Help! Still trying to get my head around it

wylo

Hi,
Im just looking for help, if someone could explain to me in the most basic basic terms what has happened in the past year or so to the worlds economy and our economy.
Dont get me wrong I understand technically what a recession and depression is, I have even read up the past few Irish budgets, receipts , expenditures, deficits, surpluses,etc.
But where has all the money actually gone in the World. It cant just vanish, how can every country be losing if you get me?
If there was a way of explaining it as if our country had just a few people in it with no money, just one person the government who organises the rest, someone else a farmer, someone a house builder.

I do kind of understand why were 16 billion down for this year and I understand our current problems, but I just cant get my head around how money can vanish especially if no country is benefiting, all across the world its happening, asia, middle east, Europe, America, Australia, Africa, etc
Its a bit of a messy post but any help would be great.
edit: maybe this belongs in Economics

cat&mouse

Your not alone on that one.!!! I wondered the same thing too. Like the saying in Ennergy Eficiency business, heat is transferred either to another person or another thing. If we open the door on a cold day, we say the heat is lost, but it is actually Transferred to somewhere out there, not lost.

nesf

It does belong in Economics. I'll move it there for you.

nesf

Essentially, money is just a medium of exchange it doesn't have any actual value in and of itself. The "paper wealth" of an asset can disappear because its perceived value of the asset can change. Money is only a medium of exchange, that's all. It doesn't disappear, the value of the assets merely changes.

This may help: http://en.wikipedia.org/wiki/Fiat_currency

An Fear Aniar

Bad lending decisions.


.

li@mo

I'm going to put this simply:

Lets say in the world there existed at the height of the boom, €100

Now we're in a recession,.....a worldwide recession.......nobody has money

WHERE HAS THE €100 GONE???

Surely in the world today, there exists the same amount of money as always.

My take on it is that the banks created "virtual" money which they gave out as mortgages and loans. This was essentially money that didnt exist.

Buildings didnt sell and now lie idle.

Banks want their repayment which the property developers cant afford.

Anyone agree?

li@mo

li@mo wrote: »

I'm going to put this simply:

Lets say in the world there existed at the height of the boom, €100

Now we're in a recession,.....a worldwide recession.......nobody has money

WHERE HAS THE €100 GONE???

Surely in the world today, there exists the same amount of money as always.

My take on it is that the banks created "virtual" money which they gave out as mortgages and loans. This was essentially money that didnt exist.

Buildings didnt sell and now lie idle.

Banks want their repayment which the property developers cant afford.

Anyone agree?

Again, as nesf said. Money is simply use to express the value that someone assigns to a good. Values change - if your house was worth 500,000 at the height of the boom, it may reduce to say 300,000. Thats nothing to do with the money system, it just the price which the market puts on your house.

Also read http://boards.ie/vbulletin/showthread.php?t=2055464119&highlight=money, it gives a good overview of what you asking.

ixoy

I seem to recall that only a small minority of a bank's "money" is actual cold hard cash left by customers in accounts - the majority of it is speculative to a degree, in the sense that it would be property or investments. They can lend out money against this - I'll give you 1m, because you're going to make a piece of property that'll be worth 1.5m, so I know you're good for it. If now someone says that land is only worth 0.5m well then the bank now suddenly has a problem. Worse still could happen, they can't recoup the cost of that original 1m loan at all because the developer can't sell it. No hard currency has disappeared, but the bank is now in crisis because it has suddenly lost access to some of its capital. Multiply this by a huge factor (and a variety of similar and more complex transactions) and now if all the banks are suddenly at this position, across the world...

Might be a bit simplistic but I think that's a kernel of the problem.

nesf

ixoy wrote: »

Might be a bit simplistic but I think that's a kernel of the problem.

The kernel of the problem was that many banks (thankfully not any Irish banks to any great extent or we would be in far more trouble) used accounting tricks to move certain forms of assets off the balance sheet so they only had to hold a very small amount of capital in reserve against them. This was one of the crucial problems in the Basel I regulation of the banking market and in fairness to worldwide regulators the Basel II regulations that were being drawn up prior to the credit crunch were specifically going to attack this problem precisely because it allowed banks to hold very risky assets yet have to put very little aside against potential losses.

