Against my better judgement, I've ended up writing a lot about the
financial mess that we're currently going through. If you've read that, you
know that my opinion is that the mess amounts to a giant pile of fraud.
But even having spent so much time reading and studying what was
going on, the latest news from the financial mess shocks me.
Even knowing how utterly sleazy and dishonest many people in the financial world
have been, even knowing about the stuff they've been doing, the kinds of
out and out fraud that they've perpetrated, the latest news makes them
look even more evil than I could have imagined.
Let's start by reviewing a bit.
The basic thing at the root of the problem is something called a
collateralized debt obligation - CDO. A CDO is basically a share of a
great big bunch of loans, where the loans are backed by a piece of property.
The most common form of CDO is basically a wrapper around a batch of
Mortgage-based CDOs were traditionally a really safe investment. People
will go to great lengths to avoid losing their homes - so an investment
that would only lose money if people lost their homes was pretty solid.
It became a hugely popular thing to invest in - and a hugely profitable
thing for the bank to sell.
The problem was, there were more people who wanted to buy mortgage based
CDOs than there were mortgages to bundle into CDOs. So banks started looking
for ways to make more mortgages. They'd already gotten people who could really
afford houses to take out mortgages. So they needed to find some other way of
getting people to take out more mortgages. They came up with a whole
bunch of schemes that let people do things like borrow more money than they
could afford to pay back; or that gave mortgages to people with bad credit.
They did pretty much anything they could possibly do to find ways of getting
more mortgages to bundle up and sell. It got to the point where they would
give people huge mortgages with no documentation. You didn't need to
show that you were buying a house that was worth what you were borrowing; you
didn't need to show any evidence that you had an income. Nothing.
Realistically, no one actually expected these things to get paid off. But they
didn't worry about it: they just bundled them up for sale. In order to sell
them, they structured them into packages that made these very risky things
look safe. The main trick was something called tranching.
Tranching takes the mortgage bundle, and divides it into tiers. When loans
get repaid, the top tier gets repaid first. Only once the top tier
has been entirely repaid does the next tier start to get repaid.
By making a bunch of tiers (tranches) you can make the top ones look
like they're really safe, even when it's based on pile of shit.
We've known for a long time now that tranching was a giant cheat. That top
tier looked safe only because of a lie. It was only safe if the
chances of individual mortgages in the bundle failing to be repaid was an
independent event. But the mortgages that were given out like candy to kids
weren't independent in that sense: the events that caused one to fail would
cause almost all of them to fail. The supposed safety of even the top
tranch was a bad joke.
Making matters worse, the banks didn't just sell these bundles of
mortgages. They layered them. They'd take a bundle of mortgages, package them
into CDOs, and sell them. Other banks would buy parts of those CDOs, wrap up
bundles made up of slices of other CDOs, and sell those. And so on, layer upon
In my opinion, this was, in an ethical sense, simple fraud. Unfortunately,
it's also entirely legal. It shouldn't be, but most of this stuff is
far beyond anything that was imagined by the people who wrote the laws.
The institutions involved were effectively printing money. They were
issuing loans that they knew wouldn't be repaid, but they still claim the
interest from the loans as a profit. They were taking bad loans, and selling
them at a profit, to someone else who claimed them as a profitable investment,
and who then used the non-existent expected profits from that to buy more
stuff - which was frequently repackaged versions of the same stuff.
The same garbage was being packaged, sold, repackaged, resold, re-re-packaged,
re-re-sold, and so on, over and over again, making a "profit" on each sale.
But the profit was fake: bank A would make a CDO, and sell it to bank B. Bank
B would wrap that up with some other CDO and sell it to bank C. Bank C would
wrap that and sell it to bank A, which would buy it with the "profits" from
it's sale to bank B. Bank B would then buy more stuff from A using the profits
of its sale to C. And so on. Each transaction created "profit" that didn't
Of course, it's not quite that simple. All of the businesses involved in
these shenanigans have all sorts of legal reporting requirements, and they
need to have their profit statements confirmed by a supposedly independent
auditor. And there's always a chance that these things would fail. In order to
be able to really count them as profits, they needed some kind of insurance.
So they created a kind of monstrosity called a
credit default swap. What
happens in a credit default swap is that you pay someone to take your risk for
you. For example, you take a loan of one million dollars that you made. You go
to a third party, and you pay them $100/month. If the loan gets paid back,
they get to keep the $100/month. If the loan doesn't get repaid, then they're
supposed to repay the entire loan principal. Effectively, it's like a kind
of insurance against a loan not being repaid. With a CDO, you can supposedly
absolutely count on not losing the principal behind an investment.
Here's where we get to the next two kinds of fraud.
First, to sell "insurance" in the form of credit default swaps, you
don't need to prove that you can repay the principal if the loan goes
bad. There are numerous cases of people with a couple of million dollars being
the backers for billions of dollars worth of credit default swaps.
From the very start, it was obvious to everyone that the CDSs were frauds: the
people who were, supposedly, on the hook to repay if loans went bad had
absolutely no ability to actually repay. They didn't have the money to back
the things that they were insuring, and they had no way of getting the money
to do it. And everyone involved knew it. Credit default swaps were, much of
the time, pure fiction. Once again, though, it's legal. The people buying
the swaps simply claim that they fully expected the folks on the other side
to be able to pay. They never checked if that was true; they didn't have to.
So even though if anyone actually checked, it was obvious that lots of people
involved in CDSs couldn't possibly pay up, no one actually did the checking.
They just assumed that the CDS counterparties had the money to pay up if they needed
to. There was more profit to be made by simply trusting the other
parties than by actually checking, and there was no legal requirement to check.
Second, you don't have to be the person who made the loan to buy the
insurance on the loan. Anyone can buy a credit default swap on any
Just think about that for a moment. If you're a financial trader, you can
buy insurance on something that you don't own! If we did this with normal
insurance, I could buy flood insurance on a building I don't own in New
Orleans. I could take out an automotive damage policy against a car that my
neighbor parks under a dead tree. Credit default swaps pretend to be
insurance, but they're not. Insurance protects the owner of a property; credit
default swaps don't do that. They're really just simple gambling. A CDS is
just a bet: by buying a credit default swap, I'm betting that the
underlying loan is going to go bad. By selling a credit default swap, I'm
betting that the underlying loan is good. To go back to one of my examples,
a credit default swap is sort of like me making a bet that the car parked
under a dead tree is going to get damaged. If it does, I collect. It's not
my car, but if the tree falls on it, I win. That's a CDS. It's nothing but
legal gambling. The investment firms are bookies
connecting betters on different sides, and collecting a commission.
This much we've know for a while. This much by itself is astonishing, and
disgusting, and appalling. This much is fraud on an epic scale, and should be
more than enough to justify stripping the perpetrators of every dime they
have, locking them into jail cells and throwing away the key.
But it turns out that the reality is even worse.
How could it get worse than this?
It turns out that investment firms were deliberately putting
together packages of loans that they knew weren't going to get
repaid, in order to provide some of their customers with something
that they could bet against.
Let's go back just a bit. Remember the whole tranching deal?
The investment bank puts together a shitload of mortgages, and then
sells shares in them. They get to take the top tranch, and sell it
as a high-quality safe investment. Of course, if you can't sell
the whole thing, then you're left holding the riskiest crap. The
bank really doesn't want that. So they'll only sell a CDO if they
can find suckers to buy every level of it. In order to make a CDO,
one of the hardest things to do is find people to buy the bottom of
it. The worst part of a pool of mortgages is called the
equity, and it's generally between one and ten percent of the
loan pool. You really need to work to find people willing to
buy the equity tranch.
But, a few years ago, at the height of the bubble, hedge funds suddenly
started volunteering to buy the bottom tranch. They didn't want the
supposedly good stuff, they wanted the garbage. Naturally, the banks were
absolutely thrilled. They put together billions upon billions of
dollars worth of CDOs, which were made possible by the hedge funds
buying the equity.
So far, nothing wrong. If someone wants to buy high-risk crap
in exchange for high profit, that's their prerogative.
What the hedge funds were really doing is making it possible for the
investment banks to create CDOs that were likely to fail, and then buying
credit default swaps against the top tranches of those CDOs, betting
that they were going to fail.
The strategy here is simple. I spend $5 million buy the bottom 5% of $100
million worth of loans that I think are going bad. I'm expecting to lose that:
I'm going to be out $5 million. But, I also use another $5 million to buy
credit default swaps on $60 million worth of the higher tranches of that
pool of loans. Now, if the pool goes bad, I'm out $10 million - $5 million
for the crap that I bought that's now worthless, and $5 million to
buy the credit default swaps. But because the whole thing went bad, I get
to collect $60 million.
Now we're starting to get pretty damned sleazy. These guys want to bet
against the CDOs. That's OK: if you believe that the things are going to fail,
and you're willing to risk your money on that belief, then there's nothing
wrong with you going ahead and doing it. But when you're deliberately helping
to produce the things that you believe are going to fail in order to give you
something to bet against? That's moving into the realm of at least highly
questionable behavior. When you're doing it by betting against something
that you don't even own? That's getting worse. (Remember, these guys aren't
betting that the lowest 5% tranch that they own is going to go bad; they're betting on the
higher tranches - the upper 50 or 60%. The only reason that they bought
any of the CDOs is because they things would never have been sold
if the banks couldn't get a buyer for that bottom tranch.)
There's another bit of sleaze here. The credit default swaps aren't bought
and sold on the open market; they're bought and sold via private contracts. As
I mentioned before, most of the time, you can be the backer of a CDS even though
there's no way in hell that you could pay up if things go south. But when
the hedge funds bought CDSs, they made damn sure that the people they bought
the CDSs from were absolutely able to pay up.
It gets worse.
Anyone who honestly looked at the whole CDO thing a few years ago knew
perfectly well that the thing was going to collapse sooner or later. The hedge
funds knew, perfectly well, that the people that they wanted to buy credit
default swaps from were likely to go belly up eventually. So they wanted
to be in the situation of being the first ones to collect, before the
big insurers backing the CDSs ran out of money.
So they didn't just find crappy CDOs to bet against. They went to the
investment banks, and asked them create CDOs consisting of piles of
specific, high-risk loans. They provided specific requirements - complaining
when firms tried to put together better packages. They'd only back the true
crap. They wanted shit that would go bad, and go bad fast. And
most of the big investment banks went along with it. (To their credit,
a few refused.)
Both the banks and the hedge funds knew what was going on here: they were
creating and then selling CDOs where they knew that the things were
designed to lose all of the money invested in them. And the
investment banks went to their other customers, and lied! They sold these
things to their customers, telling them that it was a safe, profitable
investment, even though they knew that they were designed
to lose all of the money invested in them!.
The hedge funds would buy the lowest tranch of these monstrosities,
and then buy CDSs against the other tranches. When the loans failed,
the hedge funds collected shitloads of money.
The banks, meanwhile, went along with this. Why? Why would they
screw over their own customers? Easy: they make money by
selling the things. Sure, the people
involved had to know that, in the long term, this was likely to kill their firm.
But in the short term, they were being paid cash in commissions and bonuses
for selling this crap. The people who sold the designed-to-fail
CDOs were collecting millions and millions of dollars in bonuses. And
the hedge fund folks eventually collected billions on
the swaps on failed loans.
For the brokers, bankers, and hedge-fund managers, this was hugely
profitable. They got to take home amounts of money that most of us
can't even imagine. Lots of them are now out of jobs - but
they've still got their millions of dollars in the bank. It
worked for them.
To call this sociopathic behavior on the part of the scum involved is
an understatement of absolutely epic proportions. What the people
involved in this did is no different that just stealing money from the
people who they suckered into buying worthless CDOs. They deliberately
sold worthless garbage - things that they didn't just know
were going to lose money, but that they designed to lose
money - lying to the buyers, telling them that it was a great safe investment,
knowing that the buyers were going to lose everything. But they didn't
care - because doing that would put money into their own pockets.
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Preach on, brother. Preach on!
Thanks so very much for a clear understandable explanation.
wow, great explanation of the fraud that i've been trying to wrap my brain around for a couple years.
don't forget, almost none of these jackasses are in jail, while their investors are impoverished, homeless or worse.
Stuff like this is why the "invisible hand" of "rational agents" who "always act in their own best interests" can't possibly be the basis of any solid economic theory.
This is a great explanation, one of the best I've seen. Thanks so much!
Very nice presentation of exactly this scam (with Broadway performers singing a song commissioned just for this story).
Hedge fund Magnetar seems to be the originator of this fraud.
ACT ONE. EAT MY SHORTS.
A hedge fund named Magnetar comes up with an elaborate plan to make money. It sponsors the creation of complicated and ultimately toxic financial securities... while at the same time betting against the very securities it helped create. Planet Money's Alex Blumberg teams up with two investigative reporters from ProPublica, Jake Bernstein and Jesse Eisinger, to tell the story. Jake and Jesse pored through thousands of pages of documents and interviewed dozens of Wall Street Insiders. We bring you the result: a tale of intrigue and questionable behavior, which parallels quite closely the plot of a Mel Brooks musical.
What an awesome summary of the last few years of financial disaster. I have never seen such a good explanation in a major media outlet...
I hate to sound so grandiose, but this post alone justifies blogging as a legitimate form of journalism and education..
Yeah, but, uh... Congress must have been forcing them to do all this stuff.... With regulations!
Yeah, that must be it.
