6 ms·

I've watched the economy for 30 years. Now I'm truly scared

51 points by nreece 18y ago

rgrieselhuber 18y ago
In order to make this post a hacker-relevant discussion (I enjoyed the article, by the way) how about this quote: "Everybody tries to 'game' the system on their route to vast personal fortunes - whether short-selling, packaging up dud mortgages as prime mortgages or telling lies about their financial viability - and the result is that the system is getting wise. The best course today in any financial transaction is to presume zero integrity. Credit is drying up and with it the very lifeblood of the economy." When I read this, the first thing I thought of were the inevitable enhancements to the credit rating systems at personal and corporate levels which will arise in the next few years as a result of all of this. If we're going to continue to abandon trust and integrity for their own sake and only include them as features of self-serving transactions, then it seems natural that we will have to push our current credit-rating systems much further to the (temporal and relational) edges than where they currently are.
- DaniFong 18y ago
  I've been doing some thinking along the lines of using statistical mechanics and information theory to produce a self-consistent measure of risk (unlike the current rating systems). Does anyone know if there's been any work in the area?
  - hugh 18y ago
    What would it mean, in this context, for a measure of risk to be "self-consistent"?
    - DaniFong 18y ago
      At the first pass, it would mean that possibilities would add up correctly. Here's one example: give every investment, stocks, bonds, cash, commodities, etc. a distribution of possible returns. Then, every holding company also has a distribution of possible returns, obtained by adding up and scaling the distributions of the stock respectively held. So long as the market changes at a rate substantially faster than the holdings change, this is a self-consistent model of stocks in that the total amount of expected stock value remains the same. One can then examine the distribution of possible returns of a given investment and assess one's own position of risk. The problem with this is how limited it is. It does not, for example, account for hedge fund pricing well at all, since in hedge funds the holdings change nearly as fast as the market does. It doesn't account well for the wiles of any particular, fast trading investor. It does, however, lend itself to a fairly simple model for static futures, forwards, options, and swaps. Why is this line of reasoning interesting? The credit systems we used to have couldn't handle the complexity of the derivatives that were being created. By one method or another, bad investments, especially mortgages, were being added up, and in the process the market found it difficult to track how risky the summed investments were. Credit rating agencies don't even make publicly known what their credit ratings represent! An investor is compelled to then blindly believe them, which, in this case, spectacularly failed.
      - menloparkbum 18y ago
        How does this concept differ from the stochastic calculus based implementations of VaR?
        DaniFong 18y ago
        I don't know. Maybe it doesn't differ from it at all. I'm not a domain expert by any means... Thanks for the tip.
  - dangoldin 18y ago
    I've been thinking of applying agent based simulations as a new way to measure risk. That's a bit different than what you're thinking of but I think it would be self-consistent, or at least the way I understood it.
    - DaniFong 18y ago
      Agent based simulations would probably be a very excellent approach. Unfortunately, the system is highly nonlinear and quite chaotic, so you'd have to do some work into engineering dissipation into the system to keep it from fluctuating wildly.
- MaysonL 18y ago
  Charles Stross's vision of a post-Singularity Net dominated by spam-bots, con-bots, and very convincing AI's with bridges in Alaska for sale seems more and more plausible.
davidw 18y ago
One of the things that crept up in reddit as it went downhill was a propensity for "doom! gloom!" headlines. There's certainly a lot to worry about with the current crisis, but let's be careful.
- Retric 18y ago
  Bankers don't create wealth they gather it from other people. There are a lot of people going nuts because their ability to do this is breaking down. So, investment banks might fail, but as long as people don't pull money out of their checking or savings account I don't think the system is losing money. What I expect is happening is a lot of "fake" wealth is being destroyed but I don't think it's a good idea to buy up fake wealth with cash the government is borrowing. Because, as soon as we borrow money people will take money out of the system to buy our bonds which necessitates our buying assets to compensate.
  - DabAsteroid 18y ago
    Bankers don't create wealth This is a common fallacy. Bankers manage risk in lending, reducing overall risk. This is valuable, i.e. it creates wealth. If any given Bankers were not performing risk-reduction service for society, they would be outcompeted in the market by their competitors. Therefore, to say that bankers do not create wealth, would be to imply that bankers are in conspiracy to distort the lending market.
    - preview 18y ago