There were also problems with allowing banks to do their own risk calculations with respect to their assets (I think, I could be wrong it's well over a year since I read this stuff in any detail).

JDLK

The current financial crisis has its roots in the rise of neo conservatism in America and globalisation. Under conservative policies markets are deregulated and allowed to find their own balance (this is known as free market capitalism). Conservatism also advocates classical economics- classical economics argues that the future can be predicted through probabilty and mathematical calculations. This has led to financial institutions believing they can predict the future values of products, markets etc- this practice is know as hedging, derivatives etc- basically the speculation on the future value of stocks, commodities, bonds etc

America is the finacial hub of the world which explains why the effects of the American sub prime scandal effect the rest of the world. The sub prime market was fueled by massive debt- essentially financial institutions were borrowing heavily from each other and lending at higher rates to consumers in the belief that they could pay it back. Sub prime lenders tend to lend to high risk borrowers (people with below standard credit ratings) This is fairly common as a higher interest rate is used as incentive for the lender who should also be spreadint their risk by hedging in low risk investments(again, borrowers). They didnt spread their risk- instead they focussed heavily on lending to high risk borrowers, or they thought they spread their risk but hedged on over inflated derivatives. Why did they do this? Hard to say but I beleive it was down to inflated confidence in the market and the belief that the high interest rates would offset any losses. The got a very basic lesson - high risk people couldnt pay back and defaulted, this knocked confidence which exposed their overinflated hedges which quickly nose dived leaving them unable to pay back the banks- causing wide spread panic and wiping billions off the exchanges in lost confidence which basically made all the lenders stop in their tracks in a frantic bid to limit damage and survive.

Globalisation again played an important role here as American industried began to be outsourced to Asia and America was cought in a situation where it was borrowing billions from China while sending all of its industries there- this might work if you had a global economy but because China was saving dollars and lending instead of trading it essentially sucked both the industries and the capital out of the American economy. American consumers were borrowing billions from China while also sending their jobs (their primary means of repaying debt) to Asia aswell. China deliberately undervalued the Yuen against the dollar, which basically allowed them to hoard dollars while giving out little in return (comparitively)- the rest of Asia also refused to float its currencies (this is known as dirty floating)

This lead to global finacial companies treating American consumers as global consumers- but because American consumers lost their manufacturing jobs to outsourcing they were unable to repay their loans- this sent shockwaves through the finacial sector as each sub prime lender defaulted.

Essentially "confidence" was lost in the lending market- ie banks did not trust that people would pay them back and so cut back on credit (credit crunch) in order to survive and mitigate their losses- unfortunately this led to good businesses losing liquidity and folding even though their liquidity ratios were good which again knocked market confidence.

Governments have been trying to restore confidence by gauranteeing loans and this is what Obama is trying to do with his stimulus package.

Fingers crossed

(PS I know my spelling sux before anyone comments)

Its basic enough to say that deregulation leads to finacial scandals (we've had these problems many times in history) and on the flip side liberal policies can also lead to economic problems such as stagflation. Obviosuly the issue is the unregulated lending but personally I believe the problem lies in the fact that technololgy has allowed the finacial market to become much more gloablised than the "real" markets and politics. Finacial institutions are not in touch with local economic forces- instead seeing finacial growth as the ultimate goal and pressuring indurstries to locate geographically in places which apresent very different social and political levels of global interaction- primarily China (which is set for 7.5% economic growth while the rest of the wrold contracts at an average of 4% this year). We need a level playing field in globalisation and financial institutions need to help their commercial customers offset the problems in maintaining competitive advantage, instead of pressuring them to adjust to unsustainable market forces for short term gains.

We need to dig up Keyens, clone his DNA and get him going again!!:D

silverharp

JDLK wrote: »

Under conservative policies markets are deregulated and allowed to find their own balance (this is known as free market capitalism).