James Howard Kunstler has been saying this for *years*. Often in quite colourful language, in jeremiads well worth reading. His latest take is "Where's Rico". (kunstler .com)
But thank you, for a very clear explanation of the details.
And of course those creating the trenches and those counting on making money on the top tier, really really HATE those of us who pay off mortgages early. We screw up their whole system. Unfortunately there aren't enough of us around.
And the investment banks went to their other customers, and lied!
This part seems to be the only step in the whole process that might actually be illegal. The SEC's charge against Goldman Sachs is that they materially misrepresented (a polite way of saying "lied about") certain facts about a specific CDO. Specifically, that they misrepresented the role of John Paulson, the hedge fund operator who designed the CDO in question. They can probably make similar charges about a bunch of other CDOs, but uncovering the evidence would take some detective work.
I won't disagree that Paulson looks like an amoral scumbag here, but I haven't seen any evidence so far that he did anything actionable. Likewise the ratings agencies, who served as useful idiots in all of these deals. These are actions that should be, but apparently aren't, illegal.
The more I read about the financial crisis, the more broken the whole market seems. But even in this bizarre situation where people built houses of cards to deliberately topple and collect big on, it seems like there's a major financial institution behaving completely irrationally: namely the ones backing the CDSs on the built-to-fail CDOs. Since the hedge funds were tapping them for money, they presumably had money, which you don't get by being other people's fall guy. Since the CDOs in question were designed to fail fast -- before the well ran dry -- why did the CDS backers not look at them and say, "No, we're not doing this. These are shit built exclusively to do us out of our money. Go find some other mark." Did CDS issuers simply get in the habit of not even looking at the credit they were insuring?
This is my summary of your post:
Investing institutions create arbitrary contract systems for the sake of making profit from the existence and volatility of credit and debt.
Why is this ethically any different than trading stocks or derivatives? This "collateralized debt market" is new and unregulated, so it's dangerous. What is the solution? Ban it, sure. OR, regulate it - just like every other abstract financial market we currently have.
Please understand my perspective: I've always thought stock and derivative markets are somewhat ethically questionable - and so I'm automatically distrustful of this new housing stuff as well - not at all trying to argue that it is ethical or acceptable.
Isn't it true that trading stock encourages investment in companies that, in theory, helps advance whatever those companies' goals are? So, doesn't it stand to reason that there could be some social/economic positive to trading in a better-regulated collateralized debt market as well?
These are all honest questions, I know next to nothing about this stuff. I'm trying to understand, rather than argue.
And a bit of pith: I was outraged to hear this as I think it's wrong.
Not in the least.
I believe this is often referred to as 'hedging your bets', where you bet both sides in order to avoid a loss, no matter what the market does. Doing it correctly can minimize your risk exposure, and net you a nice house and a fancy car. In good times, some magazine may also write wonderful articles about how smart you are, and how successful you have become. We have a horrible tendency to idolize this type of behavior, it is a systemic flaw.
Brought to you by the same deregulators that brought us the savings & loan debacle of the Reagan/Bush I years.
Those f__kers owe me 60% of my retiremend fund, and I live in Poland ffs! If bad karma had mass they would collapse into black holes.
Alan B, the scumbag part is when it moves from professional trader to people holding the bag because they were lied to. The hedge fund managers and the people paying the CDS knew what they were doing, and betting for things to go one way or another. High risk, high payouts. The individual investor who was sold on "sure thing rated AAA" is the person who had no way to know what they were sold, the sole reason we invest via investment bankers is that we expect them to know what's good for us, and act in our interest. And that's why Goldmann Sachs is on the chopping block for selling to investors, not for packaging for the hedge fund guys.
I think that there are differences between different kinds of financial instruments.
When you invest in a company, you're buying something: a slice of the company. When you invest in a CDO, you're still buying something: a slice of a loan. There are all sorts of ethical questions about exactly when a company or a loan is legitimate - so it's not black and white, but conceptually, there is something real that underlies the transaction.
When it comes to things like CDSs, one major problem is that they exist independently of anything real. They're pure gambling. Really, putting money into a CDS is no different that putting down $50 with your bookie on a football game. It's just a bet. The only difference is scale: the credit default swap is just a really, really big bet. Betting on sports through a bookie is illegal. But betting on loan defaults through a bank is completely legal, even though it's much more dangerous.
Again, I think it's worth comparing to insurance. I can't insure something that I don't own. I can't buy insurance on my neighbor's house. I can only buy it on my house. And I can only buy insurance on my house once. I can't buy 10 different insurance policies on my house through 10 different companies, and then collect 10x the value of my house if something happens. But with CDSs, hedge funds were able to buy CDSs for tranches of CDOs that they didn't own, making bets that would 20 to 100 times more than they'd invested in the equity tranch of that CDO. It's like they bought insurance on their investment 20 times, and then collected on all 20 policies.
If I did that with my home insurance, it would be called fraud. But when a hedge fund does it, it's entirely legal.
Similarly, when the counterparties to the CDSs took money for "insuring" the CDOs, it wasn't someone exploiting volatility; it was someone lying. A company with $4 million in total assets, promising to cover $500 million in loans is just lying. They can't cover it; they know that there's no way in hell that they'll ever be able to cover it. But they're allowed to say that they'll cover it, and the owner of the CDO is allow to claim that they insured it, so it's covered.
In short, the problem is the lies. Buying insurance on something that you don't own isn't buying insurance; it's gambling. Claiming that it's buying insurance is lying. Providing insurance for something you can't possibly cover, in order to pocket the premiums is lying. Pretending that someone who you know can't possibly cover your losses will cover them is lying. Putting together a package of investments that's designed to fail, and then selling to people with the assurance that it's a safe investment is lying.
The people involved in these schemes engaged in lying on a massive scale, and used those lies to line their own pockets with stolen money.
I'm interested in the same question Jake Wildstrom asks. Where did these CDS backers come from? Were they lied to in order to induce them to buying the CDSs?
Great explanation, thanks for that.
What I don't understand is how the investment bankers and hedge funds found peope that would write CDSs for the built-to-fail CDOs. If both parties knew that the CDOs would go bad, how could they hide this from the people writing out the CDSs? Did they just lie about what was actually in those CDOs?
"I've always thought stock and derivative markets are somewhat ethically questionable ..."
Along with the bad side: greed, gambling and excess, the markets actually do provide some good value to our society. If you take a look around and see all of the really huge things: buildings, trains, ships, etc. these things are incredibly expensive to build. If there were no markets, then to build something you'd need to get the rich people together to invest. As the loses could be great, assembling the money for investment would be hard. Less big things would be built.
The markets, on the other hand, create a relative easy way to pool together large chunks of money, while distributing the risk across a far larger group of people. They are what makes it possible for us to build things that are massive and that take decades to pay-off. Without the markets, there'd be far more money hidden in mattresses, and not out there building useful things or advancing our technologies. We'd have way less investment in the world.
Of course with every opportunity comes a herd of loathsome people looking for their slice ...
An important thing to look at is the bailout of AIG. AIG failed because it sold insurance it couldn't cover. When the US Government stepped in with a couple hundred Billion to cover those loses, who got the money? It was the people who bought the bogus "insurance" that they knew could not be covered.
AIG will never pay back the money it got. The "investors" who got the money from AIG after the US Government put it there will never pay it back either.
If AIG had been allowed to fail, then the couple hundred Billion would have been lost by those "investors" who bought the "insurance" that AIG sold and couldn't cover.
Why should the US Government cover the gambling losses of anyone when they make stupid bets with people who can't pay?
Getting people to buy the CDSs isn't particularly hard.
The main information that people outside of the system get was from bond-rating agencies. And before the collapse started, the bonds from the upper tranches of the designed-to-fail packages were rated AAA - i.e, they were rated as incredibly unlikely to fail.
Why they got that rating is the real question - and in my opinion, it comes back to the whole fraud thing.
The rating agencies are paid by the people who issue the bonds. So they want to give the things the best rating that they can - because if *they* won't rate it high, and a different agency will, then they'll lose business. So there's a bias there, as a rating agency, to not notice the things that your competitors aren't noticing.
And they basically built the ratings based on an assumption of independence. They built their assessment of the likelihood of failing on the idea that the chance of any given loan failing was independent of the chance of any other loan failing. that assumption means that you could take any two loans from the bundle, each of which had a 5% chance of defaulting; if you then *knew* that the first one defaulted, the probability of the second one also defaulting would remain unchanged, at 5%.
But the reality is, the loans were all similar, and all likely to default under exactly the same conditions. So if one of the loans failed, realistically, the chances of another one failing would increase. With each successive failure, the probability of more failures increases more - because they're all affected by the same pressures.
So the ratings were based on an invalid assumption. But the people who were the counterparties on the CDS were working based on the idea that the ratings agencies were giving a fair assessment of the risks.
Ah yes. I rememeber back in 2001 or so, when I learned that Paul Rubin had approached (either Moody's or S&P) to try to bully/convince them into upgrading the rating of Enron, that I thought something was seriously wrong with our rating system.
So maybe it goes beyond these parties, and right into the heart of the 3 big rating agencies as well? I imagine they don't have dupes working there.
Just a "thank you" for a clear explanation of just what the hell was going on during that oft-referred to but seldomly explained "bubble"!
John Paulson and Goldman Sachs were exploiting the stupidity of large financial institutions that should have known better than to invest in dubious financial products. Such banksters keep normal banks on their toes, which is a good thing!
Actually, when I read the news I do think that Goldman Sachs crossed a line. But there are more sides to every story, and you shouldn't believe everything you read.
Mark, I sincerely appreciate this post. Fantastic work.
I happened on this recently at lcurve.org:
In March 2006 Forbes reported 793 billionaires in the US with combined net worth of $2.6 trillion. In March 2007 Forbes reported 946 billionaires in the US with combined net worth of $3.5 trillion. That is a 1-year increase of 19% in the number of billionaires and an increase of $35% in their net worth during a time of increasing poverty. Severe poverty is at its highest point in three decades.
I wonder how much of the spike is attributable to hedge fund profits.
In the late Seventies, the wealthiest 1% of Americans held 27% of U.S. wealth. Twenty years later, the figure was 43%, and it's obviously higher than that now.
Great summary, but I think you left out some important ingredients in the whole scam.
1. The bond ratings agencies are totally corrupt and/or incompetent. They were rating the upper tranches of derivative CDO's as investment grade, without regard to the actual composition of the bond or its probability of default. They are paid by the banks that create the securities that they rate, and they provided the ratings that the banks wanted. The banks deliberately exploited this because they knew they could sell the CDO's based on their top-quality rating.
2. As Michael Lewis makes clear in the epilogue of his book, all of the big investment banks went public over the last 20-odd years, whereas previously they were private partnerships. This foreshadowed our current disaster because what it did (and was intended to do) was to shift the risk from the partners to the suckers who buy the stock in those companies. And, sure enough, this is precisely what happened. The principals at the big banks came out with tens or hundreds of millions of dollars, and their shareholders got cleaned out (Bear, Morgan-Stanley, etc).
3. Precisely because the big banks are publicly held, the various players who exploited the CDO/CDS market also short-sold the stock of the banks involved. So, for example, a hedge fund would buy a CDS from, say, Morgan, then turn around and short Morgan's stock because they knew that once the whole thing blew up, there would be at the very least big losses at Morgan, and perhaps even drive Morgan into default. And so it came to pass.
4. Writing a CDS is the functional equivalent of buying the underlying bond, except that there is no limit to how many times one can "buy" the same bond. That is, each mortgage was magnified countlessly many times into synthetic debt obligations in the form of CDS's that were, ultimately backed by it.
5. Lewis reports that the synthetic securities got so out of hand that they even wound up with circular dependencies! I have no idea what it would mean to have an instrument that pays off iff it defaults ....
Thanks for the great post. I think this is a solid explanation of the egregious behavior exhibited from 2005 onward. While I generally agree with the concepts here, I do have to disagree that CDS is an instrument built purely to propagate fraud through the debt marketplace. CDSs were in the marketplace long before CDO trading became a mint for banks and hedge funds.
The brief history is that CDSs are an instrument to hedge credit risk introduced by lending to potentially unstable corporations or countries. While this sounds shady, it's actually a great way for new companies, distressed corporations, or developing nations to get lending from private institutions. As any basic investor knows, it's never a good idea to invest without having a proper hedge in place to counter any losses that could be incurred.
It's important to understand why CDSs are viable hedging instrument. For this, lets take a real life example:
Say I purchased a 10 year Delta Airlines corporate bond that I paid a face value of $100 for in 2001. It's now 2004, and I'm worried that Delta Airlines will default or restructure, affecting their ability to repay me my $100. Hence, I go into the CDS marketplace and I buy a CDS to cover $100 of Delta Airlines debt. I pay a small premium to the CDS seller every few months. In 2005, Delta Airlines defaults and my CDS contract is activated. I give the CDS seller my Delta Airlines bond (not totally worthless by the way, just worth much less than $100), and the seller would give me my face value of $100 that Delta Airlines is no longer able to repay me.
At it's purest, a CDS is a financial instrument that makes perfect sense. Just as there are many hedges for equity (e.g. - options), a CDS was originally built as way to hedge a loan. The options market for equity has been around for much, much longer than the CDS market. When you sell an option, you do not have to prove to the buyer that you currently own the equity that the option is against. In a similar vein, CDS buyers do not need to hold the debt security that they are covering at the time the CDS is issued.
