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I am so tired of hearing about "confounding financial products that no one can hope to understand". An intelligent person willing to spend a few hours would ha

by simon_ 16y ago

I am so tired of hearing about "confounding financial products that no one can hope to understand". An intelligent person willing to spend a few hours would have no trouble gaining a basic understanding of CDOs, credit default swaps, and the like. There's no excuse for that kind of thing in mainstream journalism (where you often see it), and I'm kind of surprised that you hear it from Jason.

stretchwithme 16y ago
I agree. Maybe what journalists really mean is that they can't understand them after spending the five minutes they allocate to understanding every topic. These instruments were created to shift risk to those most naive about the housing bubble collapse. Those who saw it coming knew there was great profit in getting others to take on that risk. Just pay them enough and they'll take it on. Congress can't acknowledge its own role in creating the bubble so they're trying to regulate how people took advantage of it. But its not the market's exploitation of our government's stupid actions that need to be fixed. They will always find a way. Our government needs to stop being stupid.
sethg 16y ago
As another article recently linked from HN pointed out, even if you can get a basic understanding of CDOs and credit default swaps in a few hours, if you went to actually invest in one of the things, the legal documents defining your actual relationship with your counterparty were hundreds of pages long and filled with jargon.
jerf 16y ago
A computer can basically do four things: Load a value from memory, store a value into memory, add two numbers together, branch to another list of instructions if a number is 0. So, if you understand those operations, you understand everything about computing, right? The problem with the financial world wasn't that they built on incomprehensible primitives. The problem was the incomprehensible structures they built with them. Just like programmers and programs. A basic understanding of the primitives is necessary but not sufficient in either case. And the programmers have an advantage that all the source code they are running is in one place; to understand the financial system technically would require access to the whole, which you can not have. (If you want to quibble with that list of primitives: Fine, just pretend I used your list instead. It won't change my point.)
- adsyoung 16y ago
  Nice one. For me the big takeaway from all of this has definitely been that when things get too complex, all sorts of things that we rely on for the system to function properly stop working. In particular, the hiding of risk removes a lot of the correcting mechanisms from the system. Nassim Nicholas Taleb's argument that we should ban complex financial instruments and keep things very simple and close to those primitives makes a lot of sense to me. Whether it's in anyway practical or not, I have no idea.
j_baker 16y ago
Warren Buffet has said he doesn't understand CDOs. If he doesn't understand them, I think most people can be forgiven for not understanding them.
- Keyframe 16y ago
  This comes in handy for regular folks http://www.crisisofcredit.com/ http://www.crisisofcredit.com/
- anamax 16y ago
  > Warren Buffet has said he doesn't understand CDOs. Buffet has also said that he doesn't understand tech companies or computers. Buffet is always playing angles. When you can't spot the angle, he's probably playing you.
Adaptive 16y ago
simon_ I fully agree. This is also what drives me nuts about, for example, NPR's coverage of the crisis. I love the Planet Money team for instance but they invariable do their "gosh can you believe how nuts this financial stuff is" schtick during each episode of what is otherwise a decent show. I'm tired of hearing a procession of Ira-Glass-cadence-imitating NPR ingenues with gee-golly-wow attitudes interviewing financial pros. Journalists serve as proxies for the reader/viewer/listener. When they do the "this finance stuff is just crazy" routine they imply that we shouldn't have been expected to understand and follow the finance industry in the first place. That implicit expectation of ignorance is the media equivalent of "math is hard". We need to raise expectations of education and comprehension. It's entirely possible to understand this stuff in high school. We should be teaching it in every public school. Of course that would make it harder to get away with stuff. Not surprising then, that we don't teach it in schools today.
adsyoung 16y ago
And yet a lot of the interviews I've heard about the crisis indicate a lot of the people dealing in them and rating them did not understand them. Telling people that they should try harder is unlikely to solve the problem in the future I think.
- stretchwithme 16y ago
  I think it was the risks they didn't understand, not how the instruments worked.
  - adsyoung 16y ago
    Perhaps, but I would have put understanding the risks within the scope of understanding the instruments.
    - deleted 16y ago
      [deleted]
    - jrockway 16y ago
      Nobody really expected everyone to default on their homes at once. It was unprecedented.
      - adsyoung 16y ago
        Right, so they didn't really understand the risks involved. It's not like thousands of people woke up one morning and independently, by coincidence, decided to default on their homes. It's a long complex causal chain, with snow-balling effects and the like, that very few people had an appreciation for because the instruments involved were very complex and there were too many layers involved. This lead to a very non-linear system where it was impossible to have visibility over the whole thing.
        anamax 16y ago
        > It's a long complex causal chain, with snow-balling effects and the like, that very few people had an appreciation for because the instruments involved were very complex and there were too many layers involved. You write that like it's unusual. It's not - it's how life works. > This lead to a very non-linear system where it was impossible to have visibility over the whole thing. Of course it's impossible. Complete visibility is the exception, not the rule. If you want safe and visibility, buy T-bills. If you want more return, you have to play against someone who thinks that you're incorrect and is willing to pay if they're wrong.

