Garbage In, Financial Crisis Out
from the so-much-for-the-quants dept
With everyone trying to figure out just what went wrong to cause the rather spectacular financial mess Wall Street finds itself in these days, Saul Hansell over at the NY Times wanted to find out why all the sophisticated risk management quant algorithms that Wall St. has been so big on lately failed to warn of impending doom. His answer, basically, is that people on Wall St. were lying to the algorithms, coming up with ways to purposely enter data such that the risk seemed much less than it actually was -- in order to let them keep pushing the boundary. Then, it became a situation where people start relying on the computers just because the computer says so -- even though the data is bad. This happens time and time again. Even when people know that computers make mistakes, it's just so convenient to have a computer "confirm" your thinking that you start ignoring other warning signs.Thank you for reading this Techdirt post. With so many things competing for everyone’s attention these days, we really appreciate you giving us your time. We work hard every day to put quality content out there for our community.
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Filed Under: algorithms, computers, quants, trust, wall street
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Saw it coming
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Re: Saw it coming
Didn't this happen in 2001 with Enron? Get rid of all the accountants and speculation marketplace. This is evil!!! No more creative ways to figure the balance sheets!
AIG said they will be able to pay back the $84B loan within two years! Who is going to pay for that? [Facepalm]
Consumers, of course, in the form of higher premiums!
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I KNEW IT
VOTE McCain 2008 - The economics of failure have failed, together we can make them work again.
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Re: I KNEW IT
I realize you're kidding, but some will not. Some will actually agree with you. So I'm responding.
The problem with this argument is as follows: The reason we have regulations over corporations is the same reason we have criminal laws over people. People are by their nature selfish and need some limits.
Am I saying that all criminal laws are good or that everything should be regulated? No. What I'm saying the issue is not whether we should regulate. The issue is only how much.
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Re: Re: I KNEW IT
Over time, it will balance out to a happy medium, just as it has done in other industries. In the mean time, we will see a lot of overcompensation and in-fighting. The economy can't be good all the time, but we can learn from our mistakes to minimize the peaks and valleys. If nothing else, the last several years have been an interesting experiment of "trust the market until it shows that it can't be trusted." Let's hope we learn the right lessons from that experiment.
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Re: Re: I KNEW IT
BEWARE the love of money!!
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Re: Re: I KNEW IT
"People are by their nature selfish and need some limits."
The free market deemed lending to "the poor" to be a bad risk. The government said this was selfish and greedy.
Yes, it was. And it worked. Government regulation changed that, and look where we are now.
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Re: I KNEW IT
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Re: Re: I KNEW IT
I think someones a grumpy hedge-fund manager whos had a few rough days . . . those credit default swaps would put anyone in a bad mood.
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Re: Re: I KNEW IT
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My generation (40 years old) grew up with a sense of mistrust of technology. I'm really worried about people growing up without that mistrust. I mean, who in their right mind would drive into a river because a computer told them to?!
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Re:
I've actually found the opposite to be true. The older you are, the more likely you are to have a blind faith in the accuracy of computers. To use your example, I wonder what the average age of the drivers they had to tow out of the Avon River? I'm guessing that it wasn't a bunch of teenagers.
My friends and family jokingly say "It must be true because I read it on the Internet", but the reason that it's funny is because people give more credence to information if it's in printed form, even if it's on a blog or a regular web site. And I think this phenomenon is more prevalent the older you are. If you grew up where anything printed was in books and newspapers, you probably had an inbuilt assumption about the accuracy of that information. But the younger you are, I think the more likely you are to view information, printed or otherwise, with a critical eye.
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Grabage is the foundation of our monetary system.
I am not saying I could come up with a system that works better, but at the very least shouldn't we be thinking of a new open monetary system so that the power to control the value of currency is a function of the people who use it?
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Re: Grabage is the foundation of our monetary system.
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Re: Re: Grabage is the foundation of our monetary system.
The current financial crisis has everything to do with market participants inability of coming together to determine a market interest rate. This interest rate is set by foreigners (and some domestic) running the Federal Reserve System.
The Fed's actions in setting the federal funds rate is central economic planing, because it reflects the price of money to a borrower and thus affects demand for money, affecting prices throughout the economy in a manner less pervasive but just as damaging as direct price controls.
If you look at low interest rates and think its a good time to buy a house, you are being mislead. These interest rates are not set by the market. It is being used to manipulate the markets so that knee-jerk reactions will be used to enhance power to the Fed.
You have been warned.
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Re: Re: Re: Grabage is the foundation of our monetary system.
And make the feds pay their debt.
At the very least, the damage is localized to investors of a country instead of the whole country(the taxpayers).