At the time of exercising, there's a big difference between what happens in the options market versus what happens in the CDS market. When an option is exercised, the seller must be in a position to deliver the actual equity security to the buyer. As noted in the post above, when a credit event occurs and a CDS is exercised, there is no requirement in the CDS contract for the buyer to deliver the debt security. What happens in practice is that a market value of the underlying debt security is determined by all vested parties (usually a consortium of major banks), and the CDS buyer has the option of either delivering the debt or the determined market value of the debt covered by the contract.
To go back to the Delta example above, say the marketplace determines that my bond is worth $40 face value after the default (instead of the $100 I paid for it). When exercising the CDS contract, I have no obiligation to hand over the bond, so I could give my counterparty $40 (determined market value of the bond), and I'd get my $100 in return, all while holding on to my bond. Clearly, my counterparty would never know if I actually ever had the bond to begin with.
Generally speaking, because there is no requirement to deliver the actual debt security at the time of exercising, the CDS market turned speculative relatively quickly, and led to the numerous issues identified in the post above.
I firmly believe that CDSs are not the real problem in this equation. Just as is the goal with options, CDSs aide in providing liquidity in an otherwise illiquid marketplace (find me a bank who was willing to extend a loan to General Motors or the country of Greece in recent months without having some sort of ability to hedge their investment). Some simple regulatory measures could make CDSs a viable and useful instrument. For instance, capital requirements for investing institutions to have the required cash on hand to deliver in the event that the CDS contract is exercised would be a good start. Better yet, a requirement to exchange the actual security would curb speculation immensely and put a hard cap on the dollar amount of CDS contracts in the marketplace. Lastly, a commoditization of the CDS marketplace, similar to that of the options marketplace, would provide both liquidity and additional oversight.
The best answer appears to be to structure the system so that the various participants bear financial interest in their products. Ratings agencies, investment banks, etc. should be financially accountable for the success of their products.
Does the current proposed financial regulation bill accomplish this?
Good explanation. One point you missed is that a very large amount of funny money was "printed" by very large banks off-balance-sheet, which means that (at the time) regulators weren't required to be informed (at least in full). More importantly, this whole scam was built into one of the major foundations of our economy: the entire mortgage-backed securities system.
If this whole scam had taken place without involving the country's mortgage system, it could have collapsed without dragging the whole economy with it (IMO).
IMO we need more legally required transparency in:
- Investments/bets by banks larger than a certain size (so that if they fail the create systemic risk).
- Creation of new instruments where rating experience doesn't already exist.
We also need a "Chinese wall" between the major foundations of our economy (such as the MBS system) and untried, innovative instruments (where rating experience doesn't already exist).
Large financial institutions should be prohibited from investing more than a certain percentage of their managed assets in untried, innovative instruments, the percentage being measured as a (very small) fraction of the total economy rather than their own size.
New and innovative instruments are fine, and should be allowed or even encouraged, but very large institutions should not be allowed to put more than a tiny fraction of their managed assets into such instruments.
And I include in "managed assets" their required reserves.
There's a legitimate financial purpose of the tranching. It lets people buy bonds with different durations. If I have long liabilities (pension obligations), I want long investments. But those -- and especially safe ones -- are hard to come by. I don;t think the tranching was really the problem -- people knew the long tranches were riskier. The problem was exactly what you identify -- there was a lot of supply for mortgage investment and the mortgage makers scrambled to place mortgages. Credit quality suffered but, more importantly, the easy availability of mortgages distorted the housing market so that the bubble could form.
"An excerpt from Wall St. Journal reporter Greg Zuckerman's book on the collapse of the subprime mortgage market":
Part of the problem is that in 2005 the Senate Banking committee tried to change (make stronger) the regulations on Fannie and Freddie, but one of the parties would not vote for it so it languished in committee.(the regulations would have made it more difficult to issue alt-A mortgages and subprime loans which greatly contributed to the problem.) But yes, more transparency to what was going on would have been vital also.
So why not only allow companies CDS's on investments that they own, this would then be in, the classic sense, insurance against the investment going bad. Couple that with only allowing companies to sell CDS's that have the collateral to pay if the investment goes bad?
Is it that easy or am I missing something here?
I have to agree with that, the problem from what I can tell, is that the risk assessment of the tranches failing was way, way, off. Everything obviously swings on the risk assessment, so the real problem here are the rating organizations. I guess its like a bookie who is setting long odds on a sure thing, but its not his money that is at stake when everyone who bets wins big.
I am surprised that legitimate companies selling CDS's just took someone's word that the investment was solid, I would have thought you would have your own guys going over the details and determining the risk for yourself.
And for the piece de resistance:
The hedge fund managers only have to pay taxes on their ill-gotten gains at the capital gains rate [15%] instead of paying taxes as if they earned their lucre as salaries.
I'm impressed. This post was one of the clearest explanations of the CDO/CDS mess I've ever read.
Here's a thought: the state should simply refuse to enforce contracts that are this opaque. A contract must have
1) a "meeting of the minds", an agremment understood by both parties, and
2) an "exchange of consideration".
Things this complex and abstruse I think fail both tests.
Thank you for this very good summary of the actual financial crisis.
Just one comment. I hope it will aliment your reflexions and those of your readers. I read recently some articles about the new book of Jean de Maillard "L'arnaque" (The Scam ) a french magistrate. His provocative thesis is that fraud is at the center, not the margins, of recent capitalism.
I thought his ideas were very exaggerated, but with all these revelations, I think that finally he may be right.
Interview for "L'expansion" : http://www.lexpansion.com/economie/actualite-economique/jean-de-maillar…
Sorry, the interview is in french, but I hope you will be able to grasp the main ideas with the Google translation tool...
There may have been some fraud on individual deals - but put the pitchfork down.
Question - is short selling a stock bad? For individuals and for society?
How is CDS different than a put option on a stock? And how is that different than insurance from a risk prespective - leave legal issues like insurable interest aside. If I buy a put option on IBM for example, should I have to own the stock? Arent I just paying a small premium for say 6m of protection of the destruction of value below a certain price? Isnt that pretty much the same dang thing as Geico selling me a policy that my car will lose value over 6m. Again, there are some different definitions in each I understand, but from a risk prespective both can be modelled and two people can take opposite sides and trade it. One wins, one loses. Big deal.
The products themselves are fine. Some people won, some lost. So be it. Fraud is different, being a scumbag is different. If both sides have fair dealings, I see no issue. (And fair dealings doesnt mean doing the other guys homework.)
Btw - as for consumer protection, considering that virtually every company will eventually go bankrupt, should we allow people to buy equity? I mean, in BK you have a claim on NOTHING. Your only out is a bigger scuker who thinks BK is further away than you think. Dangerous gamble isnt it?
I think that there is are very significant difference between traditional short-selling and the scam involving CDOs - and those differences are exactly why I think that the CDS/CDO thing was a scam, and traditional shorting isn't.
There are two main differences:
(1) In a traditional short, you need to buy the asset. In a traditional short, the basic idea is that you pay someone to borrow their asset; you then sell it immediately. By the end of the contract, you need to buy back identical assets, to return to the original owner. There's one huge difference: the traditional short is tied to a specific piece of assets. You can't short 200% of the stock in a company. In fact, the set of all investors shorting a stock cannot short more than 100% of that stock. But with a CDS, a single investor can buy 50 different CDS contracts covering 100% of the basic asset, which neither they nor the seller of the CDS own. I can't set up shop selling short contracts on IBM stock unless I own IBM stock. But I can set up shop selling CDS contracts on anything I want - I don't need to own it, I don't need to have any connection to it, and I don't need to have any assets of any kind to show that I'm legit.
(2) In a traditional short, the shorting is public. There's a public market, and the fact that people are shorting the stock is known, and the fact that they're selling the shares they "borrowed" for the short affects the stock price. This is where the value of shorting comes from: much of the information that we get about investments comes from the market itself; a short contract provides information that there are people willing to put up their own money to back their belief that an investment is overvalued. But a CDS is a private contract. It's not traded in an open market; it's not backed by the underlying asset; it has no effect and provides no information to other participants in the market.
Put those two things together, and you can see exactly why CDSs can cause so much trouble. The quantity of CDSs on an asset is completely untethered to reality; and it's completely unknown.
CDSs are a big part of where the fake money in this whole thing came from. You make a loan that's based on the incorrect assumption that a property will increase in value. The CDS allows you to book that as a profit. Then you can take that profit and invest it in more loans. And you can use CDSs to back those. Layer upon layer. All of those CDSs are the foundation on which the entire pile of garbage is based. But the CDSs are a total fraud: no one can possibly pay them. The counterparties to the CDS frequently can't possibly pay up.
There are specific examples that came out. In the Lehman bankruptcy, they'd bought CDSs on a billion dollars worth of assets from a firm whose total assets were around four million dollars. Did they really believe that if the underlying loans failed, the $4 million firm would be able to pay up? Does anyone really believe that?
But that's what the system was built on. And that's why I continue to maintain that regardless of what the law says, in an ethical sense, it was fraud. The laws have lagged; these kinds of contracts were invented to exploit loopholes in the law. So they're completely legal. But that doesn't make them honest. They're fraud.
@Mark C. Chu-Carroll
1. What you describe in 1 above doesnt jive with a hedging transaction you describe below. And its a huge jump to call it fake money - ask the guys that lost money how "fake" it was.
2. You make a loan, then hedge via CDS. Great from a risk prespective - absolutely horrible from an accounting prespective. The CDS does not allow you to book a gain, instead you have a generally speaking non-marked-to-market loan against a marked-to-market CDS.... good luck with that.
3. CDS volumes are published. Sorry if you didnt know that. If when they weren't - and not 100% of them are necessarily published - big deal. Stop relying on what other people are doing. If you love math so much, do your own work. CDS prices are published - maybe not for free but there are independent sources that will give you reliable information and be liable for it. It aint free though - sorry.
4. As for traditional shorting - you are aware that Treasury securities can be short well past there stated outstanding amount? And no one publishes that data that I can find. Market there works just fine. Dealers will run you over on that one.
5. What about Options? When you are looking at a stocks short-interest - are you considering or seeing the shorts via options, ETF or index puts and the OTC market? (yes some people execute stock short via OTC options) Nope. Good luck to you relying on short-interest data. The market price is all you have to tell you what people think.
I am not trying to be a jerk. The market is a scary place. Sticking your neck out into something you dont know about generally ends quite badly. Calling that fraud though strikes me as wrong. You are getting worked up by leading articles. It is a scary place though, but the truly scary stuff is telling mom/pop that stocks always go up in the long run, that the economy always grows, etc etc. The long bias is scary.
You're right, Anon. It is absolutely not fraud to set up a deal that you intend to fail and then find suckers to finance it, like Paulson did.
Wait. Sorry. That actually is the definition of fraud. My bad.
This "designed to fail" is completely misleading. It was designed to pay-out based on the performance of mortgages that already existed in the market. Paulson did not originate those mortgages nor did he have any non-public material information about them.
Lets look at an analogy. You and I are staring at the leaning tower of Pisa - says two weeks after it starting leaning. I say - hey I think that thing will fall over. You say - no way...these people who built smart educated etc. I say fine, I bet with you (neither of us had anythign to do with teh building/design etc) that it will fall over in the next 5 years. You bet that it does not. Scenario 1) It doesnt fall. You win I pay $100. Scenario 2) It falls over tomorrow. I win $100.
Where is the fraud? I didnt design the tower, I just observed it leaning. Paulson didnt "design" the mortgages. We - you and I - did "design" a bet on the tower potentially falling, so be it. That design worked perfectly in both scenario 1 and 2.
You have an outcome bias. And since Paulson was right and something "designed" must be "good", that there was fraud.
@46: I think this is closer to the Paulson situation: You and I are staring at the Leaning Tower of Pisa. I say, "I'll bet that tower will fall." You agree. I ask you to advertise for people to invest in the hypothesis "The Tower of Pisa will not fall in the next 100 years." You do: you send out advertisements offering the chance to invest in the "will-not-fall" hypothesis, telling investors that many experienced architects have given their word that it won't fall. I pay you $100 for collecting all the bets. At the same time, I wager with some other people that these many bets will all fail.
The Tower falls. I pay you $100, but I collect thousands on my wager. You collect $100. The only losers are the people who took your word for the fact that the Tower was a sound structure.
Did you behave ethically in encouraging people to invest in a structure that you knew would fall? Does it matter that I paid you money to make those advertisements?
MCC@43, you can have the same effect in traditional short selling too, as seen in the VW debacle in Germany in I think 2008. Since you immediately put the share back in the market when short selling, the same physical share can be short sold multiple times, with the same due date. In the VW case, people weren't realizing that while VW as a publicly traded company, only about 10% of it's stock was really on the market (the rest is held by institutions that cannot trade in it). So when it came time to rebuy the stock and return it to the original owners, a lot of people were scrambling to get their hands on stock with very limited supply, making VW the most valuable company in the world for a short time.
tranching is not what caused this problem. it is something that makes the higher tranched bonds safer than lower. i fail to see how this is a lie.
investors wanted yield in a low interest rate environment and banks wanted to make money off of fees. they ended up creating some bad investments. greed and shortsightedness (by all parties, INCLUDING INVESTORS) caused this disaster.
oh and the first mortgage bond was sold in late 70s and was vanilla. CDOs for abs (like mortgages) came very recently and have a very short track record.