No way , you can talk about a free market in the US at the turn of the 20th C, when the the federal Gov was very small and before an Income tax even existed , ever since then the free market has been whittled away. You can call it an unholy alliance betwen Big gov. and big business but dont blame it on the free market. However what you have written is good propaganda to complete the socialism process in the US, well done comrade!

ionix5891

read this

http://cynicuseconomicus.blogspot.com/2008/07/root-of-problem.html


the whole blog does a great job at explaining where we are and why in easy to understand examples, highly recommended read for anyone interested in subject

JDLK

silverharp wrote: »

No way , you can talk about a free market in the US at the turn of the 20th C, when the the federal Gov was very small and before an Income tax even existed , ever since then the free market has been whittled away. You can call it an unholy alliance betwen Big gov. and big business but dont blame it on the free market. However what you have written is good propaganda to comelte the socialim process in the US, well done comrade!

An unregulated finacial system in America at the turn of the 20th century led to the great Depression (the US was in fact the only country not to adopt a social insurance policy during the age of collectivism)

BUT

Im not a socialist, I called for a more Keyensian approach to the current situation- Keyens was a capitalist- but saw capitalism a merely a means of raising living standards not growth for growths sake. In fact I would like to see communist China dismantle it unfair communist trade system for a freer global trade.

I see liberal reaction(Obama) to conservatism as simply the natural swing in the economic political pendulum- its happened before and once liberal policies succumb to the corruption of power (rent seeking) it swings back to conservatism the only middle ground is Keyensiism and we are seeing America adopting an interventionist stance with a government stimulus package (Keyens) which I see as a positive step in restoring confidence- this is not the realm of socialism , its the realm of moral economics

I hate dogma in economics - there are elements in a lot of schools of thought that are attractive from modelling and policy perspectives and there are a lot that are not.

But can you repost your original post in Conspiracy Theories? That should keep them going over there for a while!!!

JDLK

Deleted User wrote: »

I hate dogma in economics - there are elements in a lot of schools of thought that are attractive from modelling and policy perspectives and there are a lot that are not.

But can you repost your original post in Conspiracy Theories? That should keep them going over there for a while!!!

A rather glib response, I assume was more for effect than substance

Would you care to elaborate and contribute or stay on the sideline and snipe?

nesf

ionix5891 wrote: »

read this

http://cynicuseconomicus.blogspot.com/2008/07/root-of-problem.html


the whole blog does a great job at explaining where we are and why in easy to understand examples, highly recommended read for anyone interested in subject

His latest analogy suffers from being too simplistic*, take his stuff with a proverbial fist of salt. That said, I enjoy his posts.




*There's more to production than factories that take commodities like iron etc and turn them into objects. There are a wide variety of traded services in modern economies (think legal services, on-site IT support and what have you). This complicates things greatly and means simple three town analogies don't capture as much of the modern economy as you'd like.

ionix5891

yes it is a bit simplistic at times and economics is certainly alot more chaotic but it does help get the head around some of the concepts

i have to say that blog made me more interested in economics (and the realization that all my saving are in hands of crooks)

nesf

ionix5891 wrote: »

yes it is a bit simplistic at times and economics is certainly alot more chaotic but it does help get the head around some of the concepts

i have to say that blog made me more interested in economics (and the realization that all my saving are in hands of crooks)

Yeah, there's the problem of a little knowledge. Stuff like this is great so long as it's covered in caveats about why the real world doesn't work this way.

A bit like neo-classical economics...

Time Magazine

JDLK wrote: »

The current financial crisis has its roots in the rise of neo conservatism in America and globalisation.

It's amazing how your Keynesian views have distorted your perspective on this, my good man.

http://gregmankiw.blogspot.com/2008/09/distorting-history.html

It's a bad thing when I agree with Greg Mankiw.

Obama stimulus ... We need to dig up Keyens, clone his DNA and get him going again!!:D

It's amazing how your Keynesian views have distorted your perspective on this, my good man.