      But is that what happened here? Financial institutions lent money to borrowers who could not afford the loan they were given. The financial institutions packaged up those extremely risky loans to pass the buck on to another institution. It seems that the institutions did not manage risk. In a very generic view, bankers may have value. But as far as this financial crisis goes, they failed miserably.
      - DabAsteroid 18y ago
peakok 18y ago
[Hank Paulson's plan] made no demands that any financial executives sacrifice pay or bonuses despite having driven their firms and wider economy to the point of bankruptcy. He does not want the government to provide new bank capital to help recapitalise a bust banking system. Instead, he wants the government to buy their toxic debt and so leave the banks unreformed. On top he wanted complete discretion to act as he chose without any oversight. And this is the man who originaly designed the bailout plan ? This guy obviously doesn't want to save the US & world economy, he wants to save Wall Street first and go on like nothing happened. Why him ?!
- anamax 18y ago
  Since we're not going after the politicans who "encouraged" the no-money-down loans and took campaign contributions from Fannie and Freddie, it's unclear why you're upset that the financial execs aren't taking a hit. If you're renting because you couldn't afford to buy or you bought what you could afford, should you pay to keep people in houses that they can't afford?
  - adrianwaj 18y ago
    They should be out of their houses. They are lucky to have lived in such houses in the first place. Also, those that acted improperly should be brought to justice. New rules should be in place to stop this from happening again. The greed and vice that led to this won't go away with the bail out. Power is all too abused.
  - trevelyan 18y ago
    The housing market is a distraction guys. The problems are with derivatives.
quasimojo 18y ago
good! good! everyone under forty should be cheering this on. if you finally want to be able to afford a house, you need people who currently own houses to go through some degree of hell. the "bailout" is about making sure those who had money yesterday have it tomorrow. i say let the power change hands. LET IT SHATTER. i will buy the pieces on sale.
- ConradHex 18y ago
  I take it you aren't a homeowner, then?
  - quasimojo 18y ago
    yes, a home OWNER, as in i hold no mortgage. i have zero debt. i have cash to buy distressed assets. i just wish people would stop trying to "save" things.
    - michaelneale 18y ago
      I am in similar boat. But what worries me is if this means much more then that... what if you suddenly don't have cash, or its worth nothing. What does it matter if you own lots of houses and no one can rent them. Well, its unlikely it would ever be as bad as that ;) but heck, hard not to worry about unlikely events.
robak 18y ago
I'm so bored of listening to this! just let them go bankrupt! Is this capitalism or what???? Nationalize insurance industry, finance industry, automotive industry. Let the Market clean up the excesses as it has been doing for hundreds of years! This time is NO DIFFERENT.
Tichy 18y ago
I am tired of hearing "we need more decency and trust, it was just the greed of a few people that got us into this mess". I'd prefer transparency to trust, because then we could actually see if somebody is behaving badly, and decide to distrust that somebody. Apart from that, it was everybody's greed that is to blame, not just a few bad bosses. If you put your savings into an investment you don't understand, because you have been promised high interests, you and your greed are to blame. Also, there is the possibility that things simply went wrong. Shit happens. Why does there always have to be a scapegoat? What the state should do is prevent fraud, that would probably be sufficient.
- DougBTX 18y ago
  Unfortunately, it isn't clear that even the people selling these mortgage-backed securities knew how risky they were.
  - Tichy 18y ago
    One more reason not to blame "bad morals" for the crisis. I guess most "securities" had a long chain of other investments behind them, and one or more chain elements where risky. Of course the guy selling the thing ten steps down has no idea anymore how risky it is. But that is where transparency could help a bit, maybe?
esja 18y ago
While I agree with much of what he says (despite working in derivatives), and while I realise the message is what should be addressed, and not the messenger, I think it's worth noting that Will Hutton's wife profited very nicely from the debt explosion here in the UK, as part owner of a company called First Premise, a buy-to-let landlord, and that this may be why his increasingly shrill rants never place any blame on the greedy "man on the street" who was only too happy to sign up for a fraudulent loan and thereby contribute to this mess. For the last ten or more years of my life (in Australia and the UK), I've been living in a strange world where every single social conversation eventually converges on property prices, property investment, buy to let, negative gearing, renovations, decking, auctions... I'm willing to suffer some hard times if it means all of that will disappear and we can go back to being normal humans again. At least until the next bubble. :-(
- michaelneale 18y ago
  >I've been living in a strange world where every single social conversation eventually converges on property prices Its really tiring isn't it. well it is good that is over, its just the other crap I don't want. But if we can get back to doing stuff rather then speculating, then great.