The VW debacle is apropos: at the very least, if you short stock and can't buy it when the time comes, expect to be bankrupt.
And the reason tranching is a problem here is that "safer" is relative, and is only meaningful if any of the investments are safe. Shooting yourself with a BB gun may be "safer" than doing so with a .38, but that doesn't mean either is remotely safe. (And both can void your life insurance.) I could argue, correctly, that my pet cat is smarter than a ballpoint pen: that doesn't make him smart by most standards.
@ michael richmond from anon43
Sorry. In a CDO, there is no reliance allowed on the sponsor bank. In fact, the stated counterparty to the deal is GS itself....ie GS is betting against you in this trade explicitedly. Nothing unethical or wrong there.
As for Paulson "knowing" it would go under. That was not a fact in 2007, it was an opinion or belief. It turned out true, but that does not mean he knew it to be a fact.
"Paulson did not originate those mortgages nor did he have any non-public material information about them."
No, he had input into the design of the CDOs. Stop trying to mislead people.
"As for Paulson "knowing" it would go under. That was not a fact in 2007, it was an opinion or belief. It turned out true, but that does not mean he knew it to be a fact."
He specifically chose high risk loans to put in the CDOs. He absolutely did his best to encourage the creation of CDOs that were designed to fail. It's not like he picked random CDOs, or found them in some portfolio and chose a position: he had input into what went into them.
"You have an outcome bias. And since Paulson was right and something "designed" must be "good", that there was fraud."
I don't think you understand the accusation. The accusation is that Paulson specifically chose high risk assets to put into a bond, thus (in his mind) ensuring the failure of the CDO. We know that he intended the CDOs that he designed to fail because he only bet against them, taking no hedge position. The investors who bought into these things were told that they were highly rated, and his role in their creation was not disclosed. This is where the accusation of fraud comes from.
Your tower example ignores the role of Paulson in building the CDO. In truth, a better analogy would be if the architect of the tower bets on it falling, but no one else is told that the architect has taken this position. Sure, he didn't design the individual bricks, but he built the tower itself... and he expressly chose poorly baked bricks to put into the foundation.
Go back to wage-slaving for Goldman Sachs by helping Google sell ads for the corporate banking occupation you serf.
With all due respect, your characterisation is both naive and inaccurate in countless ways. For example, nobody would have entered into a CDS contract with knowledge that the counterparty didn't have the money to make good on the contract. I can assure you that enormous resources were put into investigating the solvency of counterparties. It's like saying someone would buy car insurance from a company they know up front cannot afford to cover them in the event of an accident. Your conjecture is totally absurd and not supported by any facts.
There are countless other pieces of mis-information in your post. While there was no doubt fraud that was perpetrated, I encourage you to dig past your surface level investigation as it is clear to me that you are fairly uninformed.
However, I think it misses a component that I still can't get past - a complicit partner that seems to have sailed through this entire escapade utterly unscathed.
The ratings agencies.
None of this would have worked. Not one single bit of this could have got off the ground to more than the tiniest extent without the eager help of the ratings agencies.
Think about that for a minute. Those firms whose job it is to tell you how safe investments are? Guess where their money comes from? From the companies whose products they rate. You know those banks deliberately selling bad CDOs to their customers? How could they successfully fool their customers? How could they convince them that those bad CDOs were actually a decent investment?
The ratings agencies were the ones that rubber stamped all that crap as "safe" investments, all the while pocketing a shitload of money for doing so...
How many of them lost their jobs? How many of them are in jail? How many of them have had regulators looking over their shoulder, insisting they change the way they do business?
This whole thing is going to happen again. It will take a decade, and it will be in a different form to the last time, but it will all happen again - a few people will make utterly insane amounts of money while everyone else pays the cost. And the people that will make the fraud actually work will be the ratings agencies.
As for Paulson "knowing" it would go under. That was not a fact in 2007, it was an opinion or belief.
Spare us the hoocoodanode. Lots of people who were paying attention knew that the market was going to go under--the timing was a matter of guesswork (several hedge funds blew up because they were too early), but the fundamentals were clear. And remember that the SEC alleges Paulson himself designed the Abacus 2007 CDO to fail. Which, as I said earlier, is almost certainly unethical but not illegal.
What other posters said above about yield chasing is also important--that was a big reason why there was so much demand for these things. People who manage things like pension funds and university endowments need relatively safe investments with some yield to them, and Federal Reserve Board interest policy was keeping yields low on traditional fixed-income investments like Treasuries and highly rated corporate bonds. This effect continues today. For example, the current APR on my money market account is in the mid-teens. That's basis points, not percentage points (100 bp = 1%).
I'll believe there's fraud in the Goldman Sachs case if it turns out that they helped push the down side of the securities in question. Sort of like giving their former CEO the decision as to whether or not to allow Lehman Brothers to go under.
Claims that CDOs and CDSs and tranching are inherently fraudulent are patently ridiculous. While they are, however, inherently dangerous, they have extremely important uses--they were not invented for the sake of sneaky profits, but because they served a genuine need. But they should be heavily regulated.
The US has not had a bank run since the invention of Deposit Insurance. But DI is inherently dangerous, carrying with it the risk of moral hazard as banks think they have a license to gamble big time. That is why DI came with heavy regulations, and why Reagan's deregulation of S&L's was beyond stupid, leading almost overnight to the S&L collapse.
"Claims that CDOs and CDSs and tranching are inherently fraudulent are patently ridiculous. While they are, however, inherently dangerous, they have extremely important uses--they were not invented for the sake of sneaky profits, but because they served a genuine need"
What genuine need does a synthetic CDO serve? In what way does it add value to the economy as a whole? Who had the need that the CDO was invented to serve?
" I can assure you that enormous resources were put into investigating the solvency of counterparties."
Interesting. So, these enormous resources were basically wasted? Because AIG didn't have anything like the money it needed to make good on the CDS contracts that it sold, and as far as I can tell this was the norm. I guess you could argue that only AIG had the knowledge that they couldn't possibly pay on their obligations, and that they hid this fact from their customers... but really, isn't that sort of the point?
Liquidity and risk management. Mortgages went from being the investment nobody really wanted to becoming highly popular. Tranching the CDOs then allowed investors to fine tune their exposure.
Unlike Deposit Insurance, though, all the obvious dangers were ignored and left unregulated. First out of ignorance, then later out of deliberate self-willed delusions. In fact, as states tried to curb some of the worst aspects, the Bush administration claimed federal preemption and blocked any attempt at regulation.
I have always wondered why AIG did not hedge their exposure? They were simply too much on the one side of these correlated securities and derivatives. They are the eminent insurer and they should know risk and how to manage it. I reckon that most economists and MBAs are very poor mathematicians, but they have mathematicians on their staff. Are they suffocated by the traders who only wanted their bonus and exposured the company to unacceptable risk? Or just more cases of bad math!
"Mortgages went from being the investment nobody really wanted to becoming highly popular. Tranching the CDOs then allowed investors to fine tune their exposure."
I'm still confused. In what way is this a "genuine need". Who had the need? In what sense was that need genuine?
Because it seems to me that what you are saying is that the genuine need was to somehow generate more money without adding any genuine value by allowing an asset to artificially inflate. What am I missing here?
This post is wrong on so many counts. You claim "From the very start, it was obvious to everyone that the CDSs were frauds." If this were true, then many more people would have bet against them. As a scientist you should be precise enough at least not to claim "everyone" knew. This is dishonest.
You use sentences like "There are numerous cases of people with a couple of million dollars being the backers for billions of dollars worth of credit default swaps." to push your case that it is all fraud. This is factually correct, but misleading and dishonest on your part. No insurer of a large class of assets has the cash to cover a total meltdown of that asset class. Imagine if every car in the US got in a wreck at once and the insurers had to pay for them all. They would fail. Same thing for house insurance. Same thing for life insurance. Same thing for health insurance. Insurers only expect to pay a small amount of cases per year, and only hold enough assets to cover their expected payouts, otherwise (by your reasoning) for every dollar of insured asset in the world there would be a need for another dollar of potential loss to be held, which would be a terrible waste of resources. The problem with the current financial mess is this insurance needed to be paid all at once, exceeding the risk the insurers had estimated. For you to use this (and many other simplistic, misleading, and uninformed) points to push your case for fraud is intellectually dishonest.
Similar incorrect and misleading is your argument that banks were "effectively printing money" by selling these instruments around and around. You simplify this again to such a level that your conclusion is wrong. If your claim of "Each transaction created "profit" that didn't really exist " were true, then could two banks just automate the sale of an item back and forth, faster and faster, and realize unlimited profits? I think not.
Unfortunately the rest of your post contains many more errors and outright incorrect statements, all in your quest to label it all fraud.
I agree there was likely fraud, but it was likely much less widespread than you claim. Using factually incorrect or misleading arguments is no better than when "creation scientists" use them to back up their beliefs.
Using charged words such as "shenanigans," "sociapaths,"sleazy," "evil," and others makes it clear you have a little bit of emotional bias. This bias likely makes you select those points backing up your feelings while ignoring conflicting data. You're not presenting an explanation or teaching; you're on a crusade based on oversimplifying and mispreresenting the truth.
It's sad that so many people with little understanding of how current economic systems work do no critical thinking when eating up this crap, mostly because it feels good and confirms what they want to be true. A few people on here seem to understand that the situation is not nearly as simple or clear cut as you do, so there is still hope :)
This post is long enough, so I won't take the space to cover the many more things you simplify incorrectly to back your case. Others have posted some of it. Please stick to science you understand well, like computer science and math, which you cover very well. This area has clearly gotten you unglued from making good, accurate posts, and has led you into pop-econ drivel.
The need was "genuine", in that people voluntarily paid for increased mortgage liquidity and for fine tuning their risk exposure.
You seem to be using "genuine need" and "genuine value" in some namby-pamby prudish sense, having nothing to do with the real world. You certainly are not defining the notion, but are, in essense, declaring yourself right by calling the proof that you are incorrect not "genuine".
Quite simply, having greater flexibility with investment options is a genuine need for some people, so much so that they pay for it. Greater flexibility creates greater value. That is Econ 101. There is nothing artificial going on. It creates wealth just like the inventions of the peanut butter and jelly sandwich and the spring-loaded mouse trap created wealth in their day.
In brief, Mark has no knowledge of economics or finance, but has fooled himself rather well. He's intellectually indistinguishable from a reporter for the WSJ, or 99% of all stock analysts.
I recall one job interview at a major investment firm. I was shown an article from the WSJ, where the reporter identified the best hedge funds, explaining his methodology rather clearly. I was asked to explain why the article was laughably bad. That was the easiest job interview question I've ever had!
"It creates wealth just like the inventions of the peanut butter and jelly sandwich and the spring-loaded mouse trap created wealth in their day."
William, the price of a house was artificially inflated by the tranching and aggressive marketing of CDOs. Then that market inevitably collapsed. So what actually happened was that a small group of enormously well paid people managed to get a large amount of money from a much larger group of much less well paid people, in exchange for which they destroyed the housing market. I'm asking you how the original product served a genuine need, in the sense that it added value to the economy.
I mean, people are willing to pay money for a lot of things, for example, stolen cars. However, I think that we would both agree that this does not suggest that car-stealing technology necessarily fulfills a genuine need... or rather, we can either agree that this need was not genuine or we can define genuine as "existing" and need as "desire". I agree that there was an existing desire to generate a false sense of value in order to gain bonus money. What I don't agree with is that this added value to the economy. It's more like stealing cars: it transfers existing assets but the net economic result is a loss.
It is somewhat naive of you to assert as a fact that greater flexibility in a specific market creates greater value, in the face of actual evidence that greater flexibility in that market failed entirely to create greater value, and in fact led to an economic recession and the near destruction of the entire financial sector.
"It's sad that so many people with little understanding of how current economic systems work do no critical thinking when eating up this crap, mostly because it feels good and confirms what they want to be true."
I suppose so. But it's no more sad that to see a bunch of supply-side dogmatists insist that something that actually happened didn't happen because it doesn't jive with how they think current economic systems work.
This economic crisis is a learning opportunity for macroeconomists. It was largely unpredicted and the correct response was unknown. We've proceeded as a nation almost entirely on guesswork, and there are genuine regulatory issues that have to brought up. I would think that any economist with a genuine interest in understanding the economy would treat this situation as a challenge to the model that failed to predict it, rather than holding onto their old model as if none of this happened.
While there are genuine cases of outright fraud, it's clear that the market itself failed to self-correct in time to avoid economic disaster. That's a problem. It seems that CDOs and CDSs were at the root of the problem, partially because they encouraged inflation in the housing market, and partially because the system in place was easy to game.
Now, it could be that with your "superior" knowledge of economics, you can dismiss all of this as just jealousy on my part. Perhaps in your brain, I want to be rich, and I hate people who are rich, and I just want to knock them down a peg or two.
But the truth is, the major investment houses have an enormous distorting effect on the economy as a whole, and the incentive system in place does not encourage a long term view on the part of the people making decisions. Rather, short term profits and selling lead to immediate gains, and if the consequences of those short term decisions are disastrous, the people who made the decisions get to keep their gains.
Economics 101 should tell you that this is a stupid system to have in place, and that the inevitable result of it will be a preference for short term gains and immediate profit, adding volatility to the market.
Artificially inflated? What, precisely, do you mean? People were willing to pay more for houses.
I answered you, and you've been deliberately stupid about it. Either that, or deliberately coy about what you mean by "genuine" need.
