Comments on: Financial Crisis Act I: Government Meddling

By: What I’m Working On: Supercharging Innovation « Complex Adaptive Systems

Fri, 31 Oct 2008 21:33:24 +0000

[...] 31, 2008 by kevindick If you’ve been following my posts on the financial crisis (here, here, and here) and Singularity Summit (there, there, and there), you might wonder, “Uh, but [...]

By: Financial Crisis Act III: The Flailing Response « Complex Adaptive Systems

Financial Crisis Act III: The Flailing Response « Complex Adaptive Systems — Wed, 15 Oct 2008 23:20:02 +0000

[...] 15, 2008 by kevindick As we saw in Act I and Act II, the current financial crisis was enabled by government interference in the housing and [...]

By: Financial Crisis Act II: Wall Street Sharks « Complex Adaptive Systems

Financial Crisis Act II: Wall Street Sharks « Complex Adaptive Systems — Fri, 03 Oct 2008 22:16:17 +0000

[...] Act I, we saw how government meddling overheated the housing and mortgage markets. Now we’ll see [...]

By: kevindick

kevindick — Thu, 02 Oct 2008 18:19:19 +0000

Re MBSs in general, Arnold Kling thinks you’re on to something:

http://econlog.econlib.org/archives/2008/10/my_views_on_the.html

The problem is that derivatives on illiquid assets tend to make risks opaque, which is bad. So you need to couple them with well guaranteed insurance. This is what the FHA does for low-income borrowers–where the marginal decrease in interest rate from improved liquidity does the most “good”.

As Taleb notes, in areas of high uncertainty, you want redundancy. So I would say that, except for FHA insured mortgages, we should have high down payments, limit trading in MBSs, and have high capital requirements for the trading we allow.

By: rafefurst

rafefurst — Thu, 02 Oct 2008 17:33:59 +0000

BTW, Michael Shermer was part of an interesting debate that is somewhat relevant here:

http://www.abc.net.au/rn/allinthemind/stories/2008/2339872.htm

While I normally think Shermer’s stuff is right on, I found myself agreeing with his opponent on just about everything and thought that Shermer was showing himself to be an ideologue in a way that I’ve never seen from him before. His application of evolutionary and sociological theory and studies seem like long, trite stretches of logic and unsophisticated. I guess some people are better at detecting BS than slinging their own :-)

By: rafefurst

rafefurst — Thu, 02 Oct 2008 17:24:52 +0000

I am curious as to why mortgage backed securities are a good thing in the first place. Or any type of derivative on illiquid assets, especially ones that individuals are not prepared to treat as pure investments such as their homes. Yes derivatives grease the wheels of the market and provide ersatz liquidity where there may be none, however they increase volatility and create lever points for cascades like the current situation. Perhaps we should be asking whether leverage on family homes is something that society can do without, and what stability benefits might result from such a “backwards” move.