Keynes (1942) wrote:

“Organized public works, at home and abroad, may be the right cure for a chronic tendency to a deficiency of effective demand. But they are not capable of sufficiently rapid organisation (and above all cannot be reversed or undone at a later date), to be the most serviceable instrument for the prevention of the trade cycle.”

The situation is far more complex than it is being made out to be. Casually associating deregulation with neo-liberalism is at best a half-truth. Ignoring the blame of intervention (by Clinton, by the Fed in LTMC, by establishing Fannie and Freddie...) in causing this crisis is foolish. Blaming globalisation without casting an eye on Iceland is intellectually dishonest. Finally, citing early Keynes without acceptance of his later work, and the great insights that macroeconomics has provided since, can only be justified by idealogy -- and as I'm sure Bill Clinton can now appreciate -- that is never a good basis for policy creation.

JDLK

The Economist wrote: »

It's amazing how your Keynesian views have distorted your perspective on this, my good man.

http://gregmankiw.blogspot.com/2008/09/distorting-history.html

It's a bad thing when I agree with Greg Mankiw.



It's amazing how your Keynesian views have distorted your perspective on this, my good man.



The situation is far more complex than it is being made out to be. Casually associating deregulation with neo-liberalism is at best a half-truth. Ignoring the blame of intervention (by Clinton, by the Fed in LTMC, by establishing Fannie and Freddie...) in causing this crisis is foolish. Blaming globalisation without casting an eye on Iceland is intellectually dishonest. Finally, citing early Keynes without acceptance of his later work, and the great insights that macroeconomics has provided since, can only be justified by idealogy -- and as I'm sure Bill Clinton can now appreciate -- that is never a good basis for policy creation.

Modern liberalism in the American context is associated more with interventionism (regulation) than deregulation- which accords perfectly with Keynes "The General theory..".

If we are simply going to trade other peoples blogs then we should just post up a list of web links: so here's one from Robert Skidelsky: http://www.skidelskyr.com/site/article/where-do-we-go-from-here

The question was asked how we came to this- but it is not enough to simply say banks loaned too much- we must ask the question why people were'nt able to pay back their loans. To simply assume that millions of people were dumb enough to take out loans they knew they couldnt pay back is being the most intellectually dishonest (not to mention downright insulting) and to then assume that finacial institutions, who supposedly make a living off predicting the future (another thing Keyens said was impossible) could not have the most basic foresight to spread their risk properly is pure naivity.

The fact is that on paper the numbers added up (in a gloabl context) but once the flow of dollars was not able to go back into the US economy to repay the American conumer debts we immediately saw defaulting- this was both a government and market system failure

Important note: While I am a supporter of a more Keyensian approach it makes little difference whay I think- the fact is fiscal policies are being adopted by governemnts right now as we speak- most notably America- which is in line with what the original poster asked- what went wrong (corruption through deregulation) and what is the current situation (government intervention/stimulus) - these are the present day facts

nesf

JDLK wrote: »

we must ask the question why people were'nt able to pay back their loans. To simply assume that millions of people were dumb enough to take out loans they knew they couldnt pay back is being the most intellectually dishonest and to then assume that finacial institutions, who supposedly make a living off predicting the future (another thing Keyens said was impossible) could not have the most basic foresight to spread their risk properly is pure naivity.

Remember the penalties for defaulting on a mortgage in the United States are very low. You only take a hit to your credit rating, you do not owe any money to the bank even if the sale of the property did not cover the whole mortgage amount. If people already have a low credit rating then they do not have anything to lose by taking a chance on buying a home and hoping to resell it later on for a profit. It's not a case of them being dumb enough not to realise they mightn't be able to pay it back, it's that the cost of not being able to pay it back was very small for Sub-Prime borrowers.

Also, remember that there were some very dodgy lending practices going on with "teaser rates" for the first year or two suddenly turning into very high interest rates which arguably a lot of buyers might not have been aware of.