You're being ridiculously bizarre here. The need is almost always for a "car". Not for a "stolen car".
Meanwhile, yes, car-stealing technology does fulfill a genuine need: there are people who are willing to pay for it.
You're agreeing with yourself at this point. It has nothing to do with what I posted.
What was added was what I told you explicitly: greater flexibility in investment options and risk exposure. Totally ignoring my response and making up gibberish, and then pointing out that said gibberish is indeed gibberish is not exactly a refutation. You are simply choosing to be willfully ignorant at this point.
It's not naive. It's essentially a theorem.
Now this is naive to the point of gross stupidity.
As I mentioned from the beginning, CDOs and the like are dangerous. You as might as well say no one has a "genuine need" for matches because sometimes they burn houses down. Matches create wealth, yet they can also be used recklessly and destroy wealth. The latter fact in no way shape or form contradicts the former fact.
Ditto for CDOs.
Supply-side dogmatists? What crap are you making up out of nowhere? I haven't seen anyone post anything on supply-side anything.
Oh, now I get it! There are a lot of economists out there (not posting here) jamming their heads further shoved up their collective recta, and that's not good. Well, no, but what on earth does that have to do with the question as to what purpose CDOs and CDSs serve? Nothing whatsoever. If you want to change the subject do so, but please don't mix it in as if you aren't.
CDOs/CDSs may or may not have been the root of the problem, although they were the first domino to fall. The deeper problem is that of moral hazard associated with them. To the extent that they act like insurance, they encourage the insured to take extra risks.
We saw this when Reagan deregulated S&Ls while leaving them insured at taxpayer expense.
I just dismiss you as beyond stupid, griping for the hell of it and not bothering to notice what people actually are saying.
Yes, what of it? You've identified what all the rest of us have noticed all along: CDOs and CDSs are inherently dangerous.
Econ 101 has been brought up because some people here have been talking jive turkey pop-econ about the most basic issues, like identifying "value" or "need".
The fact that the economy as a whole does not follow the Econ 101 script has not been disputed here. What, exactly, is your point?
"Ditto for CDOs."
You've accused me of having poor reading comprehension skills. And yet, you seem to have missed the point that the definition you gave for 'genuine need' is exactly the same as the one that I agreed to: 'existing desire'. Your specific quote was "Meanwhile, yes, car-stealing technology does fulfill a genuine need: there are people who are willing to pay for it." That is, there is an existing desire for the technology.
Once we agree that what you mean by 'genuine need' is 'existing desire', I can ask a question about what I mean by 'genuine need', that is, a product fulfills a genuine need if it generates new wealth.
Now, I agree with you that there is a desire for greater flexibility and risk exposure. What you have not demonstrated, and what I have asked for, is how these things added value to the economy as a whole. A stolen car moves assets and creates a net loss--and it is the economics of this transaction that creates a desire for a stolen car, rather than a legitimately purchased one. Observationally, it appears that the CDO market did exactly the same thing, it moved assets but did not generate wealth.
What I mean, precisely, by "artificially inflated housing prices" was that the market price for houses climbed beyond a sustainable level, driven by factors that had little, if anything, to do with the actual supply of and demand for housing.
"You're being ridiculously bizarre here. The need is almost always for a "car". Not for a "stolen car"."
Umm... no. If that were the case, people would simply buy a car. It's not like there isn't a large supply of cars available at a variety of prices, from a few hundred to a few hundred thousand dollars. But a chop shop will not pay market price for a new even used vehicle, so they are in fact only in the market for stolen merchandise, or legitimate merchandise sold at a steep loss. In either case, the transaction reduces net wealth rather than increases it.
These CDS sound like a broken attempt at a prediction markets. If they were publicly traded, instead of bought and sold in secret deals, maybe this wouldn't have happened. People would have been less likely to buy CDOs if they saw lots of money betting that they'd fail.
I wish that other people could buy insurance on things that I own (as long as it's public). If there's suddenly a lot of people buying fire insurance on my house, it's time to check the smoke alarms and put the fire department on speed dial. Or I could make some money by taking the other side of the bets, if I were confident in my fire safety.
And stupidity too. Here, you are engaging in misdirection. You gave a ridiculous argument: if something is dangerous, it can't have a "genuine" need whatsoever. I pointed out that this is ridiculous. And instead of responding to my argument, you just go on now and bluster:
You gave no definition nor agreed to one. You simply implied with examples that do not imply what you think they do.
For someone who just said very loudly that you gave the same definition I did, you proceed to cite the example which you said is not a "genuine" need and which I said is. Sheesh, you're just responding at random.
Excuse me, but you are the one who has been throwing out the terminology "genuine need" without defining it, and I'm simply trying to make sense of your self-invented category and not succeeding very well. I believe it is simply a crackpot phrase like "specified complexity" or the like, an obfuscation that you think captures the essence of your assertion of fraud, but frankly says nothing beyond you don't know what you are talking about.
That's a different question. I simply pointed out that they most certainly did add value to the economy as a whole: they were sold for a price. You seem to operate in crackpot cookooland, a nephelococcygia of priggish disapproval of money and economics that allows you to have childish opinions with no need to back them up, and to rant against anyone who knows better.
As for mechanism, this is Econ 101: every new choice increases the economy's overall wealth.
This is flat out ignorant. You are just winging it, right?
How badly did Peter want the car that Paul just stole? If it was Peter's fifth car, and Paul's first, it may well be that society is now better off, wealthwise.
The cost of crime is, in fact, usually not the transfer, but the fact that the Peters of the world do something to protect themselves from and avenge themselves upon the Pauls.
You're gibbering. Seriously, the above is just word-salad.
The thief is a person with a positive car desire, a possibly unrealistic estimate of his potential punishment, an inferior sense of empathy, and a comparative advantage at car-theft than wage-slaving.
Observationally, you're gibbering. The CDO market generated wealth, something you keep denying by begging the question that it was "artificial" or something. They've been around for about 25 years. And yes, they crashed Kidder Peabody in the 90s, and markets as a whole more recently. So what?
They are, as anyone who thinks about them for any length of time realizes, quite dangerous. Meanwhile, they do generate wealth so long as they do not burn the house down.
More nonsense. More Dembski-like making-it-up-but-it-sounds-good gibberish.
What on earth is a sustainable price level? What happened was deceitful ARMs started popping, and there was a hiccup in the mid-tranche CDOs as a result, which led to the biggest bank run in modern history. I'd like to blame over-aggressive bankruptcy laws/mortgage default procedures myself as the real cause. Demand for housing didn't suddenly nosedive, as you seem to be saying.
Indeed, which is "artificial", driven by factors that had "little" to do with "actual" supply and demand? The price increase, or the price drop? You're arbitrarily declaring it was the increase, and the drop was "natural". I'd say the drop was, if anything, more obviously deserving of the term "artificial". I mean, that was the starting point of Mark's rant in the first place: Goldman Sachs engaging in "fraud" to push down housing prices.
Buy? Who said anything about "buy"? You? You're just assuming your conclusions.
The need for a "stolen car" as such is quite uncommon. Perhaps Paul wants to frame Peter, and thus needs hot property to end up in Peter's hands.
The available prices include "free (not counting your supposed conscience and the time and effort involved and the risk of getting caught)" to a car thief.
Really, you're just making things up. The car thief has his need for a car, and fulfills it by stealing because he has the skills/immorality/fearlessness/stupidity needed, not because he woke up and thought, "you know, I could really use a stolen car right about now".
The rest of us fulfill needs using money, usually, because we don't have what it takes, mentally or physically, to be a car thief, but we do have what it takes to work for a living.
Someone I knew way back when talked to me about not filing with the IRS for the previous 20 years. We were acquainted and friendly enough, and I filled him in on what I knew could happen: since he held two jobs, neither one probably deducted enough. I also warned him that he really really does not want to yack about his non-filing: the IRS runs a rewards program for turning in tax cheats, something he did not know. No doubt I could have earned some easy cash with a quick phone call, but I did not have it in me to do so.
As for those who would do so, they would do so because they have a desire/need for money, so much that it outweighs their sense of empathy towards people they know. (I'm ignoring any sense of empathy towards recipients of tax-funded spending.) And you know what--it's a desire for money that such people have. Not a desire for rat-fink-squeal money.
Again, that depends on the people involved. But you certainly are obviously making things up at random. Does a chop shop doublecheck that the cars being brought in were actually stolen? No. Do they turn away clunkers that were obtained by honest means? No. Do they reject cars being brought in by their owners who are trying to destroy incriminating evidence? No. The chop shop needs cars, not stolen cars.
"This is flat out ignorant. You are just winging it, right?"
No. I'm pointing out a simple economic fact: stolen goods represent a loss. If you think this is ignorant, please enlighten me as to how car theft positively impacts the net wealth of a society.
You: "You gave no definition nor agreed to one. You simply implied with examples that do not imply what you think they do."
Me: "However, I think that we would both agree that this does not suggest that car-stealing technology necessarily fulfills a genuine need... or rather, we can either agree that this need was not genuine or we can define genuine as "existing" and need as "desire". "
"what I mean by 'genuine need', that is, a product fulfills a genuine need if it generates new wealth."
So I did, in fact, provide a definition, and you did, in fact, agree to it.
I think the problem here is that you're so convinced that I'm stupid and ignorant that you aren't really bothering to put any thought into what you say.
"Demand for housing didn't suddenly nosedive, as you seem to be saying."
Actually, not only didn't I say that, I didn't even seem to say that in any way. What I said was much closer to this:
"What happened was deceitful ARMs started popping, and there was a hiccup in the mid-tranche CDOs as a result, which led to the biggest bank run in modern history."
The existence of a glut of deceitful ARMs was driven--as far as I can tell--by the demand for CDOs. The price of houses was also driven by that demand. However, the prices that people were paying for houses was more than they could afford--that would be the sustainable part--and eventually, housing could not be inflated any further.
Just as a side note, William, what's your rhetorical strategy here? I'm assuming that you actually think that you are correct about something, and that you actually think that it is worth your time to tell other people that you are correct about that thing. I'm basing this on the fact that you keep saying that you're right about something.
So, do you think that if you call me stupid enough times, that you'll either convince an unbiased reader that I am stupid, or that I'll suddenly start listening to you, or what? Or do you just like insulting people? Because honestly, I think that you may actually know something about this, but since you waste every post being insulting and patronizing rather than actually explaining what your points are, it's really hard to tell.
Basically, you just keep repeating your original assertions. Repetition isn't an effective communication strategy. Maybe, if you think that you are right about something, you should spend more time explaining why you're right, and less time trying to convince me that you're a total asshole.
"For someone who just said very loudly that you gave the same definition I did, you proceed to cite the example which you said is not a "genuine" need and which I said is. Sheesh, you're just responding at random."
I'll try explaining this again. Perhaps I was unclear.
What I meant by genuine need was "This creates wealth".
What you meant by genuine need was "There exists a desire for this"
I agreed with you that by your definition, there was a genuine need for CDOs. I do not, however, think that the CDO market met a genuine need by my definition.
My definition is not at all like specified complexity. I've been extremely clear about what I mean, using simple, one syllable words. I have not changed my definition. It is not difficult to measure. You could propose a metric like the DJIA or GDP to measure wealth, if you like. If you can demonstrate in some way that the CDO market increases available wealth, you will have demonstrated that it fulfills a "genuine need".
I am currently of the opinion that the CDO/CDS situation was basically a shell game in which a large number of people lost money and a small number of people made exactly that much money minus some transaction cost. I could be wrong. But if you can't listen for long enough to actually read three simple words, you don't really stand much chance of convincing me that I am wrong.
Seth, the problem is that you're talking at cross-purposes. Your fundamental definitions and his are entirely different.
There's one classical definition of wealth, which is "anything that someone will pay for". By that definition, then CDSs *do* create wealth - because they're something that someone will pay for - and by creating something that someone will pay for, you create wealth.
By that definition, you also end up with car theft producing wealth: the original owner of the car will buy a new car, and the thief will sell the parts of the car. The original car never disappears - it was already paid for. The theft takes something that was already bought, and turns it into a bunch of new things that can be bought and sold.
On the other hand, you're using a definition of wealth where the creation of the wealth is the production of new goods and services which have an intrinsic value of their own. By that definition, a CDS is a fraud, because it doesn't have any value of its own: it only has a value in reference to a legal agreement.
I agree with you in terms of definitions. The problem is that it's an incredibly tricky distinction to make. And it's a distinction that a large number of economists absolutely reject as completely, utterly, instrinsically meaningless.
If you come from the school of thought that there's a distinction between "wealth" and "what people will pay for", then there's absolutely no way to have a meaningful discussion with someone who defines "wealth" as "what people will pay for".
People who believe in the distinction will at least consider the argument that things like CDSs are completely fraudulent; that the problem we're going through in the economy was caused by CDOs driving housing prices to something far beyond what the houses were worth, and so on.
People who don't believe in the distinction will say that that's a load of meaningless hooey. If the meaning of what something is worth is "what will someone pay for it right now?", then things' values can't be inflated beyond their worth: that's like saying that something can be made to weigh more than its weight. In that school, CDSs *are* creators of wealth - because you can create them, and someone will pay for them. Someone created something that has value, and therefore it created wealth.
I know that I'm doing a lousy job of explaining the ideas of the wealth-as-value people. I'm doing my best, but frankly, it makes about as much sense to me as my wealth-is-distinct-from-value beliefs make to them.
