was deregulation plus the human drive towards selfish means of profit and/or self-preservation.

as you point out the proximal cause is quite easily identified. As it always is, from Tulips to monopolies in the South Pacific. It is also easily fixed, as it usually is and aversion therapy means that popular indulgence in bubbles is quelled for a while and then..... I think there was a Disney song about it.

Which brings us back to the parallels with the climate change debate, at what point are the costs high enough that a substantive change in behaviour should occur? Given that it is quite likely that at the end of this depression the world will be in a better place than it was at the start at the last one, I'm not sure it is such a big deal. Of course I will concede that this might appear to be the philosophical equivalent of I_luv_sbre residing sufficiently above sea level not to be concerned with global warming. But it isn't

[I_luv_saber]

Of course I will concede that this might appear to be the philosophical equivalent of I_luv_sbre residing sufficiently above sea level not to be concerned with global warming. But it isn't

Ouuuuch, low blow!

Seriously though, I just want to stress that I consider myself pretty environmentally concerned. I think, regardless of global warming (and keep in mind, I'm not denying it, simply questioning the reason happening), we need to be cleaning things up and pursuing cleaner technologies (as well as be more careful about how much waste we produce and what we do with it). I just don't like the fire and brimstone method that's being used unduly in order to get people to do it.

[fencerchica]

Even if the loan-takers are not well versed in higher economy, they should know:
1. Their present wage, after tax
2. A rough estimate on how well their employer is doing, sales-wise
3. Non-housing essential (food, transportation, insurance, etc.) monthly costs, a rough estimate and rounded up for safety
4. The asking price for the house

The prospective loan-taker can now do a really simple estimation on whether he can take on the loan. Subtract #3 from #1, and one has a maximum available spending room for monthly housing costs. Divide #4 with this difference, and one has a payoff time, excluding interest. (The true payoff time will of course be considerably longer.) If this optimistic calculation of the payoff time is longer than one can be reasonably sure that one is employed (see#2), then the loan-taking is a risky business.

I'm replying again to include a link to a fascinating article I just found: Negative Amortization for UberNerds

This article on the nitty-gritty of Option ARMs is honestly kind of horrifying. And the mechanics of how Option ARMs handle interest accrual is just one potential aspect, as I mentioned in my earlier reply to your post, of homebuying. But as the author says towards the end:

But that’s the real point, isn’t it? If your head just exploded, and you’re the kind of person who usually reads CR, just imagine what the kind of person who doesn’t usually read CR makes of all this during some ten-minute spiel by some loan officer. We already know that there are lots of loan officers and brokers who don’t understand how these loans work; remember Babs the Wonder Broker? (One of MaxedOutMama’s finds: someone who is apparently a mortgage Account Executive who was convinced that neg am loans do not charge interest on interest. The only way that could happen is if the required payment each month were calculated only on the original balance, not the original balance plus prior shortfalls. That would, if you did it that way, leave a portion of the total loan balance that isn’t accruing interest. Of course, even if you did that during the neg am period of the loan, once you got to the 60-month recast or the 110% balance cap, you would use the total balance to recalculate the payment, and so from that point forward you would be charging interest on the capitalized interest. That’s not how these loans actually work, but the point is that even if they did work that way you couldn’t consider the capitalized balance to be “free money,” just slightly cheaper money.) So imagine some poor consumer getting “the explanation” from a loan officer who doesn’t understand how neg am works. You’d think that most adults, generally, would be suspicious if they were told by some joker on the internet (say) that banks will actually lend you money without charging interest on it. But if a broker tells you that? They must know, right?

[erooMynohtnA]

[Hauptman]

Great cartoon!

[Inquartata]

Once a strong possibility shows statistical significance the debate is over.

This idea used to be anathema to science. One was never supposed to stop questioning.

When did religion take over science?

They all said global cooling? This gets said a lot in many places and mostly only ever gets cited back to studies on geological timescale suggesting the next climate cycle was a cooling one.

No. I recall watching PBS programs in the late 1970s which were directly predictive in the short term. Things like studies of the rate of southward advance of the permafrost in Newfoundland or wherever being followed promptly by speculation on whether this meant that a "long overdue" glaciation was imminent. There were even musings about whether fossil fuel use might be the only thing staving off a new Ice Age...

These market activities are as tangible as the stresses and structural failures that cause bridge collapses, and having at least a basic understanding of them is just as important. Heck, even more important for people like us, considering that the failure of our financial system is also a political issue and one that reponsible voters need to get a real handle on in order to move forward in the future.

Can you point out a time when having such a "basic understanding" saved us from anything in the past? Mobs are not famed for being moved by knowledge, and that is exactly what causes financial crises, among others: Mob behavior.

I suppose it's comforting to know why your ship is sinking, but it's unlikely to stop the sinking, much less prevent it in the first place...

Exactly, and this is the reason why realistic regulatory systems are necessary. As I stated before, the abuse of leveraged investment vehicles was the proximate cause of the recession; the ultimate cause was deregulation plus the human drive towards selfish means of profit and/or self-preservation.

Heresy! President Obama claims that it was the lack of universal health care and an underfunded basic education system. And he can't be wrong. Time to fall in line and stop contradicting our new master!