BEWARE THE GEEKS--FORMULAS THAT FAILED WALL ST. ARE HEADED TO DC

NY Post ^ | April 18, 2009 | Michael Barone

[Scanian]

BEWARE of geeks bearing formulas.

That's the lesson most of us have learned from the financial crisis. The "quants" who devised the risk models that induced so many financial institutions to buy mortgage-backed securities thought they had reduced risk down to zero.

Turns out they got a few things wrong. Their formulas were based on only a few years of actual data. Or they failed to take into account the possibility that housing prices would fall. Or that the market for mortgage-backed securities might suddenly stop functioning.

The lesson seems clear. Don't allow a whole system to become hostage to the workings of some geek's formula. Keep in mind the possibility that the real world might not behave as the formula indicates.

But, astonishingly, our society seems about to forget that lesson, just as it should have been learned. Congress is poised, at least if the Obama administration gets its way, to pass major new laws on carbon emissions and on health care whose success depends on geeks bearing formulas.

Consider carbon emissions. Carbon dioxide is a harmless gas, not a pollutant. But geeks bearing formulas tell us that increasing amounts of it will heat up the world's climate and cause catastrophic damage some decades hence.

Al Gore is so certain of this that he tells us all debate must end -- disagreeing is like denying the Holocaust. But the Holocaust happened, while the disasters that Gore predicts have not.

[machman]

Greeks never seem to accommodate these....

[Vaduz]

The more stupid the idea the more obama will love it he’s proved that more than once.

[freekitty]

That’s for sure.

[Caipirabob]

Turns out they got a few things wrong. Their formulas were based on only a few years of actual data. Or they failed to take into account the possibility that housing prices would fall. Or that the market for mortgage-backed securities might suddenly stop functioning.

Forgot to carry the 2 BUMP!

[conservatism_IS_compassion]

The Black Swan: The Impact of the Highly Improbable  by Nassim Nicholas Taleb

Great book.

[edpc]

The "quants" who devised the risk models that induced so many financial institutions to buy mortgage-backed securities thought they had reduced risk down to zero. Turns out they got a few things wrong.

The biggest problem with the trading of these securities was the belief they were solid because they were backed with a government guarantee. The true fault lies with legislators who pushed this Ponzi scheme; not with bankers forced to make them.

[metesky]

"What conclusions should be drawn? Readers will judge for themselves. But I think I detect today a certain public scepticism when intellectuals stand up to preach to us, a growing tendency among ordinary people to dispute the right of academics, writers and philosophers, eminent though they may be, to tell us how to behave and conduct our affairs. The belief seems to be spreading that intellectuals are no wiser as mentors, or worthier as exemplars, than the witch doctors or priests of old. I share that scepticism. A dozen people picked at random on the street are at least as likely to offer sensible views on moral and political matters as a cross-section of the intelligentsia. But I would go further. One of the principal lessons of our tragic century, which has seen so many millions of innocent lives sacrificed in schemes to improve the lot of humanity, is - beware intellectuals. Not merely should they be kept well away from the levers of power, they should also be objects of particular suspicion when they seek to offer collective advice. Beware committees, conferences and leagues of intellectuals. Distrust public statements issued from their serried ranks. Discount their verdicts on political leaders and important events. For intellectuals, far from being highly individualistic and non-conformist people, follow certain regular patterns of behaviour. Taken as a group, they are often ultra-conformist within the circles formed by those whose approval they seek and value. That is what makes them, en masse, so dangerous, for it enables them to create climates of opinion and prevailing orthodoxies, which themselves often generate irrational and destructive courses of action. Above all, we must at all times remember what intellectuals habitually forget: that people matter more than concepts and must come first. The worst of all despotisms is the heartless tyranny of ideas."

- The last paragraph of British historian Paul Johnson's 1988 book Intellectuals

[Lonesome in Massachussets]

“An idea so stupid only an intellectual could believe it.”

“[A]n effete corps of impudent snobs who characterize themselves as intellectuals.”

Einstein was a recently promoted patent clerk second class when he revolutionized physics. Ward Churchill was a tenured professor. Draw your own conclusions.

[Mouton]

The repackaging of mortgage backed securities by risk was prima facia evidence the banks knew many of the mortgages in these packages were probably going to into default. Of course Fannie and Freddie were pumping these things out as if they were all equally valuable. The I am here to help you government gave its unwritten guarantee and the rest is history. I loved it this week when Dimon at JPM said they were NOT going to take part in the latest scheme to sell off the bad paper. Seems Dimon said he was aware of and prepared to take whatever risks they had with the paper they held BECAUSE THEY KNEW THEIR DOWNSIDE. To paraphrase that: we kept the good stuff and repackaged the junk into the bottom tranches. Now that the music has stopped, we have a chair and are not going to give it up to someone who has no chair at the behest of the Zero.

Many including Greenspan were concerned about the implied government guarantees of these securities but no one cared to listen or if they did they were quickly dismissed as being biased against poor people (albeit some of this worthless paper was floated on million dollar properties). The Congress is unwilling to cast light on the members who were up to their eyeballs in this racket. The whole thing boils down to everyone just kicking the can down the road hoping nothing would happen on their watch because the government and ultimately the people would bail out the loans.

That is why I was so against the bailouts and still am. It is also why I would love to see the ultimate culprits here put up against the wall and shot. Maybe we should tell the Chinese we are not going to make good on bonds they hold because they were issued to fund this fiasco. Perhaps they can handle the situation for us as they would at home: shoot the guilty and bill the family for the bullet.

Vince

[conservatism_IS_compassion]

The Black Swan:
The Impact of the Highly Improbable

 by Nassim Nicholas Taleb

[Corey Ohlis]

Beware of grift-bearing Geeks.

[Mad Dawg]

Well done!

[Lonesome in Massachussets]

Not that you’re bitter or anything ;)

I share you sentiments. All physical or social scientists worth their salt know the limitations and assumptions underlying their models. I’m not sure this means that these guys were not worth their salt. They could have understood the risks, but the “user community” was too busy cashing seven figure bonus checks to pay any attention. It’s like selling a teenager a fast car.

I think the real danger is the decoupling of decision makers from long term consequences. That’s why closely held banks didn’t get into trouble. Share companies and GSE did. If you paid CEO bonuses with non transferrable five options, you might see entirely different behavour.

[ding_dong_daddy_from_dumas]

Seems Dimon said he was aware of and prepared to take whatever risks they had with the paper they held BECAUSE THEY KNEW THEIR DOWNSIDE. To paraphrase that: we kept the good stuff and repackaged the junk into the bottom tranches. Now that the music has stopped, we have a chair and are not going to give it up to someone who has no chair at the behest of the Zero.

I agree. There is increasing vandalism to foreclosed properties, which in many cases makes them virtually worthless. I wish I could simply say "The other shoe has not dropped," but I believe it's not just one more shoe (e. g. toxic commercial properties), and Geithner and company don't want us to know.

[steelyourfaith]

 

Beam me to Planet Gore !