The point is, sometimes you can't have a meaningful argument, because you're just no speaking the same language as they are. Everything that William is saying is entirely sensible if you accept his definitions. And everything that you're saying is entirely sensible if you accept your definitions. But you're not using the same definitions. And you can't formulate your argument in his definitions - because the definitions make the argument meaningless. Likewise, his arguments don't make sense when you use the definitions that I think we agree on. There's just not enough common ground to build a debate on.
"And it's a distinction that a large number of economists absolutely reject as completely, utterly, instrinsically meaningless."
The thing is, every economic theory that I've ever encountered, whether micro or macro, agrees that there exist zero sum transactions, negative sum transactions, and positive sum transactions, and that therefore not all economic transactions result in an increase in net wealth.
An admittedly brief literature review in economics journals did not uncover any articles at all that discussed positive impacts of theft on wealth, but several that discussed a negative impact. So, while their may be people who define "wealth increase" as "any transaction at all, regardless of consequences", I'm not sure that any of these people are economists, or at least not economists that are publishing research.
It seems to me that if you are correct, William is simply denying the existence of negative-sum games.
*their* should be "there".
No, you are not pointing out a simple economic fact. You are making things up.
Whether Peter has it or Paul has it, a car is a car is a car. The theft of the car in itself does not destroy the car, and there is no net loss. The losses come about because of the efforts would-be victims take to prevent and punish crime, and because of the efforts would-be thieves take to steal and evade punishment.
As I explained in my previous post and which you point-blank ignored: if Peter doesn't really need that fifth car, and Paul could really use that first car, then all other things being equal, society (wealth-wise) really is better off when Paul has Peter's car. This is Econ 101. But since society as a while isn't just money, we collectively put severe restrictions on this style of transfer, and legally rely on progressive taxation.
No, you have not provided a definition. You were just making up a word salad, with the most substantive bit simply being a circular argument that CDOs are "fraud" because they aren't fulfilling a "genuine" need because the price increases seen are "artificial".
The actual problem here is that you have zero comprehension of economics beyond what a dollar bill looks like, but just assume you must have expertise. It is completely beyond your comprehension that there is knowledge to be had beyond your ignorant guesswork.
It seemed that way. It's hard to tell, because you are using terminology in your own make-it-up-as-you-go-along fashion, coupled with zero desire to actually learn what the words mean.
That's what I said. A much more accurate description of what went wrong than the meaningless rant that CDOs are inherently fraudulent that you were going on about.
This is ignorance, again. "Glut"? You are yet again assuming your conclusion, so to speak. It was not a glut. The percentage of actual defaults was rather small when the middle-tranche CDO hiccupped.
It wasn't even a panic as such. Modern finance is driven by making pennies everywhere. If your hedge fund had 1% middle-tranche CDOs that were staying down for a month, everyone's computer models said there were more pennies to be made somewhere else. They all jumped ship. And for people not computer trading at the time, well, they could see in slow motion certain funds dipping a bit fast, so they too exited. The modern version of a bank run ensued, and the rest was a crash.
We had this when GarnâSt. Germain was passed in 1982, leading to S&L deregulation and the ensuing collapse. Perhaps coincidentally, G-SG was what legalized ARMs in the US.
Meanwhile, it certainly did not help things that the ex-CEO of Goldman Sachs had the final say about whether to rescue Lehman Brothers or not.
There was a crash. Not a drop in demand for housing.
Truth and the facts.
And you keep evading my responses, or engage in blatant deceit, or jaw-dropping stupidity. Simple example: Peter's fifth car is stolen by Paul, his first. You ignored my example, and then just asserted that no matter what, the act of stealing lowers all-round wealth in society, as if I hadn't said anything.
I refer you to basic assertions that can be found in Econ 101 textbooks, and you blithely go on as if it just can't be true, and then invent your own bizarre theory of economics, that what motivates a car thief is not that he wants a car but can't afford one using legal methods. Uh uh, there's something about a stolen car that he just has to have. Scenarios exist where that is the case--I gave one, and I can easily think up a few more--but they are extremely uncommon.
So you keep making up gibberish, I'll call you stupid.
Your intellectual strategy is Creationist Crackpot through-and-through.
Yes, I know that's what you think. You explained it in a circular fashion, throwing in "artificial" and "sustainable" as if they clarified anything. They didn't.
Really? How do you recognize in 2003 that the CDOs are not creating wealth because there's an "unsustainable" glut in housing going on? You can't, so far as anyone knows. Research into bubbles is currently a hot topic, for obvious reasons. And along comes Seth Manapio who strings together his happy little word salad, and he is so proud of how clear he is? How easily measurable it is?
Go ahead, pull a non-Dembski: show us the numbers in a real system.
Except, of course, that I did use some metric and you rejected it out-of-hand. Here are numbers for you: according to this summary, there were over 86 gigadollars in CDOs world-wide in 2003. People were indeed buying them.
What's your metric?
Your words are too simple. So simple they don't mean anything.
People lost money in the crash. The crash was not too surprising, because CDOs carry a strong moral hazard, as I pointed out from the beginning of this discussion. They serve a genuine need (hint, referring to the house burning down afterwards is not a refutation), but being dangerous, they should be strongly regulated.
Amazing. You've identified a class of economic transactions that always, no matter what, result in a decrease in net wealth! Car theft!
Well, I'll repeat what I've said before. Sometimes they do. Sometimes they don't. It depends on Peter and Paul.
Well, no kidding. As I said, there is a negative impact. But it's not the theft qua theft that is the net loss. That in itself is positive, negative, or zero-sum.
See footnote 3 in this extremely famous paper from 1968 by an extremely famous economist.
No, I did not have to do a brief literature search. I have a little bit of knowledge about this material, and I am not winging it as I go along.
No one was passing that off as a definition. Sheesh.
You are just blatantly lying about what I said: it depends. Meanwhile, you have put yourself in the position, by your own pseudologic, of denying the existence of positive-sum games.
Mark Chu-Carroll writes:
Seth's problem is that he doesn't have any fundamental definitions. He doesn't know anything about economics, and is just winging it, making it up as he goes along.
This is absurd, going past what Seth said and what I responded to. The pure act of theft in itself simply results in Peter short one car and Paul up one car. There is no net change in wealth here whatsoever. You sound like the idiots who declare massive hurricanes a good thing for the economy, because the building industry gets to come in afterwards and build build build! If they are so good, why wait for Mother Nature? If car thefts are so good at wealth creation, why not just make it official?
At this point, you're speaking crackpot nonsense. What in the world is "intrinsic value"? Is insurance fraud? You're just making up terminology that conveniently allows you to rant against CDOs/CDSs, without noticing that it cuts across large parts of what we consider normal business. For what it's worth, insurance, once upon a time, was denounced as fraud.
Except no definition has actually been provided.
Seth point-blank asked in what sense CDOs generate wealth. I answered him. The burden is on him (and you, at this point) to refute that such a sense is even possible. Not to chirp like crickets with your hands on ears just because it wasn't the sense you wanted to here.
And people like you and Seth are under an intellectual obligation to tell us what houses really were worth, and how you determined this. Why are 2005 prices artificially inflated while 2009 prices sancrosanct measures of genuine value? I see no answer, just circular claims.
More importantly, it's kind of objective. If you have a better approach, let the world know.
Actually, you're doing a lousy job of explaining the ideas of the wealth-is-distinct-from-value beliefs. I repeat my question: which housing prices were genuine at the time--2005 or 2009--and how did you figure that out?
No, Seth is mostly posting gibberish. He is making things up as he goes along. His definitions are words without apparent reference.
"As I explained in my previous post and which you point-blank ignored: if Peter doesn't really need that fifth car, and Paul could really use that first car, then all other things being equal, society (wealth-wise) really is better off when Paul has Peter's car. This is Econ 101. But since society as a while isn't just money, we collectively put severe restrictions on this style of transfer, and legally rely on progressive taxation."
Well, I ignored it because it wasn't a very good example. Likewise, it is very specific to a narrow situation and is not relevant to the system as a whole or theft in general. It also has too many assumptions about what makes society better off, but with no explanation of how society is better off in this specific case or in general. So again, please, point me to an example in the literature of how theft, in general, increases the wealth of a society.
"You are just blatantly lying about what I said: it depends. Meanwhile, you have put yourself in the position, by your own pseudologic, of denying the existence of positive-sum games."
No, I really don't. There is no quote of mine or position I take that denies the existence of positive sum games. I'm quite clear about this when I define fulfillment of a genuine need as doing something that increases the wealth of a society. If there were no positive sum games, the wealth of society could not increase. You, on the other hand, are stating that all increases in choice and all transactions must increase wealth (and stating that this is Econ 101), which means that you are denying the existence of negative sum games. Specifically, you think I'm making things up when I say that theft is a negative sum transaction.
"There was a crash. Not a drop in demand for housing."
You made up the idea that there was a drop in demand, I'm not sure what you think you gain by claiming that the position that you invented didn't occur.
My specific point was that the demand for and supply of housing was not the only thing driving the price. That's why the price dropped suddenly in the absence of a change in either supply or demand.
"No one was passing that off as a definition. Sheesh."
Well, you were. You defined a genuine need as an existing desire. That is, you claimed that there exists a genuine need for a product when there are people willing to buy the product, that is, any time there is an existing desire. You further pointed out that this need is totally divorced from consequences in your position on car stealing technology. Therefore, you define a genuine need as any transaction at all.
Perhaps you would care to present a different definition?
"See footnote 3 in this extremely famous paper from 1968 by an extremely famous economist.
No, I did not have to do a brief literature search. I have a little bit of knowledge about this material, and I am not winging it as I go along."
I read that footnote. It said exactly what I've been saying: a theft is a wealth transfer that fails to increase available wealth. Not only that, but the entire paper is about how to best deal with the cost of crime.
Like I said before, the real problem here is that you're so convinced that I'm ignorant and stupid that you're actually now calling me ignorant and stupid while providing me with literature that backs me up. It's fascinating, actually, how delusional you are about this.
"What's your metric?"
I'm actually using the major indexes as my metric. My hypothesis is that the CDO market (and other factors) created a large scale wealth transfer that is represented in the overall market crash. It's sort of, but not exactly, like a gigantic pump-and-dump scheme involving the entire economy. Your metric--the fact that lots of money got poured into that market--is actually encompassed by what I'm saying... that money is the wealth transfer.
I'm not denying that such a market cannot possibly create wealth. I'm saying that in the years between 2001-2008, it did not create any wealth. And I'm basing that on the fact that the market dropped to pre-2000 levels when the pricing for houses dropped.
I'm not sure why you think I'm making up the idea of "sustainable pricing". You seem relatively well educated. You're aware of the existence of market bubbles. You're probably aware that there is this idea out there about the the equilibrium price of a good?
"The actual problem here is that you have zero comprehension of economics beyond what a dollar bill looks like, but just assume you must have expertise. It is completely beyond your comprehension that there is knowledge to be had beyond your ignorant guesswork."
Actually, the problem here is that you are assuming that this is true, and so it is informing how you respond to what I'm saying. You have, for example, accused me of creating "word salad" when I talk about "increasing available wealth", and then claimed that I don't believe in positive-sum games... despite the fact that a positive sum transaction is one that increases available wealth. It's as if you are reading each sentence I write in total isolation from all the others, and then trying to figure out what that sentence would mean if it were being written from a particular perspective.
"I repeat my question: which housing prices were genuine at the time--2005 or 2009--and how did you figure that out?"
Interesting question. Economists were discussing (and dismissing) the possibility of a housing bubble in the US from at least 2003. No one is dismissing it now, of course, because nothing is more obvious that a collapsing bubble.
My only answer to this question is this: housing prices definitely overshot their equilibrium level. That's not disputed among economists right now. By how far, or where that equilibrium is, I don't know and neither does anybody else.
No, you ignored it because it refuted what you said, that car theft is a net loss. It's not. Typically it's a net gain for society, wealth-wise, simply because the value of the car is proportionately higher for the thief than the victim.
The net loss comes from everything besides the transfer itself.
You brought up the "stolen car" issue, as if that somehow illustrated the difference between a "need" and a "genuine need". It didn't, partly because you know zilch about the economics of car theft in the first place.
You're just making excuses. You brought up the car theft example, and when shown not to be what you said it was, you just make up more off-the-cuff nonsense.
You said: "A stolen car moves assets and creates a net loss". I refuted it. If, by your pseudologic, this constitutes a denial of negative-sum games on my part, then by the exact same pseudologic, it constitutes a denial of positive-sum games on your part. My obvious point, which obviously flew right past you, was that your logic was trash, not that you don't deny the existence of positive-sum games.
Except that you provide no way to measure it. And when something like CDOs did increase the wealth of society, and that's not the answer you wanted to hear, you excluded it with accusations of "artificiality" or "nonsustainability", but conveniently not defining those terms either.
I see nothing but word salad on your part.
I've never said anything like that. All increases in choice and all mutually agreeable transactions increase wealth in pretty much any Econ 101 model. The basic theorem is that the maximum over a superset is always greater than or equal to the maximum over a given set. Econ 101 texts typically illustrate this with "deadweight loss" associated to illustrate the economic loss associated with taxation or with a production quota.
More precisely, I think you are making things up when you talk economics.
My specific point was that the demand for and supply of housing was not the only thing driving the price. That's why the price dropped suddenly in the absence of a change in either supply or demand.
