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A major purpose of writing these is to eventually convince folks who love cheap mortgages and well-funded pensions but hate CDOs that they have an incomplete mo

A major purpose of writing these is to eventually convince folks who love cheap mortgages and well-funded pensions but hate CDOs that they have an incomplete model of how the world works and an inconsistent preference set.

Ensorceled 5y ago
Do you have a better answer than "you just don't understand"? I am also under the impression that much of "high finance" is problematic, the industry seems to be often parasitical and rife with problems such as insider trading and market manipulation.
- patio11 5y ago
  Consider this a pre-commitment to write someday, at excruciating length, why many of the features that Americans take for granted about mortgages depend on a) mortgage securitization (CDOs) and b) the U.S.‘s quixotic policy to massively subsidize the supply chain for homeownership and, thereby, homeowners.
  - tablespoon 5y ago
    > mortgage securitization (CDOs) I don't think those things are synonymous. You can have mortgage securitization without CDOs. IIRC, the issue with CDOs was they were used to "innovatively manufacture" "low risk" investments out of high risk assets. They were so complicated that sophisticated professional investors lost track of the underlying situation, made decisions based on a flawed model of them, then got caught with their pants down when their model failed.
    - kasey_junk 5y ago
      Any argument against a CDO is implicitly an argument against a mortgage backed security. In fact, CDOs by their nature can be _more_ decoupled from systematic mortgage risk. So while you could theoretically have securitized mortgages without other kinds of CDOs its largely not something that makes mortgage securitization less risky.
      - tablespoon 5y ago
        > Any argument against a CDO is implicitly an argument against a mortgage backed security. In fact, CDOs by their nature can be _more_ decoupled from systematic mortgage risk. I'm skeptical because it was CDOs that blew up, not more typical mortgage backed securities. I think the key phrase there is "can be." Complex software can be reliable, but it also can be a buggy mess or reliable except for that one bug that literally kills you. The complexity creates a situation it too much trouble to really understand it, so people treat it as a black box and just hand-wave and believe whatever they want. It seems CDOs had a similar problem, while perhaps regular MBS are simple enough that they don't.
  - quacked 5y ago
    Ooh, can you tie in the final abandonment of the gold standard, the introduction of the IRA/401(k), and the relationship between insane over-leveraged derivatives markets and American consumer financial health? Afaik, the successful tying of the consumer investment (and especially retirement) account to the performance of the financial market (rather than to the parts of the market that manifest themselves in more physical ways) has created a situation where any large-scale decision that might improve the material lives of Americans but would harm the 'market' (via lowering the value of the USD or certain fund share prices) has become untenable. Millions of voters can be controlled by trotting out "never hurt the market because then what will happen to your investments?" whenever something interesting comes along. I'm certain that the enormous subsidization of the housing market and the associated treatment of housing as a primary investment vehicle for those same voters is related.
    - mountainofdeath 5y ago
      What you describe is mostly a political decision that effectively subsidizes the mutual fund, broker and financial planning markets and the broader equities (and to a lesser extent, fixed income market) to the benefit of...you guessed...people who already own it. Pension funds invest in many of the same things everyone else invests in, directly or indirectly. The difference is now you have millions of amateurs with small sums versus a few hundred professionally managed institutions. Either way, the little guy loses.
    - tablespoon 5y ago
      > Millions of voters can be controlled by trotting out "never hurt the market because then what will happen to your investments?" whenever something interesting comes along. The 401k has served as a clever trick to get large numbers of laborers to support policies that mainly benefit rich capitalists and to oppose many policies that would help themselves.
      - quacked 5y ago
        That is precisely my position. It is a scam; producing very little value that didn't already exist for Americans while enriching the owners of the 401(k) portfolios beyond nearly anyone in history.
  - pdonis 5y ago
    While the details of the connection would of course require a long article to discuss, I think the basic observation involved is simple. Just compare these two facts: (1) Americans expect to be able to get 30 year mortgages at rates around 3 percent; (2) Americans expect to be able to invest their retirement savings in stocks and bonds with a long term rate of return of 8 percent or more. These two facts make no sense when put together unless somebody is putting a massive thumb on the scales somewhere. In a free market such a situation would be impossible, because nobody would have any incentive to lend money for 30 years at 3 percent when they could just invest it in stocks and bonds over the same time horizon and get 8 percent.
- csomar 5y ago
  CDOs and insider trading are orthogonal. The issue with CDOs is not the concept or the engineering but the implementation thereof. The banks (or underwriter) took risky loans and labelled them as safe; and the whole idea of CDOs is about pricing risk for mortgages. So it blew off. > the industry seems to be often parasitical Most industries are. Oil, Pharmaceutical, Weapons, Government bureaucracy, etc... The list is really long. I'd say that Finance is one of the most regulated areas; but you are unlikely to notice other rip-offs (ie: oil leak that cost the tax payer and the citizen)
  - Ensorceled 5y ago
    >> the industry seems to be often parasitical > Most industries are. Yes. Are you defending the issues in finance because of this? That this means that corruption and insider trading are ok?
ClumsyPilot 5y ago
"incomplete model of how the world works and an inconsistent preference set" This is unfair, do you have complete model of how the world works while basic questions in economics remain unanswered, like how exchange rates work, how growth works of even on the nature of money? "There is little agreement on a definition of money or what assets serve as money, much less on the nature of the private and social costs and benefits of a money economy" https://en.wikipedia.org/wiki/List_of_unsolved_problems_in_economics https://en.wikipedia.org/wiki/List_of_unsolved_problems_in_e... Even if we fully understood impact of financial policy, this is a political topic and requires involvement. It's far to easy to deflect criticism by pretending that the finance system is like a well-oiled machine, carefully put together, all pieces humming in harmony, and the plebs shouldn't meddle with it.
Ozzie_osman 5y ago
I think there's a difference between CDOs and other instruments as a financial tool in general, and between turning them into speculative investments.