51 points by nreece 18y ago

In order to make this post a hacker-relevant discussion (I enjoyed the article, by the way) how about this quote: "Everybody tries to 'game' the system on their route to vast personal fortunes - whether short-selling, packaging up dud mortgages as prime mortgages or telling lies about their financial viability - and the result is that the system is getting wise. The best course today in any financial transaction is to presume zero integrity. Credit is drying up and with it the very lifeblood of the economy." When I read this, the first thing I thought of were the inevitable enhancements to the credit rating systems at personal and corporate levels which will arise in the next few years as a result of all of this. If we're going to continue to abandon trust and integrity for their own sake and only include them as features of self-serving transactions, then it seems natural that we will have to push our current credit-rating systems much further to the (temporal and relational) edges than where they currently are.

DaniFong 18y ago
I've been doing some thinking along the lines of using statistical mechanics and information theory to produce a self-consistent measure of risk (unlike the current rating systems). Does anyone know if there's been any work in the area?
- hugh 18y ago
  What would it mean, in this context, for a measure of risk to be "self-consistent"?
  - DaniFong 18y ago
    At the first pass, it would mean that possibilities would add up correctly. Here's one example: give every investment, stocks, bonds, cash, commodities, etc. a distribution of possible returns. Then, every holding company also has a distribution of possible returns, obtained by adding up and scaling the distributions of the stock respectively held. So long as the market changes at a rate substantially faster than the holdings change, this is a self-consistent model of stocks in that the total amount of expected stock value remains the same. One can then examine the distribution of possible returns of a given investment and assess one's own position of risk. The problem with this is how limited it is. It does not, for example, account for hedge fund pricing well at all, since in hedge funds the holdings change nearly as fast as the market does. It doesn't account well for the wiles of any particular, fast trading investor. It does, however, lend itself to a fairly simple model for static futures, forwards, options, and swaps. Why is this line of reasoning interesting? The credit systems we used to have couldn't handle the complexity of the derivatives that were being created. By one method or another, bad investments, especially mortgages, were being added up, and in the process the market found it difficult to track how risky the summed investments were. Credit rating agencies don't even make publicly known what their credit ratings represent! An investor is compelled to then blindly believe them, which, in this case, spectacularly failed.
    - menloparkbum 18y ago
      How does this concept differ from the stochastic calculus based implementations of VaR?
      - DaniFong 18y ago
        I don't know. Maybe it doesn't differ from it at all. I'm not a domain expert by any means... Thanks for the tip.
- dangoldin 18y ago
  I've been thinking of applying agent based simulations as a new way to measure risk. That's a bit different than what you're thinking of but I think it would be self-consistent, or at least the way I understood it.
  - DaniFong 18y ago
    Agent based simulations would probably be a very excellent approach. Unfortunately, the system is highly nonlinear and quite chaotic, so you'd have to do some work into engineering dissipation into the system to keep it from fluctuating wildly.
MaysonL 18y ago
Charles Stross's vision of a post-Singularity Net dominated by spam-bots, con-bots, and very convincing AI's with bridges in Alaska for sale seems more and more plausible.

davidw 18y ago

One of the things that crept up in reddit as it went downhill was a propensity for "doom! gloom!" headlines. There's certainly a lot to worry about with the current crisis, but let's be careful.

Retric 18y ago
Bankers don't create wealth they gather it from other people. There are a lot of people going nuts because their ability to do this is breaking down. So, investment banks might fail, but as long as people don't pull money out of their checking or savings account I don't think the system is losing money. What I expect is happening is a lot of "fake" wealth is being destroyed but I don't think it's a good idea to buy up fake wealth with cash the government is borrowing. Because, as soon as we borrow money people will take money out of the system to buy our bonds which necessitates our buying assets to compensate.
- DabAsteroid 18y ago
  Bankers don't create wealth This is a common fallacy. Bankers manage risk in lending, reducing overall risk. This is valuable, i.e. it creates wealth. If any given Bankers were not performing risk-reduction service for society, they would be outcompeted in the market by their competitors. Therefore, to say that bankers do not create wealth, would be to imply that bankers are in conspiracy to distort the lending market.
  - preview 18y ago
    But is that what happened here? Financial institutions lent money to borrowers who could not afford the loan they were given. The financial institutions packaged up those extremely risky loans to pass the buck on to another institution. It seems that the institutions did not manage risk. In a very generic view, bankers may have value. But as far as this financial crisis goes, they failed miserably.
    - DabAsteroid 18y ago