by simon_ 16y ago

stretchwithme 16y ago

I agree. Maybe what journalists really mean is that they can't understand them after spending the five minutes they allocate to understanding every topic. These instruments were created to shift risk to those most naive about the housing bubble collapse. Those who saw it coming knew there was great profit in getting others to take on that risk. Just pay them enough and they'll take it on. Congress can't acknowledge its own role in creating the bubble so they're trying to regulate how people took advantage of it. But its not the market's exploitation of our government's stupid actions that need to be fixed. They will always find a way. Our government needs to stop being stupid.

sethg 16y ago

As another article recently linked from HN pointed out, even if you can get a basic understanding of CDOs and credit default swaps in a few hours, if you went to actually invest in one of the things, the legal documents defining your actual relationship with your counterparty were hundreds of pages long and filled with jargon.

jerf 16y ago

A computer can basically do four things: Load a value from memory, store a value into memory, add two numbers together, branch to another list of instructions if a number is 0. So, if you understand those operations, you understand everything about computing, right? The problem with the financial world wasn't that they built on incomprehensible primitives. The problem was the incomprehensible structures they built with them. Just like programmers and programs. A basic understanding of the primitives is necessary but not sufficient in either case. And the programmers have an advantage that all the source code they are running is in one place; to understand the financial system technically would require access to the whole, which you can not have. (If you want to quibble with that list of primitives: Fine, just pretend I used your list instead. It won't change my point.)

adsyoung 16y ago
Nice one. For me the big takeaway from all of this has definitely been that when things get too complex, all sorts of things that we rely on for the system to function properly stop working. In particular, the hiding of risk removes a lot of the correcting mechanisms from the system. Nassim Nicholas Taleb's argument that we should ban complex financial instruments and keep things very simple and close to those primitives makes a lot of sense to me. Whether it's in anyway practical or not, I have no idea.

j_baker 16y ago

Warren Buffet has said he doesn't understand CDOs. If he doesn't understand them, I think most people can be forgiven for not understanding them.

Keyframe 16y ago
This comes in handy for regular folks http://www.crisisofcredit.com/ http://www.crisisofcredit.com/
anamax 16y ago
> Warren Buffet has said he doesn't understand CDOs. Buffet has also said that he doesn't understand tech companies or computers. Buffet is always playing angles. When you can't spot the angle, he's probably playing you.

Adaptive 16y ago

simon_ I fully agree. This is also what drives me nuts about, for example, NPR's coverage of the crisis. I love the Planet Money team for instance but they invariable do their "gosh can you believe how nuts this financial stuff is" schtick during each episode of what is otherwise a decent show. I'm tired of hearing a procession of Ira-Glass-cadence-imitating NPR ingenues with gee-golly-wow attitudes interviewing financial pros. Journalists serve as proxies for the reader/viewer/listener. When they do the "this finance stuff is just crazy" routine they imply that we shouldn't have been expected to understand and follow the finance industry in the first place. That implicit expectation of ignorance is the media equivalent of "math is hard". We need to raise expectations of education and comprehension. It's entirely possible to understand this stuff in high school. We should be teaching it in every public school. Of course that would make it harder to get away with stuff. Not surprising then, that we don't teach it in schools today.

adsyoung 16y ago

And yet a lot of the interviews I've heard about the crisis indicate a lot of the people dealing in them and rating them did not understand them. Telling people that they should try harder is unlikely to solve the problem in the future I think.

stretchwithme 16y ago
I think it was the risks they didn't understand, not how the instruments worked.
- adsyoung 16y ago
  Perhaps, but I would have put understanding the risks within the scope of understanding the instruments.
  - deleted 16y ago
    [deleted]
  - jrockway 16y ago
    Nobody really expected everyone to default on their homes at once. It was unprecedented.
    - adsyoung 16y ago
      Right, so they didn't really understand the risks involved. It's not like thousands of people woke up one morning and independently, by coincidence, decided to default on their homes. It's a long complex causal chain, with snow-balling effects and the like, that very few people had an appreciation for because the instruments involved were very complex and there were too many layers involved. This lead to a very non-linear system where it was impossible to have visibility over the whole thing.
      - anamax 16y ago
        > It's a long complex causal chain, with snow-balling effects and the like, that very few people had an appreciation for because the instruments involved were very complex and there were too many layers involved. You write that like it's unusual. It's not - it's how life works. > This lead to a very non-linear system where it was impossible to have visibility over the whole thing. Of course it's impossible. Complete visibility is the exception, not the rule. If you want safe and visibility, buy T-bills. If you want more return, you have to play against someone who thinks that you're incorrect and is willing to pay if they're wrong.