5 ms·

I've read the book. And all his other books. They're fun, but they're not a great source for serious understanding. The book and movie does briefly explain all

by darawk 7y ago

I've read the book. And all his other books. They're fun, but they're not a great source for serious understanding. The book and movie does briefly explain all this, but it paints a picture that the instruments themselves were inherently toxic, which was not the case. What was toxic were the assumptions that went into modeling their risk characteristics. The assets (like all assets) themselves were fine. The problem was that people didn't understand them.

wpietri 7y ago
In that assets are only created for people to purchase with informed understanding, I don't think "they were great but nobody understood them" is a possible thing. The clearest example here is shares in a Ponzi scheme. Those are definitely assets, and they are definitely not fine. They are made to not be understood. The same is more subtly true of the previous wave of essentially fraudulent mortgage-backed securities. But I think the same is also true of any hard-to-understand instrument engineered to look like a good deal at first glance. You also ignore systemic risk. For many years before the 2008 collapse, cognoscenti knew that a lot of risk had gone somewhere, we just didn't know where. But we sure found out! Saying that "all assets are fine" is sort of like saying "all chemicals are fine". It's technically true, in that dioxin and DDT don't intend to be harmful. But if the evidence shows that people can't use them responsibly, then a ban in a totally reasonable outcome.
- darawk 7y ago
  > In that assets are only created for people to purchase with informed understanding, I don't think "they were great but nobody understood them" is a possible thing. It isn't the case that nobody understands them. We understand them just fine now. This is how civilization learns. For a long time we didn't know how to price options - now we're quite good at it. > The clearest example here is shares in a Ponzi scheme. Those are definitely assets, and they are definitely not fine. They are made to not be understood. The same is more subtly true of the previous wave of essentially fraudulent mortgage-backed securities. But I think the same is also true of any hard-to-understand instrument engineered to look like a good deal at first glance. Ponzi schemes are designed to defraud unsophisticated investors. These assets serve a useful purpose and work just fine as long as their risks are properly understood, which they now are. > You also ignore systemic risk. For many years before the 2008 collapse, cognoscenti knew that a lot of risk had gone somewhere, we just didn't know where. But we sure found out! Saying that "all assets are fine" is sort of like saying "all chemicals are fine". It's technically true, in that dioxin and DDT don't intend to be harmful. But if the evidence shows that people can't use them responsibly, then a ban in a totally reasonable outcome. The evidence does not show that for these assets. You could make a similar case about basically any dangerous but useful technology. When dynamite was first invented i'm sure a lot of people died messing with it. That doesn't mean we should ban it, it means we need to figure out how to handle it and use it safely. We now understand these assets pretty well. I'll bet you basically whatever amount of money you want that the next crisis will not come from these assets.
  - wpietri 7y ago
    I'm not persuaded. There's no such thing as "understand just fine now". Ponzi schemes have been understood since the 1920s, but people keep falling for them. More sophisticated investors can get taken by more sophisticated tricks. Having worked for financial traders, I know just how pleased people can be to have pulled one over on people they see as adversaries. I agree it's possible that these assets could be fine now, either because people have truly learned a lesson, or just because of the "once bitten, twice shy" reaction that takes a few decades to wear off. But the principle by which you declare them fine, namely that all assets are fine, is definitely wrong.
    - darawk 7y ago