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Isn't it amazing how easy a focused goal of wiping out the middle class can be accomplished within 8 years?
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What a system
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Re: What a system
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Re: Re: What a system
Socialized profits for stuff like Medicaid, social housing to the poor, free high level education, and what not, versus private greedy individuals taking losses. Sounds like a Swedish system, or even Cuban system. There are a lot and growing number of US citizens that will be needing this. Where is the US moral and ethical responsibility for it's own people??? Gone with US corporate greed and to hell with the poor of the US.
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What do you think?
Does anyone know how hedge funds have faired? Were they hit more or less? Is this a concentrated problem or are all institutions exposed?
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Re: What do you think?
Acknowledgment of the power and imperfection of free markets is required, and some well designed friction is needed to prevent the system from spinning itself apart because it builds too much momentum. Most mechanisms have failure modes due to positive feedback leading to a runaway condition, and the solution is frictional - counter cyclic regulation in economic terms.
Do note, the risk of declining capital margins through wholesale deflation of collateral is a general problem and is capable of destroying the patterns of activity that have been built over the last 50 years. Since much of the value of firms and the prosperity we enjoy is the dividend from these processes, we should be very concerned about the broader impact.
Everybody will pay to some degree, whether through higher costs, reduced wealth or reduced labor income. The real questions is whether there is widespread job loss, as that will lead to a real loss in world economic welfare - as work is the source of prosperity - rather than a widespread but manageable redistribution of consumption away from luxuries to necessities. I suspect the US will pay more than most, since we bear the most of the burden of inflating away and/or paying down the debts that were incurred and replenishing the capital lost. That is on top of the war costs of the last 5 years. I suspect a connection, as something similar happened in the late 60 and early 70's, but the connection between war and runaway credit expansion in the 2000's will need to be explored by historians.
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Data
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I KNEW IT
VOTE Obama 2008 - The economics of failure have failed, together we can make them work again
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Re: I KNEW IT
The problem is that money doesn't grow on trees and when money comes from nothing it dilutes the value of everyone else's money. Once you realize this, things might make more sense...
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Re: Re: I KNEW IT
Oh, and wikipedia is full of lies.
http://en.wikipedia.org/wiki/Phil_Gramm
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Re: I KNEW IT
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how's that old quote go
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Insurance swaps
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I KNEW IT
So it had nothing to with McCains Financial advisor Phil Gram's & his "Commodity Futures Modernization Act" of 2000?
http://www.motherjones.com/news/feature/2008/07/foreclosure-phil.html
The same guy who said this is a "mental recession" & "the US is a nation of whinners"
Oh yea.... sign me up for that... now who's got the blinders on?
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Re: I KNEW IT
>>Phil Gram's & his "Commodity Futures Modernization Act"
>> of 2000?
>> http://www.motherjones.com/news/feature/2008/07/foreclosure-phil.html
>> The same guy who said this is a "mental recession" &
>>"the US is a nation of whinners"
HOLY CRAP!!! THAT SHOULD BE ON THE NEWS!!!
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Re: I KNEW IT
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Re: Re: I KNEW IT
(Dr. Evil Voice) We hold the world ransom for $1,000,000,000,000.00!! Muhahaha!
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Re: I KNEW IT
http://thomas.loc.gov/cgi-bin/bdquery/z?d110:H.R.6604:
How does a blowhard like Gram get into office?
http://www.salon.com/tech/htww/2008/05/29/treasury_secretary_gramm/
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Clancy Predicts....
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"I'm not saying one party is better than the other. I am saying they are both working against what is right. Freedom is what is right and both parties think you and me are too weak to make decisions for our selfs."
No... what you were trying to say is that somehow Clinton who was president nearly a decade ago was responsible for our current economic situation which if you read the Phil Gramm article is clearly false.
Not that I am all "Oh Clinton is the greatest!"... Let me give you a tip.... if I were going to attack Clinton.. I would bring up his "not so fair trade with China" agreements.
I do agree with you though... that neither party really represents the majority of Americans. Although I'm going to be voting for Obama, I can't stand his anti gun position.
The fact is though... I'm not going to let a wedge issue make me vote for the wrong candidate/McCain. Where's my third choice?
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Con game
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There are only 4 things certain in life
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no mistakes
Computers don't make mistakes.
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Follow the money
I've read that the investment bankers and those that rate the instuments have made millions ... why is no one being prosecuted ? Where is the inquiry ? There has been a rather large breach of the established law ........
Your congress critters (republicans) removed safe guards put in place after the great depression, look what happened as a result.
Oh crap, they will get away with it again. wtf
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