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I think his point is that, traditionally lending was a very local matter with local banks and local capital issues. If Norwegian pension funds want to fund a mo

I think his point is that, traditionally lending was a very local matter with local banks and local capital issues. If Norwegian pension funds want to fund a mortgage for a home in Paducah, KY, without some kind of securitization they're stuck earnings treasury rates and the home loan is charging the interest rate demanded by Paducah capitalists whether its higher than the Norwegian's rate are not. The point is, there are gains from trade to be had from securitizing mortgages, the trick is to design them so that the information asymmetry costs don't outweigh the benefits. Maybe that's impossible and mortgage derivatives will always be value destroying but I doubt it.

KirinDave 17y ago
Sure, but that doesn't change the fact that he's implicitly equating an accounting technique with the Theory of Relativity, the invention of the Internet, etc. This worldview seems shocking to me. It's hard to imagine that someone can equate a vaccine for polio and a statistical method as equally beneficial to society, especially when one caused such woe and the other eradicated a crippling disease.
- moron4hire 17y ago
  I never made that valuation, you made it for me. I said that the author implied finance was a lesser career choice than nuclear physics, then provided an example where statistical analysis can be used in finance to provide a social good. Not all bad-credit people are bums looking to default on their loans, skirting the credit collectors as long as they can, living on the underbelly of society. But people who were hit hard by a disaster, made a few mistakes in the past, or are just getting started out are lumped in with the deadbeats. Unfortunately, there is no way to tell them apart, based on financial numbers. By minimizing risk in dealing with these types of loans, the people who are legitimately trying to improve their lives are given an avenue to show they are responsible enough to own a home. There is still risk involved, but the construct is not inherently deceiving about its risk level. The problem was over-leveraging on this type of activity. Even over-leveraging on mutual funds and money market funds can make you lose your shirt. "an accounting trick to statistically suppress risk" Mortgage-backed securities as a construct unto themselves are no more an "accounting trick" anymore than accident, life, or health insurance policies are "account tricks". Regardless, "risk" is nothing but a probability factor anyway. Risk is the probability of losing money on an investment, not the certainty of it. To organize assets together in vehicles that allow the earnings of the winners offset the losses of the losers, you're not performing accounting legerdemain, you are reducing actual risk.

KirinDave 17y ago

Sure, but that doesn't change the fact that he's implicitly equating an accounting technique with the Theory of Relativity, the invention of the Internet, etc. This worldview seems shocking to me. It's hard to imagine that someone can equate a vaccine for polio and a statistical method as equally beneficial to society, especially when one caused such woe and the other eradicated a crippling disease.

moron4hire 17y ago
I never made that valuation, you made it for me. I said that the author implied finance was a lesser career choice than nuclear physics, then provided an example where statistical analysis can be used in finance to provide a social good. Not all bad-credit people are bums looking to default on their loans, skirting the credit collectors as long as they can, living on the underbelly of society. But people who were hit hard by a disaster, made a few mistakes in the past, or are just getting started out are lumped in with the deadbeats. Unfortunately, there is no way to tell them apart, based on financial numbers. By minimizing risk in dealing with these types of loans, the people who are legitimately trying to improve their lives are given an avenue to show they are responsible enough to own a home. There is still risk involved, but the construct is not inherently deceiving about its risk level. The problem was over-leveraging on this type of activity. Even over-leveraging on mutual funds and money market funds can make you lose your shirt. "an accounting trick to statistically suppress risk" Mortgage-backed securities as a construct unto themselves are no more an "accounting trick" anymore than accident, life, or health insurance policies are "account tricks". Regardless, "risk" is nothing but a probability factor anyway. Risk is the probability of losing money on an investment, not the certainty of it. To organize assets together in vehicles that allow the earnings of the winners offset the losses of the losers, you're not performing accounting legerdemain, you are reducing actual risk.