Humanities & Social ScienceMichael Lewis has a very long piece up sketching out the fever dream that was the late great Wall Street:
This was what they had been waiting for: total collapse. "The investment-banking industry is fucked," Eisman had told me a few weeks earlier. "These guys are only beginning to understand how fucked they are. It's like being a Scholastic, prior to Newton. Newton comes along, and one morning you wake up: 'Holy shit, I'm wrong!' " Now Lehman Brothers had vanished, Merrill had surrendered, and Goldman Sachs and Morgan Stanley were just a week away from ceasing to be investment banks. The investment banks were not just fucked; they were extinct.
I of course enjoyed the scientific analogy. The smarter an individual is the better the approximation of the "rational actor," H. economicus. But, smart people are also often much better at executing really stupid or irresponsible actions. e.g.:
... It specialized in asking home owners with bad credit and no proof of income to put no money down and defer interest payments for as long as possible. In Bakersfield, California, a Mexican strawberry picker with an income of $14,000 and no English was lent every penny he needed to buy a house for $720,000.
Comments
The smarter an individual is the better the approximation of the "rational actor," H. economicus.
Albert Einstein must not have been very smart, since he never got very far at maximizing his income.
Posted by: Pierce R. Butler | November 11, 2008 10:35 AM
Albert Einstein must not have been very smart, since he never got very far at maximizing his income.
i hope you're kidding pierce, as that just isn't a very smart quip ;-) rational actors try to maximize their utility. that could mean income, or, it could mean leisure time (so maximize income per unit time), or some other measure of personal satisfaction.
by what i mean by 'rational actors,' the less intelligent someone is the more likely they are not to 'get' compounding interest. so, the more likely they are to shoot themselves in the foot in terms of their long-term consumption by over-spending in the short-term and destroying their credit and lose some of their ability to 'smooth' their consumption (the variation in his is more than IQ, e.g., conscientiousness).
of course, a *general* result like this still entails MANY deviations from the trendline.
Posted by: razib | November 11, 2008 12:04 PM
"The arrangement (credit default swap) bore the same relation to actual finance as fantasy football bears to the N.F.L."
I love that line. That is exactly why the finance market has collapsed. Wall street created a Fantasy Finance Market (aided and abetted by Congress), bet the world on it (literally), and lost.
Posted by: Equisetum | November 11, 2008 1:12 PM
An interesting comment on that article:
I'm still trying to wrap my head around this mess generally, and the role played by credit default swaps specifically. I understand short selling. I have a reasonable grasp of options and their valuation. But I still don't feel like I'm getting the gist of this stuff.
Posted by: Craig Pennington | November 12, 2008 12:37 PM
Steve Eisman is the Greg Cochran of finance.
Posted by: agnostic | November 16, 2008 9:57 PM