And my point was that the crash was one of the "other" things driving the price down.
Let's see. Seth writes:
What I was objecting to was Seth writing:
Seth responds by excising the word salad in question, and then makes up a refutation to something I wasn't referring to. Seth is just a liar.
The car theft technology purchase relies on choice by the buyer and choice by the seller. The theft to which it is used for relies on choice by the thief but not by the victim. This is simple. The existence of choices adds to wealth. The denial of choices subtracts wealth. (See the Econ 101 "deadweight loss" examples I mentioned.) What happens regarding the wealth of society overall in the case of a car theft is what I've said before: "it depends". Overall, there is a loss, not because of the transfer from Peter to Paul, but because of all the surrounding activity associated with car theft.
Perhaps you would care to not make things up.
What the footnote says, right off the bat, is that theft is, by itself, merely a transfer, and is thus at first approximation, a zero-sum transaction. It is not, as you said and I corrected, a "net loss". The point of Becker's paper is to identify what the actual economic losses associated with crime actually are.
The footnote is 100% in accord with what I've been saying.
Ah, you've got to love those "other factors". Sheesh. Now you admit it.
When they write the economic history of this event 10 years from now, CDOs will be one of many things that caused it. And when they rewrite the history 20 years after that, CDOs will be one of many things that caused it. And when they rerewrite the history 20 history after that, CDOs will be one of many things that caused it.
It's a mess, OK? In particular, CDOs are not inherently fraudulent. But they are dangerous: they are born with moral hazard. And with the right (as in "wrong") other factors, they are a disaster.
So there you go: a genuine need existed in 2003.
That's your metric? You cheat? And look into the future? Sorry, that's not a metric. That's just Monday Night Quarterbacking. Do you get to flip flop five years from now if housing shoots up again?
Yes. I'm also aware that it's a darned tricky concept to pin down for highly liquid assets. Samuelson had a famous paper where he gave a model for stock prices, wherein they really do follow exponential Brownian motion.
We'd all like to believe housing is more of an Arrow-Debreu type good with nice well-defined equilibrium prices, but apparently that isn't true anymore. This is probably due to CDOs providing high liquidity.
The stock market can be dangerous (1929). But it serves an incredibly important way to increase wealth by allowing for investments to flow in. Ditto with CDOs. You've identified that we're Doing It Wrong right now, which is not news. You claim that you've more or less proved that CDOs cannot increase wealth, which is rank nonsense. They can and have.
We did not learn any lessons whatsoever from the collapse of Kidder Peabody. I suspect we are not going to learn any lessons from the more recent disasters. It's certainly not going to be helpful for people to go around screaming "fraud".s
"No, you ignored it because it refuted what you said, that car theft is a net loss. It's not. Typically it's a net gain for society, wealth-wise, simply because the value of the car is proportionately higher for the thief than the victim."
Cite the study that shows this, please.
Sigh. Of course there are economists who deny the existence of bubbles! "If you lined up all the economists in the world end to end, they wouldn't reach a conclusion." See this Forbes article. And this article by a famous economist lamenting bubble denial.
Without being a bubble-denialist, I do have my doubts that housing even has an equilibrium price anymore. Equilibrium prices are defined, mathematically, for a rather restricted set of goods in a rather restricted set of circumstances (for this, see your first-year graduate micro textbook), and it is perhaps the #1 most irritating assertion among economists to blindly apply such theorems.
Facing this head on was at the core of Keynes' radical approach to macro, so much so that it was instantly neutered and turned into a weak hodgepodge of half-truths that still justified government intervention.
"What the footnote says, right off the bat, is that theft is, by itself, merely a transfer, and is thus at first approximation, a zero-sum transaction."
No it doesn't. It says that superficially theft is merely a transfer. What you seem to be failing to understand is that in any society in which the concept of theft has any meaning, the "extra" costs that you allude to exist.
"Sigh. Of course there are economists who deny the existence of bubbles!"
Yes, but they aren't denying the bubble behavior as observed.
"We'd all like to believe housing is more of an Arrow-Debreu type good with nice well-defined equilibrium prices, but apparently that isn't true anymore. This is probably due to CDOs providing high liquidity."
What's really funny about all of this is that you basically are making my case.
Becker relied on the President's Commission. The profile it gives of the typical offender is qualitative, but it accords with the qualitative description I relied on: thieves are younger and poorer than society overall.
"What happens regarding the wealth of society overall in the case of a car theft is what I've said before: "it depends". Overall, there is a loss, not because of the transfer from Peter to Paul, but because of all the surrounding activity associated with car theft."
"No, you ignored it because it refuted what you said, that car theft is a net loss. It's not. Typically it's a net gain for society, wealth-wise, simply because the value of the car is proportionately higher for the thief than the victim."
So, which is it?
"The profile it gives of the typical offender is qualitative, but it accords with the qualitative description I relied on: thieves are younger and poorer than society overall."
No, not the study that shows that car thieves benefit, the study that shows that car theft is a net gain for society.
So? They are saying the market is in instantaneous equilibrium, the market is always right, people are choosing to live on the street, the fundamentals of the American economy are sound, and other drivel. And they plan to filibuster any attempt to make CDOs less dangerous.
There is no difference between "superficially" and "at first approximation". You're not arguing, you're just trying to score points rather desperately.
I referred to these "extra" costs repeatedly. You're simply lying to score points.
To go back to the CDOs: none of these "extra" costs were spent for them. There was no investment in anti-CDO technology. There was no round up of CDO sellers. There was no policing. In short, there were just pure transfers. So whatever analogy you were making with "genuine needs" and "stolen cars" was crippled at the get-go, by your fundamental unawareness that the transfers themselves are not a net loss.
Such costs ought to exist, in the form of regulation.
"And when something like CDOs did increase the wealth of society, and that's not the answer you wanted to hear, you excluded it with accusations of "artificiality" or "nonsustainability", but conveniently not defining those terms either."
You keep saying this, despite the fact that I keep defining things for you and you keep refusing to define terms when requested. Do you believe that if you repeat the phrase "word salad" enough times, people will start believing you are really smart and knowledgeable?
Maybe if you put more effort into making your own case, instead of wasting your effort insulting me, this conversation would go faster.
Now, the last time I checked, 2008 is in the past. So I can hardly be accused of cheating and looking into the future if I refer to past events and say "this is what I think happened". And I think we agree on the basic facts of what happened, but to make sure, let me try and go over the whole mess in a paragraph.
Lots of people bought houses at prices that they could not afford. They were able to do this because there were mortgage products that enabled them to either hide the fact that they were unable to afford the house at all or to push the cost of the house into the future. These products existed largely because there was a market for financial products (CDOs, for example) that hid the risk of these mortgage products. A small number of these financial products were being created with the guidance of people who wanted them to fail. When some of them did fail, the market collapsed.
Does this description meet with your approval so far?
What I've been saying repeatedly: the transfers themselves are, as Becker pointed out, approximately zero-sum, and slightly more accurately, as I'm pointing out, taking into account the differences in incomes of typical car thieves and typical car purchasers, a net gain. Whereas overall, as Becker pointed out, there is a loss to society, because of all the ancillary costs associated with theft.
Mark Chu-Carroll got it in one try: when a car is stolen, it is still part of our economy. There was no net loss of $XXXXX, the selling price of the car, contrary to what you were saying. What's your difficulty? Oh, right, you're just trying to score points.
What case? The existence of equilibrium prices? CDOs are fraud? You're not even trying to make sense anymore, just posting at random and saying you've won.
"So whatever analogy you were making with "genuine needs" and "stolen cars" was crippled at the get-go, by your fundamental unawareness that the transfers themselves are not a net loss."
I wasn't making an analogy, I was providing an example. There's a difference.
You aren't really making much sense, William. Do you think that theft is a net loss or not? Do you think that transaction costs are zero, or are you ignoring them, or what? I mean, you've claimed that theft is negative and positive sum and you've made much ado about a footnote that states that a completely naive view of theft makes it zero sum. You need to slow down. Stop responding in sound bites, accusations, and insults, and try to write a coherent paragraph.
"What case? The existence of equilibrium prices? CDOs are fraud? You're not even trying to make sense anymore, just posting at random and saying you've won."
Why do you think I think that CDOs are fraud? My point was that CDOs are essentially unhealthy and did not increase net wealth. You seem to be agreeing with me, occasionally, and at other times not.
Do you think you're making sense? Because honestly, I don't. You sound like you're just raving and tossing out phrases like "lying", "word salad", and so forth. Seriously, just try to write a single comment without an insult or accusation. Give it a whirl, it might do you some good.
It follows from what I stated, and have stated repeatedly. The cars themselves are a transfer, typically from those who don't need them as much to those who need them more. That is generally considered a net gain for society. In a different form, it is called "progressive taxation".
Car theft itself is simply not a net loss. The losses come from everything else surrounding car theft. It's not a hard concept to grasp--that you repeatedly fail to get it is why I repeatedly call you stupid, as per your earlier question.
"What I've been saying repeatedly: the transfers themselves are, as Becker pointed out, approximately zero-sum, and slightly more accurately, as I'm pointing out, taking into account the differences in incomes of typical car thieves and typical car purchasers, a net gain. Whereas overall, as Becker pointed out, there is a loss to society, because of all the ancillary costs associated with theft."
Okay, great! We agree, theft is a net loss to the society. Glad we have that worked out.
"Car theft itself is simply not a net loss. The losses come from everything else surrounding car theft. It's not a hard concept to grasp--that you repeatedly fail to get it is why I repeatedly call you stupid, as per your earlier question."
No, you repeatedly call me stupid because you're an asshole. You think I'm stupid because you don't understand what I'm saying. I get that a car thief may gain from a transaction, while the person having the car stolen from them may have an alternate vehicle or means to acquire one. I just don't agree that this is a net gain overall.
Also, you're model is somewhat naive. Let's say we got rid of the entire concept of theft, because theft is a net gain economically. Do you believe that the result would be a more productive and wealthier society?
"There was no net loss of $XXXXX, the selling price of the car, contrary to what you were saying."
Here's an example of how we differ as human beings, William. If I were you, I would say that I never said that (I didn't), and that you were therefore a liar. And then I would call you stupid.
But I doubt that you are stupid or a liar. I just think that you've had a discussion on this topic before, and you're substituting someone else's opinions for mine.
"The cars themselves are a transfer, typically from those who don't need them as much to those who need them more."
Wow! Where's the study that shows that most car thefts are from people who don't need their cars as much as car thieves do? The most stolen car in America in 2007 and 2008 was a 1995 Honda. Do you believe that the people who owned a twelve year old Honda didn't have as much need for their car as the typical car thief? How do you measure that? Does this analysis take into account the fact that most people sell cars to a chop shop, meaning the person who needed the car actually only needed money, which can be found by working at any job... a job that the person no longer owning the Honda could easily lose as a result of losing their car? Do you account for labor losses in your analysis?
Excuse me: I'm not under obligation to define the terms you use out of nowhere. Sheesh.
Your definition of "genuine need" referred to "artificial". You definition of "artificial" referred to "sustainable". You gave no definition of "sustainable", but referred to the issue at hand as proof that it wasn't "sustainable". That's called circular reasoning.
It is cheating. The question is what happened in 2003, say. You proved it was fraud, the need wasn't genuine, the price was artificial, because the bubble went the wrong way. Was it inevitable? You give absolutely no evidence, and as such, you're cheating.
Exactly. Moral hazard. Something that should be regulated for. As was done from the beginning with Deposit Insurance, and which, when it was deregulated under Reagan, led almost instantly to the S&L collapse.
When you start claiming that Deposit Insurance is fraud, I'll take your argument seriously.
Stupidity. If you had an argument, you'd give it.
Let's see. I was discussing equilibrium prices that have finally turned out to be an essential part of your "definition" of "genuine need", and I pointed out that I am doubtful they exist when it comes to housing. You jump in stating I'm making your case? Sorry, you're either lying, massively stupid, or just making up gibberish.
If by "case" you mean CDOs are inherently dangerous, I've stated that from the beginning here. If by "case" you mean CDOs are inherently fraudulent, I've disagreed with that from the beginning here.
Well, try not to throw in garbage like bald-faced lying that I'm making "your case" when you state there are equilibrium housing prices, and I demur. And try not to play idiotic word games with "approximate" and the like.
"Stupidity. If you had an argument, you'd give it."
I don't think you understand the question. Let me try again: What is it that I have said that makes you believe that I hold the opinion that all CDOs are fraudulent?
Now you get it. Before you said "A stolen car moves assets and creates a net loss", which is what I corrected. (I assumed, by the way, you meant the car was the asset, and it changed parking locations, as opposed to the car being used for transporting other stolen goods.) There is, only sometimes, "net loss" associated with "a stolen car".
There is always "net loss" associated with car theft in general. But not because of the car itself, as Becker spelled out.
Now you don't get it. That's as close to an objective meaning of gain/loss there is. What's your standard? Feelings? Car theft makes decent people unhappy, and those are the people who define "society"? Good luck with that one. Thinking past that was one of the reasons Becker richly deserved his Nobel Prize.
"Well, try not to throw in garbage like bald-faced lying that I'm making "your case" when you state there are equilibrium housing prices, and I demur. And try not to play idiotic word games with "approximate" and the like."