JDLK

nesf wrote: »

Remember the penalties for defaulting on a mortgage in the United States are very low. You only take a hit to your credit rating, you do not owe any money to the bank even if the sale of the property did not cover the whole mortgage amount. If people already have a low credit rating then they do not have anything to lose by taking a chance on buying a home and hoping to resell it later on for a profit. It's not a case of them being dumb enough not to realise they mightn't be able to pay it back, it's that the cost of not being able to pay it back was very small for Sub-Prime borrowers.

Also, remember that there were some very dodgy lending practices going on with "teaser rates" for the first year or two suddenly turning into very high interest rates which arguably a lot of buyers might not have been aware of.

I take your point about the borrowers and indeed my sentiment was that borrowers knew the personal risk was worth it but the lenders either drastically underestimated their risk of lending or most likely hedged on over inflated derivatives which were over-valued by over confident institutions relying on flawed neo classical economic views of probablity calculations-

Basically the traders advised clients (sub prime lenders included) that hedging was worth way more than it was- the true values only came to light once the borrowers, who through the most basic logic as high risk, proved why they were indeed high risk- by not being able to repay their loans.

This is the most basic and scandalous problem; High risk people were encouraged to take out loans not only by lenders but also by the cost/benefit scenario of the loans to themselves- but why? Why did lenders push loans which their own probability calculators told them would not be repaid- I dont want to give a simple explanation but the notion that high interest returns clouded their judgement (ie greed) is very tempting

Greed is natural and a flaw of the competitive market but deregualtion is the space in which greed is allowed to operate and this is a flaw of the government

Time Magazine

JDLK wrote: »

Modern liberalism in the American context is associated more with interventionism (regulation) than deregulation- which accords perfectly with Keynes "The General theory..".

As I have already stated, Keynes revised many of his views of The General Theory of Money, Interest, Prices, Jevons and Just About Everything Else. That particular work is considered his swan-song, wrongly imho. Why is it so embraced? For much the same reason that idiotic free-marketeers embrace Friedman: it's a convincing-sounding fallacy that panders to a political viewpoint, and that's always going to beat factual economic science that leaves the value judgments to elected governments. As an economic blueprint, The General Theory is not so much an imperfect document as an unfortunate historical oddity. Had Keynes delayed publication and allowed his views to develop into what they eventually became, perhaps he would be appreciated for the greater economic achievments he progressed rather than a flawed economic doctrine that has little empirical support.

I think we're debating semantics on political idealogies here. You blamed the crisis on deregulation, and associated deregulation with the forces of the political right. I dispute both of these causal chains. I have already extrapolated my views on the former; the latter is even simpler: deregulation is a matter of economic theory not political doctrine. Its adoption by the political right may have been as a tool for their interests, but that does not in itself tarnish the tool.

If we are simply going to trade other peoples blogs then we should just post up a list of web links: so here's one from Robert Skidelsky: http://www.skidelskyr.com/site/article/where-do-we-go-from-here

Both my posts link to academic source or credible newspapers. Mine were factual accounts of what has happened in history, i.e. the current crisis is at least partly a problem of over-regulation and that even Keynes himself trimmed his Keynesian ideals. Yours is one simply of opinion. A good opinion granted, and one I read before, but still not one I agree it.

The question was asked how we came to this- but it is not enough to simply say banks loaned too much- we must ask the question why people were'nt able to pay back their loans. To simply assume that millions of people were dumb enough to take out loans they knew they couldnt pay back is being the most intellectually dishonest

Where did I assume this?

and to then assume that finacial institutions, who supposedly make a living off predicting the future (another thing Keyens said was impossible) could not have the most basic foresight to spread their risk properly is pure naivity.

Where did I assume this? (And Keynes did not say predicting the future was impossible; he said it was a "beauty contest" marked by "animal spirits", but did not claim it was impossible to the best of my knowledge.)

