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Your question is spot on when you ask if the implications are well understood. History is littered with new financial technologies whose implications were not w
by cjensen 9y ago
Your question is spot on when you ask if the implications are well understood. History is littered with new financial technologies whose implications were not well-understood which immediately resulted in a bubble. The invention of stocks (South Seas Bubble), of stock margin (1929 crash), federal deposit insurance (S&L crash), collateralized debt obligations (2008 crash).
Historically, being early on a new financial technology has rarely gone well for the participants.
- CryptoPunk 9y agoCDOs were not new in 2008. The 2008 crash was a result of growing federal intervention in the housing market (federal mortgage guarantees are a huge cash cow for financial institutions and politicians who get appointed as executives of GSEs like Fannie Mae after leaving office) and the FDIC's subsidization of housing construction loans. There were large markets in car loan and commercial real estate mortgage CDOs that didn't see a crash anywhere near as large as that seen in residential real estate CDOs and construction loans, and that's because they were not subject to GSE loan guarantees and FDIC deposit guarantees, respectively.
- cjensen 9y agoYou are both right and wrong. New financial tech takes awhile to become popular enough to become dangerous. So while CDOs were invented in the late 80s, it wasn't until 2000 or so that they started to become a craze that lead to dangerous conditions. The government through GSEs and FDIC did, as you say, constantly blow air into the housing bubble. CDOs were also a big compounding factor in that they were willing to back an enormous amount of low-interest high-risk loans. Exactly the loans which blew up.