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I'm not sure, however, that there's a huge use to society in allowing many bets like this given at the very least it's a huge sink for quality human capital. I

• yummyfajitas 16y ago
  John Paulson and a few other smart people told the world "hey, we are in a bubble". They put their money where their mouth is and shorted the market. They and helped prevent us from funneling further labor and resources into housing we don't need. Do you really think the world would have been a better place if Paulson built twitter 2.0 rather than pushing CDO prices down?
  • philk 16y ago
    Yes, but the bubble itself was created by investors building and selling complex financial instruments in the first place. Wouldn't it be better if investment bankers had been building legitimate businesses rather than working out new ways to repackage and sell subprime mortgages?
    • yummyfajitas 16y ago
      The bubble was created by simple instruments: home mortgages. It would have been better if women weren't forcing their husbands to buy houses they couldn't afford, government wasn't encouraging lenders to make bad loans, and realtors weren't adding fuel to the fire. I don't see a way to prevent all of that, since all of those things are still happening. The only reason the bubble burst was because of investment banks and other speculators eventually figuring out the problem and putting a stop to it.
      • philk 16y ago
        No it wasn't. It was caused by lenders being able to lend money that wasn't theirs, facilitated by complex financial instruments. If you're a bank and you're lending your own money you've got an incentive to make sure the loans can be repaid. If you're a bank and you can instead take the loans you've made, parcel the debt up in a complicated financial instrument, sell it off to others and take an essentially risk free commission then you've got an incentive to loan money to anyone who can hold a pen and sign a document. This means you're going to lend a lot more money and this is what caused the bubble. It's not because women were forcing their husbands to borrow, it's because financial wrangling shifted the risks from the lenders to third parties further down the line.
        • yummyfajitas 16y ago
          The problem with your theory is that many banks kept the riskiest tranches of loans for themselves while selling the safer tranches to others. They would only have done this if they believed the underlying mortgages were still good. Regardless, none of this would have been possible if housing consumers didn't become housing speculators. Realtors ran commercials encouraging women to browbeat their husband into buying houses they couldn't afford (http://www.youtube.com/watch?v=Ubsd-tWYmZw http://www.youtube.com/watch?v=Ubsd-tWYmZw). Bush and Barney Frank encouraged commercial banks to lower lending standards. Speculators followed the crowd and suffered for their folly. The bubble would have existed without speculators, though it probably would not have been as large.
          • demallien 16y ago
            The problem with your theory is that many banks kept the riskiest tranches of loans for themselves while selling the safer tranches to others. They would only have done this if they believed the underlying mortgages were still good. Actually, that doesn't necessarily create any problems for Phil's point of view. That tranche of highly risky loans had to be kept by the banks - it was because this high risk stuff had been taken out of the pool that the rest of the pool looked so appealing to investors. However, the calculations to determine what percentage of loans needs to be in the high-risk tranche was very difficult to evaluate, especially if you were the investor seeking to buy the "safe" tranches, and not the bank that had originally sold the loan.