Incidentally, I think a key problem here was not with classical economics, which, incidentally, you are incorrect to assert it believes it can predict the future. The econometric tools which model risk are essentially atheoretical. They certainly do not conform to any particular branch of macroeconomic theory. Undoubtedly errors were made here as to the assumption of statistical distributions and the potency of uncertainty and financial contagion. These were errors made by guys with degrees in physics and quantitative finance. To suggest these mistakes were connected with the marginal revolters, the Austrian school or the children of Walras, is laughable. A fine ludic fallacy.

The fact is that on paper the nyumbers added up but once the flow of dollars was not able to go back into the US economy to repay the American conumer debts we immediately saw defaulting- this was both a government and market system failure

I agree entirely that it was both a market and regulation failure. I reject the notion that it has its roots in the rise of neo-conservatism and globalisation, however.

silverharp

The Economist wrote: »

http://gregmankiw.blogspot.com/2008/09/distorting-history.html

It's a bad thing when I agree with Greg Mankiw.

the video clip was interesting, talk about blowback, evidence for the prosecution that government is very good at misallocting resources in an economy especially under the pretext of some social objective?

JDLK

JDLK wrote: »

A rather glib response, I assume was more for effect than substance

Would you care to elaborate and contribute or stay on the sideline and snipe?

No, not really a glib response.

I take a little bit of an issue with the way you package everything up so neatly. You have nice little causes for events and you have nice little effects for the schools of liberalism etc.

However, I don't think you simply just take a out a school of thought and apply it to the market like that; its too complicated. To say that 'x' school of thought would lead to a solution is itself glib.

nesf

JDLK wrote: »

I take your point about the borrowers and indeed my sentiment was that borrowers knew the personal risk was worth it but the lenders either drastically underestimated their risk of lending or most likely hedged on over inflated derivatives which were over-valued by over confident institutions relying on flawed neo classical economic views of probablity calculations-

You have to look at the structure of CDOs and how insanely difficult it would be for buyers (or creators) of these CDOs to work out what the actual risk of the CDO was to grasp why this turned into the crisis that it did. The market can't work if the market can't "accurately" value the product as was the case here.


The problem wasn't down to neo-classical views of probability. It's far more complex than that and the quantitative views of risk used were a long way from neo-classical economic theory. How much do you know about derivative markets, option pricing and quantitative methods of risk analysis? (I'm asking so that I know what I need to explain and what I don't before I launch into a long complicated answer on the problems of risk analysis that led to the whole Sub-Prime crisis, I don't want to be patronising and start explaining what the Black-Scholes model is to someone who understands it (and its limitations) already)

JDLK

The Economist wrote: »

As I have already stated, Keynes revised many of his views of The General Theory of Money, Interest, Prices, Jevons and Just About Everything Else. That particular work is considered his swan-song, wrongly imho. Why is it so embraced? For much the same reason that idiotic free-marketeers embrace Friedman: it's a convincing-sounding fallacy that panders to a political viewpoint, and that's always going to beat factual economic science that leaves the value judgments to elected governments. As an economic blueprint, The General Theory is not so much an imperfect document as an unfortunate historical oddity. Had Keynes delayed publication and allowed his views to develop into what they eventually became, perhaps he would be appreciated for the greater economic achievments he progressed rather than a flawed economic doctrine that has little empirical support.

I think we're debating semantics on political idealogies here. You blamed the crisis on deregulation, and associated deregulation with the forces of the political right. I dispute both of these causal chains. I have already extrapolated my views on the former; the latter is even simpler: deregulation is a matter of economic theory not political doctrine. Its adoption by the political right may have been as a tool for their interests, but that does not in itself tarnish the tool.

Both my posts link to academic source or credible newspapers. Mine were factual accounts of what has happened in history, i.e. the current crisis is at least partly a problem of over-regulation and that even Keynes himself trimmed his Keynesian ideals. Yours is one simply of opinion. A good opinion granted, and one I read before, but still not one I agree it.

Where did I assume this?

Where did I assume this? (And Keynes did not say predicting the future was impossible; he said it was a "beauty contest" marked by "animal spirits", but did not claim it was impossible to the best of my knowledge.)

