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2007 called, they want their "mortgaged backed[1] security-derivatives[2]" back. [1] (mortgaged backed) = lenders were rubber stamping home loans to people who
by nosuchthing 11y ago
2007 called, they want their "mortgaged backed[1] security-derivatives[2]" back.
[1] (mortgaged backed) = lenders were rubber stamping home loans to people who given their current income would not be able to pay back the loan.
[2] "security derivatives" were created on those mortgages as financial instruments that could be traded like stocks, effectively like allowing a 3rd party to take out insurance on your car and get paid when you get in a crash... a full on BET against the bad mortgages - paying out if the mortgages went into default
[3] https://en.wikipedia.org/wiki/Credit_rating_agencies_and_the_subprime_crisis https://en.wikipedia.org/wiki/Credit_rating_agencies_and_the... — credit rating agencies, trusted to research, validate and rate the mortgages were for some reason giving the obviously bad and likely to default mortgages ratings on AAA, thus allowing for a greater insurance pay out on the security-derivative bets, creating an incentive for investors to make shit tons of money from defaults on these loans not to mention the repossession of the properties by banks.
TLDR; Unregulated 'prediction markets' seemingly colluded to create loans that could not be payed back, than created insurance on those bad loans - falsely evaluated as safe, inflating the pay out, and effectively fabricated a profitable bet against the entire global economy.
- maxerickson 11y agoThe credit ratings agencies exist because of highly regulated markets. They are most relevant for things like pension funds that are legally required to buy investments above given ratings. It's quite likely that a completely unregulated market would not have that particular set of incentives.
- s73v3r 11y agoI don't see how you can say that at all. One of the goals of making complex shit is to make it harder for people to tell what's going on. While there wouldn't be the incentive to hide from regulators, there absolutely still would be the incentive to hide from customers.
- maxerickson 11y agoThe basic thesis is that without regulators customers will be more careful. Another way to put it is that I sort bad regulation below no regulation: good regulation, no regulation, bad regulation. Just because the impression that someone out there is protecting people will cause them to be less wary. Some people will still buy snake oil, but a whole nother group of people will come to use the term as a pejorative.
- davidgerard 11y ago> It's quite likely that a completely unregulated market would not have that particular set of incentives. Given the actual history of how these regulations came about, and what things were like before and after, this statement is inane.
- maxerickson 11y agoThanks. I take it you don't think it is possible for bad regulation to mislead people? Because that's a piece of what happened in the mortgage crisis, the ratings agencies were given a license to charge fees for putting stamps on bonds, and those bonds were sold into regulated investments like insurance and pensions, investments that people trusted to be in secure assets, in large part because they were regulated. Take away the regulation and a bunch of that money is stuffed in mattresses, which while perhaps unfortunate, is obviously a better outcome than disappearing into a financial black hole.
- nosuchthing 11y agoWidespread trust seems better than widespread mistrust. Trust needs to be restored in regulators, rather than abolishing them and being left with so much uncertainty and a playing field ripe for malice.
- maxerickson 11y agoI don't think it is particularly important to restore trust to regulators, at least not compared to figuring out how to better measure the impact of regulation and make sure that it is still accomplishing whatever goal it was drafted to accomplish.