Ensorceled 5y ago

Do you have a better answer than "you just don't understand"? I am also under the impression that much of "high finance" is problematic, the industry seems to be often parasitical and rife with problems such as insider trading and market manipulation.

patio11 5y ago
Consider this a pre-commitment to write someday, at excruciating length, why many of the features that Americans take for granted about mortgages depend on a) mortgage securitization (CDOs) and b) the U.S.‘s quixotic policy to massively subsidize the supply chain for homeownership and, thereby, homeowners.
- tablespoon 5y ago
  > mortgage securitization (CDOs) I don't think those things are synonymous. You can have mortgage securitization without CDOs. IIRC, the issue with CDOs was they were used to "innovatively manufacture" "low risk" investments out of high risk assets. They were so complicated that sophisticated professional investors lost track of the underlying situation, made decisions based on a flawed model of them, then got caught with their pants down when their model failed.
  - kasey_junk 5y ago
    Any argument against a CDO is implicitly an argument against a mortgage backed security. In fact, CDOs by their nature can be _more_ decoupled from systematic mortgage risk. So while you could theoretically have securitized mortgages without other kinds of CDOs its largely not something that makes mortgage securitization less risky.
    - tablespoon 5y ago
      > Any argument against a CDO is implicitly an argument against a mortgage backed security. In fact, CDOs by their nature can be _more_ decoupled from systematic mortgage risk. I'm skeptical because it was CDOs that blew up, not more typical mortgage backed securities. I think the key phrase there is "can be." Complex software can be reliable, but it also can be a buggy mess or reliable except for that one bug that literally kills you. The complexity creates a situation it too much trouble to really understand it, so people treat it as a black box and just hand-wave and believe whatever they want. It seems CDOs had a similar problem, while perhaps regular MBS are simple enough that they don't.
- quacked 5y ago
  Ooh, can you tie in the final abandonment of the gold standard, the introduction of the IRA/401(k), and the relationship between insane over-leveraged derivatives markets and American consumer financial health? Afaik, the successful tying of the consumer investment (and especially retirement) account to the performance of the financial market (rather than to the parts of the market that manifest themselves in more physical ways) has created a situation where any large-scale decision that might improve the material lives of Americans but would harm the 'market' (via lowering the value of the USD or certain fund share prices) has become untenable. Millions of voters can be controlled by trotting out "never hurt the market because then what will happen to your investments?" whenever something interesting comes along. I'm certain that the enormous subsidization of the housing market and the associated treatment of housing as a primary investment vehicle for those same voters is related.
  - mountainofdeath 5y ago
    What you describe is mostly a political decision that effectively subsidizes the mutual fund, broker and financial planning markets and the broader equities (and to a lesser extent, fixed income market) to the benefit of...you guessed...people who already own it. Pension funds invest in many of the same things everyone else invests in, directly or indirectly. The difference is now you have millions of amateurs with small sums versus a few hundred professionally managed institutions. Either way, the little guy loses.
  - tablespoon 5y ago
    > Millions of voters can be controlled by trotting out "never hurt the market because then what will happen to your investments?" whenever something interesting comes along. The 401k has served as a clever trick to get large numbers of laborers to support policies that mainly benefit rich capitalists and to oppose many policies that would help themselves.
    - quacked 5y ago
      That is precisely my position. It is a scam; producing very little value that didn't already exist for Americans while enriching the owners of the 401(k) portfolios beyond nearly anyone in history.
- pdonis 5y ago
  While the details of the connection would of course require a long article to discuss, I think the basic observation involved is simple. Just compare these two facts: (1) Americans expect to be able to get 30 year mortgages at rates around 3 percent; (2) Americans expect to be able to invest their retirement savings in stocks and bonds with a long term rate of return of 8 percent or more. These two facts make no sense when put together unless somebody is putting a massive thumb on the scales somewhere. In a free market such a situation would be impossible, because nobody would have any incentive to lend money for 30 years at 3 percent when they could just invest it in stocks and bonds over the same time horizon and get 8 percent.
csomar 5y ago
CDOs and insider trading are orthogonal. The issue with CDOs is not the concept or the engineering but the implementation thereof. The banks (or underwriter) took risky loans and labelled them as safe; and the whole idea of CDOs is about pricing risk for mortgages. So it blew off. > the industry seems to be often parasitical Most industries are. Oil, Pharmaceutical, Weapons, Government bureaucracy, etc... The list is really long. I'd say that Finance is one of the most regulated areas; but you are unlikely to notice other rip-offs (ie: oil leak that cost the tax payer and the citizen)
- Ensorceled 5y ago
  >> the industry seems to be often parasitical > Most industries are. Yes. Are you defending the issues in finance because of this? That this means that corruption and insider trading are ok?

ClumsyPilot 5y ago

"incomplete model of how the world works and an inconsistent preference set" This is unfair, do you have complete model of how the world works while basic questions in economics remain unanswered, like how exchange rates work, how growth works of even on the nature of money? "There is little agreement on a definition of money or what assets serve as money, much less on the nature of the private and social costs and benefits of a money economy" https://en.wikipedia.org/wiki/List_of_unsolved_problems_in_economics https://en.wikipedia.org/wiki/List_of_unsolved_problems_in_e... Even if we fully understood impact of financial policy, this is a political topic and requires involvement. It's far to easy to deflect criticism by pretending that the finance system is like a well-oiled machine, carefully put together, all pieces humming in harmony, and the plebs shouldn't meddle with it.

Ozzie_osman 5y ago

I think there's a difference between CDOs and other instruments as a financial tool in general, and between turning them into speculative investments.