Incidentally, I think a key problem here was not with classical economics, which, incidentally, you are incorrect to assert it believes it can predict the future. The econometric tools which model risk are essentially atheoretical. They certainly do not conform to any particular branch of macroeconomic theory. Undoubtedly errors were made here as to the assumption of statistical distributions and the potency of uncertainty and financial contagion. These were errors made by guys with degrees in physics and quantitative finance. To suggest these mistakes were connected with the marginal revolters, the Austrian school or the children of Walras, is laughable. A fine ludic fallacy.

I agree entirely that it was both a market and regulation failure. I reject the notion that it has its roots in the rise of neo-conservatism and globalisation, however.

Practically your whole response is an argument semantics - which always heralds the death of any discussion, the next stage is grammar checking.

The last part was the only part where you actually expressed any independant thought or view of your own- please elaborate.

JDLK

Deleted User wrote: »

No, not really a glib response.

I take a little bit of an issue with the way you package everything up so neatly. You have nice little causes for events and you have nice little effects for the schools of liberalism etc.

However, I don't think you simply just take a out a school of thought and apply it to the market like that; its too complicated. To say that 'x' school of thought would lead to a solution is itself glib.

Please actually contribute something to the discussion. If anything your responses are packaged up in the most neatly. If you want to actually logically critique/analyse what i said or even (and i dont hold out much hope for this) contribute your own view then please do. Responses such as "you packaged everything up neatly" are the very definition of glib

Time Magazine

JDLK wrote: »

Practically your whole response is an argument semantics - which always heralds the death of any discussion, the next stage is grammar checking.

"Checking of grammar", no? :pac:

The last part was the only part where you actually expressed any independant thought or view of your own- please elaborate.

My first paragraph had views on Keynes in general; the intermediate ones were critiques of your views on the cause of the crisis rather than proposing my own. As I argued here, I do not accept your assertion that deregulation is "the cause" of this.

The penultimate paragraph was (part of) my view on what caused it: poor statistical analysis.

I expect you're already crafting your response to nesf's post from fifteen minutes ago. I suspect we will make the same point and he is better at conveying mathematical arguments in ASCII, so I'll leave that duty to him.

JDLK

nesf wrote: »

You have to look at the structure of CDOs and how insanely difficult it would be for buyers (or creators) of these CDOs to work out what the actual risk of the CDO was to grasp why this turned into the crisis that it did. The market can't work if the market can't "accurately" value the product as was the case here.


The problem wasn't down to neo-classical views of probability. It's far more complex than that and the quantitative views of risk used were a long way from neo-classical economic theory. How much do you know about derivative markets, option pricing and quantitative methods of risk analysis? (I'm asking so that I know what I need to explain and what I don't before I launch into a long complicated answer on the problems of risk analysis that led to the whole Sub-Prime crisis, I don't want to be patronising and start explaining what the Black-Scholes model is to someone who understands it (and its limitations) already)

I see, I need to provide academic qualification before I can enter into a discussion now?

Please feel free to lecture on the reliability of probability models (in the face of the economic disintegration of the worlds largest hedge fund and derivative advisors)

Of course we all know that these models only work when markets are "well behaved" and crumble when unpredictability enters the arena. Remember "Long-Term Capital Management". The fact is that quant theories-while mathmatically provable do not gaurantee success, the main problem is that over inflated share values who's only justifaction relies on a baynesian or Black Scholes probabaility calculation go to pot once a variable deemed too unlikely enters the equation

Probabailty calculations are the realm of mathematics and physics (as someone said) and from a technicsl point of view are independant or "atheoretical" however the very belief that the future can be accurately predicted is fundamentally classical see Ricardo-Malthaus, Keyensian is very much on the side of the here and now and the uncertainty of the future with really the only certainty being "in the long run we're all dead"

But I can se im being drawn into an argument on semantics- which while legitimate is is pretty inane and only loosly related to the OP's question