peakok 18y ago

[Hank Paulson's plan] made no demands that any financial executives sacrifice pay or bonuses despite having driven their firms and wider economy to the point of bankruptcy. He does not want the government to provide new bank capital to help recapitalise a bust banking system. Instead, he wants the government to buy their toxic debt and so leave the banks unreformed. On top he wanted complete discretion to act as he chose without any oversight. And this is the man who originaly designed the bailout plan ? This guy obviously doesn't want to save the US & world economy, he wants to save Wall Street first and go on like nothing happened. Why him ?!

anamax 18y ago
Since we're not going after the politicans who "encouraged" the no-money-down loans and took campaign contributions from Fannie and Freddie, it's unclear why you're upset that the financial execs aren't taking a hit. If you're renting because you couldn't afford to buy or you bought what you could afford, should you pay to keep people in houses that they can't afford?
- adrianwaj 18y ago
  They should be out of their houses. They are lucky to have lived in such houses in the first place. Also, those that acted improperly should be brought to justice. New rules should be in place to stop this from happening again. The greed and vice that led to this won't go away with the bail out. Power is all too abused.
- trevelyan 18y ago
  The housing market is a distraction guys. The problems are with derivatives.

quasimojo 18y ago

good! good! everyone under forty should be cheering this on. if you finally want to be able to afford a house, you need people who currently own houses to go through some degree of hell. the "bailout" is about making sure those who had money yesterday have it tomorrow. i say let the power change hands. LET IT SHATTER. i will buy the pieces on sale.

ConradHex 18y ago
I take it you aren't a homeowner, then?
- quasimojo 18y ago
  yes, a home OWNER, as in i hold no mortgage. i have zero debt. i have cash to buy distressed assets. i just wish people would stop trying to "save" things.
  - michaelneale 18y ago
    I am in similar boat. But what worries me is if this means much more then that... what if you suddenly don't have cash, or its worth nothing. What does it matter if you own lots of houses and no one can rent them. Well, its unlikely it would ever be as bad as that ;) but heck, hard not to worry about unlikely events.

robak 18y ago

I'm so bored of listening to this! just let them go bankrupt! Is this capitalism or what???? Nationalize insurance industry, finance industry, automotive industry. Let the Market clean up the excesses as it has been doing for hundreds of years! This time is NO DIFFERENT.

Tichy 18y ago

I am tired of hearing "we need more decency and trust, it was just the greed of a few people that got us into this mess". I'd prefer transparency to trust, because then we could actually see if somebody is behaving badly, and decide to distrust that somebody. Apart from that, it was everybody's greed that is to blame, not just a few bad bosses. If you put your savings into an investment you don't understand, because you have been promised high interests, you and your greed are to blame. Also, there is the possibility that things simply went wrong. Shit happens. Why does there always have to be a scapegoat? What the state should do is prevent fraud, that would probably be sufficient.

DougBTX 18y ago
Unfortunately, it isn't clear that even the people selling these mortgage-backed securities knew how risky they were.
- Tichy 18y ago
  One more reason not to blame "bad morals" for the crisis. I guess most "securities" had a long chain of other investments behind them, and one or more chain elements where risky. Of course the guy selling the thing ten steps down has no idea anymore how risky it is. But that is where transparency could help a bit, maybe?

esja 18y ago

While I agree with much of what he says (despite working in derivatives), and while I realise the message is what should be addressed, and not the messenger, I think it's worth noting that Will Hutton's wife profited very nicely from the debt explosion here in the UK, as part owner of a company called First Premise, a buy-to-let landlord, and that this may be why his increasingly shrill rants never place any blame on the greedy "man on the street" who was only too happy to sign up for a fraudulent loan and thereby contribute to this mess. For the last ten or more years of my life (in Australia and the UK), I've been living in a strange world where every single social conversation eventually converges on property prices, property investment, buy to let, negative gearing, renovations, decking, auctions... I'm willing to suffer some hard times if it means all of that will disappear and we can go back to being normal humans again. At least until the next bubble. :-(

michaelneale 18y ago
>I've been living in a strange world where every single social conversation eventually converges on property prices Its really tiring isn't it. well it is good that is over, its just the other crap I don't want. But if we can get back to doing stuff rather then speculating, then great.