      > I'm not persuaded. There's no such thing as "understand just fine now". Ponzi schemes have been understood since the 1920s, but people keep falling for them. More sophisticated investors can get taken by more sophisticated tricks. Having worked for financial traders, I know just how pleased people can be to have pulled one over on people they see as adversaries. You could make this argument about literally anything. You're not really saying anything specific to CDOs here, so I can't really give you a more specific response. > I agree it's possible that these assets could be fine now, either because people have truly learned a lesson, or just because of the "once bitten, twice shy" reaction that takes a few decades to wear off. But the principle by which you declare them fine, namely that all assets are fine, is definitely wrong. All assets are fine if you understand their risks. Sometimes we deem certain people or groups insufficiently responsible to handle the risks of certain assets. Non-accredited investors are not allowed to invest in private companies. The United States bans "contracts for difference", etc.. I think the problems with CDOs are extremely well understood at this point by everyone in that market. It has been one of the most studied issues of the last decade in quantitative economics. That isn't to say that it's impossible that there's some lurking risk we don't yet get. There absolutely could be. But the probability is much lower than basically any other complex asset class, precisely because this is the one that blew up last time. If you want to go hunting for latent risk, CDOs are literally the last place you should look. Our economy is chock full of astoundingly complex financial instruments. If you are worried about CDOs because they blew up last time, you are really really missing the point. If we used your system for banning assets, we'd have banned the stock market in 1929. We'd have banned tech stocks in 2001. Argentina would have basically banned all money by now. My point is: just pointing at the fact that something blew up once is an insufficient argument that it is not worth the risk. The pattern of "new thing blows up in our face" is quite common across things that turn out to be incredibly valuable and useful. The question at hand is whether we understand it sufficiently well now to use it safely. And the answer is pretty unequivocally yes. We know what we did wrong with CDOs and we know how to correct for it.
jfengel 7y ago
Blaming the problem on "people" is also missing a large part of the problem. The breadth of the crisis meant that it affected a lot of people who had never heard of CDOs, and never should have. People lost their jobs in totally unrelated fields. Companies couldn't grow because credit dried up while the mess was sorted out. People couldn't sell their houses because the entire market crashed. And so on. Of the people who did know about CDOs, many should have understood them, because they were playing around with sums large enough to affect the economy as a whole. They didn't through a combination of inertia and fraud. There were systemic effects, where a whole lot of people were making apparently sensible local decisions and nobody understood the entire interaction -- but that's not really a good justification for shrugging shoulders and say, "Well, I guess it's everybody's fault, then". People should be able to make the "assumption" that they'll be able to work in a functioning economy, without having to become experts in complex financial instruments. If the financial industry can't leave them to make that assumption, they'll vote for a government that will enforce it -- probably clumsily. If the system requires everybody to understand a financial network that most of them can't, they'll forbid it, which isn't good for the economy but is more acceptable to a lot of people than being told that the financial crash was their fault.
- darawk 7y ago
  > Blaming the problem on "people" is also missing a large part of the problem. The breadth of the crisis meant that it affected a lot of people who had never heard of CDOs, and never should have. People lost their jobs in totally unrelated fields. Companies couldn't grow because credit dried up while the mess was sorted out. People couldn't sell their houses because the entire market crashed. And so on. Sure, but i'm not sure what this has to do with my point. Should we ban internet stocks because the market was irrational in 2000? > There were systemic effects, where a whole lot of people were making apparently sensible local decisions and nobody understood the entire interaction -- but that's not really a good justification for shrugging shoulders and say, "Well, I guess it's everybody's fault, then". Ok, but how does that cash out in any kind of coherent policy recommendation?
pyrale 7y ago
In order for the instrument not to be toxic, it would have to live in an ecosystem where these flaws are not systemically induced. This industry has been failing systemically often enough to consider the product a liability.

by darawk 7y ago

wpietri 7y ago

In that assets are only created for people to purchase with informed understanding, I don't think "they were great but nobody understood them" is a possible thing. The clearest example here is shares in a Ponzi scheme. Those are definitely assets, and they are definitely not fine. They are made to not be understood. The same is more subtly true of the previous wave of essentially fraudulent mortgage-backed securities. But I think the same is also true of any hard-to-understand instrument engineered to look like a good deal at first glance. You also ignore systemic risk. For many years before the 2008 collapse, cognoscenti knew that a lot of risk had gone somewhere, we just didn't know where. But we sure found out! Saying that "all assets are fine" is sort of like saying "all chemicals are fine". It's technically true, in that dioxin and DDT don't intend to be harmful. But if the evidence shows that people can't use them responsibly, then a ban in a totally reasonable outcome.

darawk 7y ago
> In that assets are only created for people to purchase with informed understanding, I don't think "they were great but nobody understood them" is a possible thing. It isn't the case that nobody understands them. We understand them just fine now. This is how civilization learns. For a long time we didn't know how to price options - now we're quite good at it. > The clearest example here is shares in a Ponzi scheme. Those are definitely assets, and they are definitely not fine. They are made to not be understood. The same is more subtly true of the previous wave of essentially fraudulent mortgage-backed securities. But I think the same is also true of any hard-to-understand instrument engineered to look like a good deal at first glance. Ponzi schemes are designed to defraud unsophisticated investors. These assets serve a useful purpose and work just fine as long as their risks are properly understood, which they now are. > You also ignore systemic risk. For many years before the 2008 collapse, cognoscenti knew that a lot of risk had gone somewhere, we just didn't know where. But we sure found out! Saying that "all assets are fine" is sort of like saying "all chemicals are fine". It's technically true, in that dioxin and DDT don't intend to be harmful. But if the evidence shows that people can't use them responsibly, then a ban in a totally reasonable outcome. The evidence does not show that for these assets. You could make a similar case about basically any dangerous but useful technology. When dynamite was first invented i'm sure a lot of people died messing with it. That doesn't mean we should ban it, it means we need to figure out how to handle it and use it safely. We now understand these assets pretty well. I'll bet you basically whatever amount of money you want that the next crisis will not come from these assets.
- wpietri 7y ago
  I'm not persuaded. There's no such thing as "understand just fine now". Ponzi schemes have been understood since the 1920s, but people keep falling for them. More sophisticated investors can get taken by more sophisticated tricks. Having worked for financial traders, I know just how pleased people can be to have pulled one over on people they see as adversaries. I agree it's possible that these assets could be fine now, either because people have truly learned a lesson, or just because of the "once bitten, twice shy" reaction that takes a few decades to wear off. But the principle by which you declare them fine, namely that all assets are fine, is definitely wrong.
  - darawk 7y ago
    > I'm not persuaded. There's no such thing as "understand just fine now". Ponzi schemes have been understood since the 1920s, but people keep falling for them. More sophisticated investors can get taken by more sophisticated tricks. Having worked for financial traders, I know just how pleased people can be to have pulled one over on people they see as adversaries. You could make this argument about literally anything. You're not really saying anything specific to CDOs here, so I can't really give you a more specific response. > I agree it's possible that these assets could be fine now, either because people have truly learned a lesson, or just because of the "once bitten, twice shy" reaction that takes a few decades to wear off. But the principle by which you declare them fine, namely that all assets are fine, is definitely wrong. All assets are fine if you understand their risks. Sometimes we deem certain people or groups insufficiently responsible to handle the risks of certain assets. Non-accredited investors are not allowed to invest in private companies. The United States bans "contracts for difference", etc.. I think the problems with CDOs are extremely well understood at this point by everyone in that market. It has been one of the most studied issues of the last decade in quantitative economics. That isn't to say that it's impossible that there's some lurking risk we don't yet get. There absolutely could be. But the probability is much lower than basically any other complex asset class, precisely because this is the one that blew up last time. If you want to go hunting for latent risk, CDOs are literally the last place you should look. Our economy is chock full of astoundingly complex financial instruments. If you are worried about CDOs because they blew up last time, you are really really missing the point. If we used your system for banning assets, we'd have banned the stock market in 1929. We'd have banned tech stocks in 2001. Argentina would have basically banned all money by now. My point is: just pointing at the fact that something blew up once is an insufficient argument that it is not worth the risk. The pattern of "new thing blows up in our face" is quite common across things that turn out to be incredibly valuable and useful. The question at hand is whether we understand it sufficiently well now to use it safely. And the answer is pretty unequivocally yes. We know what we did wrong with CDOs and we know how to correct for it.

jfengel 7y ago

Blaming the problem on "people" is also missing a large part of the problem. The breadth of the crisis meant that it affected a lot of people who had never heard of CDOs, and never should have. People lost their jobs in totally unrelated fields. Companies couldn't grow because credit dried up while the mess was sorted out. People couldn't sell their houses because the entire market crashed. And so on. Of the people who did know about CDOs, many should have understood them, because they were playing around with sums large enough to affect the economy as a whole. They didn't through a combination of inertia and fraud. There were systemic effects, where a whole lot of people were making apparently sensible local decisions and nobody understood the entire interaction -- but that's not really a good justification for shrugging shoulders and say, "Well, I guess it's everybody's fault, then". People should be able to make the "assumption" that they'll be able to work in a functioning economy, without having to become experts in complex financial instruments. If the financial industry can't leave them to make that assumption, they'll vote for a government that will enforce it -- probably clumsily. If the system requires everybody to understand a financial network that most of them can't, they'll forbid it, which isn't good for the economy but is more acceptable to a lot of people than being told that the financial crash was their fault.

darawk 7y ago
> Blaming the problem on "people" is also missing a large part of the problem. The breadth of the crisis meant that it affected a lot of people who had never heard of CDOs, and never should have. People lost their jobs in totally unrelated fields. Companies couldn't grow because credit dried up while the mess was sorted out. People couldn't sell their houses because the entire market crashed. And so on. Sure, but i'm not sure what this has to do with my point. Should we ban internet stocks because the market was irrational in 2000? > There were systemic effects, where a whole lot of people were making apparently sensible local decisions and nobody understood the entire interaction -- but that's not really a good justification for shrugging shoulders and say, "Well, I guess it's everybody's fault, then". Ok, but how does that cash out in any kind of coherent policy recommendation?

pyrale 7y ago

In order for the instrument not to be toxic, it would have to live in an ecosystem where these flaws are not systemically induced. This industry has been failing systemically often enough to consider the product a liability.