I don't think you understand how this works, William. See, the difficulty of not being a miserable asshole doesn't come up when you agree with everything the opposing party says and think that they're brilliant. It's easy not to be an asshole when that's happening. What's hard is actually trying to analyze statements you disagree with, determine why you think they're wrong, and then writing that down without using shortcuts that do nothing for your case and that may, in fact, negatively impact your understanding of what the other party was saying in the first place.
See, when you categorize me as being stupid and dishonest, what I'm actually saying get's mixed in with all the other people who you think are stupid and dishonest, and you end up claiming that I said things that I didn't say, or just repeating insults. That makes you like you don't have much to offer in terms of information, as if you are really only good at being an arrogant prick who thinks he knows everything.
Now, I think that it's remotely possible that you may have something valuable to say, so I've been trying to get you to actually think about what you're writing before you write it, and to stop writing little snippets and actually try to form complete thoughts so that I can read those thoughts. I know, it's quixotic of me to make the attempt, but I am by nature a person who likes to learn new things, even if I have to put in a little effort to do so.
You said: "A stolen car moves assets and creates a net loss". You did not write in $XXXXX or the selling price of the car. What, exactly, is the difference? I see fake outrage on your part at pretty much nothing.
"Now you don't get it. That's as close to an objective meaning of gain/loss there is. What's your standard? Feelings?"
What was your standard when you wrote this: "What happens regarding the wealth of society overall in the case of a car theft is what I've said before: "it depends". Overall, there is a loss"?
According to this website, 65% was the US auto theft recovery rate in 2002.
You get your facts out of your wazoo, don't you?
"I see fake outrage on your part at pretty much nothing."
Well, you would, wouldn't you, since you take outrage all the time at pretty much nothing. That's kind of my point, William.
Actually, I assume that transactions cost something, to be honest. That is, there is never such a thing as a zero transaction cost. That's where I'm getting the loss, not from the value of the car per se. Which is why I say that you're making my point when you start talking about externalities to the transaction, cost of labor, cost of prevention, and so forth.
"According to this website, 65% was the US auto theft recovery rate in 2002."
Now we're cooking with gas. Let's chat about this statistic in light of what we're both saying. Now, interestingly, motorcycle recovery is about 35%. This is because motorcycles are much easier to strip than cars, and are typically stolen specifically to be stripped. So if 65% of cars are being recovered, who is stealing these cars and why?
Well, according to the FBI, most car thieves are between 12 and 17. Why are these youths stealing these cars? How does this factor into your analysis of the transaction benefits of car theft?
"Now you get it. Before you said "A stolen car moves assets and creates a net loss", which is what I corrected."
No, now you actually understand what I wrote. Imagine how much time and aggravation you could have saved by asking a simple question, or perhaps making a clear statement about gains and losses, instead of wasting all that time insulting me and making unwarranted assumptions about what I meant.
It's sort of sad, when you think about it.
Let's take out the inaccurate word and ask this again, since you pretty much ignored the substance:
"The cars themselves are a transfer, typically from those who don't need them as much to those who need them more."
Wow! Where's the study that shows that most car thefts are from people who don't need their cars as much as car thieves do? The most stolen car in America in 2007 and 2008 was a 1995 Honda. Do you believe that the people who owned a twelve year old Honda didn't have as much need for their car as the typical car thief? How do you measure that? Does this analysis take into account the fact that many people sell cars to a chop shop, meaning the person who needed the car actually only needed money, which can be found by working at any job... a job that the person no longer owning the Honda could easily lose as a result of losing their car? Do you account for labor losses in your analysis? (and I'll add) What about simple joyriding thefts? Are those factored into your typical theft?
Could you please disemvowel the Emba dude, please? This started out interesting, and is now just plain rude- I would like to put something into his wazoo, or poke my eyes out with chopsticks about now. I need my eyes more than he needs his wazoo, however. Please make him stop.
The only aspect of the post I'd dispute is the use of the word 'shocking' in the title.
In other words, Seth, you've been caught being wrong yet again, making up stuff about car theft and chop shops, and you simply spin away in utter pointless desperation.
Hence, I call you a crackpot, a liar, and stupid. Not to bring the level of discourse down, but simply that's where you are.
As I said repeatedly: youths typically find a car of much greater value for them than the car was worth to their typically older, wealthier, insured victim. Hence, the transaction by itself increases the general social welfare.
Since you seem to be dwelling on this footnote to a footnote for no particular reason, other than your own stupid delusions, let me clarify yet again. Becker assigned, as a first approximation, zero net change to society caused by the transfers qua transfers, simply because a car is a car is a car, and transfers simply shuffle the goods. Becker then identified the true economic losses to society associated with car theft. They cover measures people take to protect themselves from theft, including spending on technological defenses (locks, alarms, keys) to spending on police forces and criminal courts and prison systems (I think it was another Nobelist, Koopmans, who pointed out in the 50s that one should not count this latter spending as part of GDP but as a form of taxation.) They cover the opportunity costs of locking up people: presumably they could have been productive members of society. They cover the costs induced by thieves protecting themselves from getting caught, like destroying evidence.
I simply threw in a very minor detail. A transfer qua transfer is rarely a "zero-sum game" as you call it, but more likely a positive net change, depending on the particulars of any given thief and his victim. But overall this is dwarfed by the losses Becker identified. Hence, not really important. But it is revealing how you focused on it just the same, made up statistics as a way to criticize me, got caught making up statistics, and just kept banging away as if you had some valid argument all along. And it is also revealing that you demanded I cite sources for everything, while never providing any yourself.
If you do cite a source that shows car thieves are in general wealthier than car owners, I'll retract any assertion I made to the contrary. I won't throw in cutesy "Now we're cooking with gas" misdirection either and change the subject.
For someone who goes on and on about style, you could try something besides the lying quote out of context and the evidence-free attack. Really, you're 100% crackpot.
You've had your content-free ideas about "genuine need" that ultimately boiled down to prices that years and even decades later turned out to be "clearly" above a totally unidentifiable "equilibrium price". And when pressed, you respond with misdirection, claims to style points, made-up statistics and finger-pointing, as far away from the actual topic at hand as possible.
Pure unadulterated Dembski-level stupidity, mendacity, and trash.
What's really really sad is that people as willfully ignorant as yourself have been major influences in the economy.
I am probably writing the 139th comment, so it just shows how popular the article was.
But just so to ask, arent you simplfying the whole arguement. CDOs and CDS are an essential way to price mortgages. You need a market and if no market exsists it has to be created. I agree there was fraud. But arent the Insurance guys also smart, I mean how can they get caught. Basically it is the same people who work on both sides of the trade.
You are also forgetting the roles of the regulators who are present precisely to prevent these issues.
"If you do cite a source that shows car thieves are in general wealthier than car owners, I'll retract any assertion I made to the contrary."
William, in case you're wondering what "Dembski-level" stupidity actually looks like, you've hit it here. See, if you make a statement like "The cars themselves are a transfer, typically from those who don't need them as much to those who need them more.", you don't get to claim that it's true until it's proven false. You actually have to provide evidence that it is true before anyone has to accept it as true. What you're doing here is exactly what ID people do: make an assertion about design and then say "You can't prove it isn't true!".
If you're wondering what a "lie" is, it's when you claim that I made up statistics. I have not, at any time, make up any statistics. I used the word "most" innacurately, but that is not a "made up statistic". If you're wondering what "misdirection" looks like, you might notice that you've called "genuine need" my term several times, despite the fact that is was you who used that phrase first.
So let me ask you this again, and this time, please attempt to actually answer or at least admit that you don't actually have an answer:
Where's the study that shows that most car thefts are from people who don't need their cars as much as car thieves do? The most stolen car in America in 2007 and 2008 was a 1995 Honda. Do you believe that the people who owned a twelve year old Honda didn't have as much need for their car as the typical car thief? How do you measure that? Does this analysis take into account the fact that many people sell cars to a chop shop, meaning the person who needed the car actually only needed money, which can be found by working at any job... a job that the person no longer owning the Honda could easily lose as a result of losing their car? Do you account for labor losses in your analysis? (and I'll add) What about simple joyriding thefts? Are those factored into your typical theft?
Also, since you've claimed I hold this position several times, I will ask you again: What is it that I have said that makes you believe that I hold the opinion that all CDOs are fraudulent?
The following response of yours to me.
That, and the fact that you introducted stolen cars as an analogy regarding the economics of CDOs.
Yes, I know you say "synthetic CDO" above, but just like you've not explained "genuine need" in any comprehensible, verifiable manner, so too you've not indicated how CDOs backed by mortgages are somehow more genuine than CDOs backed by CDSs.
I referred you to the Becker paper. Sheesh. Second, it's what's obviously true in pretty much any model of an economy. Third, I was responding to your statement out of nowhere that was and remains evidence and citation free.
I was referring to standard economic models. Wealth and value are only defined with respect to a model in general.
You claimed a certain number was 75+/-25%. That turned out to be a made-up statistic. Spin it all you like. Indeed, you did say "most" and not "75+/-25%". You made it up. I provided an actual citation. I cited something.
Indeed I did. I used it in a rather unambiguous, clear sense: somebody wanted something bad enough to pay for it. You have gone on to cast doubt on the existence of such genuine needs, thinking the term really means something else. Hence your stolen car analogy. But you have not defined what you think the term ought to mean whatsoever, except with a word salad of further undefined terms.
I explained, I have nothing beyond proxies, and it's simply my personal refinement of a footnote in Becker's paper that doesn't change a thing. As in, you still haven't provided your definition of "genuine need", or given an argument that only works by cheating, looking into the future to figure out what was genuine back when it happened.
Indeed, that you are asking these question as if they are somehow showing me merely reveal that You Don't Get It Whatsoever. Not Even Close. Beyond Dembski Dumb.
These other issues are precisely what Becker's paper is all about. The economic losses associated with car theft are not the transfers that most everyone thinks of as car theft losses. (XXX BILLION DOLLARS stolen every year or whatever.) It's the everything else, as I've repeatedly stated several times now.
"Yes, I know you say "synthetic CDO" above, but just like you've not explained "genuine need" in any comprehensible, verifiable manner, so too you've not indicated how CDOs backed by mortgages are somehow more genuine than CDOs backed by CDSs."
So, basically, I've never said anything that even begins to support your repeated assertions that I believe that all CDOs are fraud. I never even said that synthetic CDOs are fraud. That's just something you made up.
Much like you've made up my positions on everything else.
"ndeed, that you are asking these question as if they are somehow showing me merely reveal that You Don't Get It Whatsoever. Not Even Close. Beyond Dembski Dumb."
I see. So, the question of who typically steals cars, what cars are typically stolen, who those cars are stolen from, and what happened to the car have no relevance to the question of whether the the typical stolen car is taken "from those who don't need them as much to those who need them more"?
"But you have not defined what you think the term ought to mean whatsoever, except with a word salad of further undefined terms."
See? More misdirection. The truth is that I not only defined my use of the term, I was forced to come up with a definition for your use of the term. You think a genuine need exists whenever there is an existing desire for a product or service, I think a genuine need exists whenever a transaction increases the size of an economy. I do not believe that the CDO market did increase the size of the economy, nor do I believe that the product is designed or capable of doing so. As I've said several times, I could be wrong about that.
In fact, my definition of genuine need was embedded in my very first question to you, the one that you have been assuming meant that I thought that all CDOs were frauds (a position I never expressed and do not, in fact, hold). I asked you:
Which means that we now know that not only did you make up my position that CDOs are frauds, you also invented the idea that I never said what I mean by "genuine need". We also know that you consider a unreferenced footnote in a 40 year old paper to be proof positive that the typical car thief needs the car more than the typical victim--and the facts be damned!
"The economic losses associated with car theft are not the transfers that most everyone thinks of as car theft losses.(XXX BILLION DOLLARS stolen every year or whatever.)"
Well, since I never stated that the losses associated with car theft was the transfer alone (quite the contrary), I'm not sure why you bring this up. What I said was
Since you have restated my exact position several times, I'm not sure why you think you're scoring here.
Well, there was the statement I quoted about synthetic CDOs, and par your usual evasiveness, you are omitting here. Then there were other statements you made about CDOs:
In short, you're simply a liar. You're less competent than Dembski, who at least spreads his doubletalk between different audiences, usually separated by months and years.
OK? So how on earth is that definition ever ever ever going to be observed? Millions of transactions are occurring every second. An econometrician is going to be able to identify which ones "expanded" the economy, and which ones "contracted" the economy? Your alleged definition is simply a meaningless bit of word salad.
As it is, economists do single out a class of transactions which always do "expand" the economy: mutual voluntary exchanges. One party wanted a car, say, more than a certain amount of cash, while the other party preferred the cash to the car. Each achieves greater utility, in the old-style lingo, after the trade.
You could be and are. It's Econ 101: mutual voluntary trade makes both parties better off. I note that for someone who has recently declared that Dembski-level incompetence is marked by lack of citations, by your own standards you are Dembski-level incompetent.
Now, it's possible to jump in and pick at this, whether talking about or not talking about CDOs. Economists do so quite regularly and it leads to all sorts of fascinating refinements and footnotes and special cases and the like. Along the way Nobel prizes have been awarded in acknowledgement of just such details.
In the CDO case, the prime issue to raise is probably one of information asymmetry. But have we had an interesting discussion on this?
Obviously not. Your complete lack of any knowledge of Econ 101, and your complete utter disbelief that it's possible people might actually know something about this stuff while you don't even have a clue, has meant that instead you've just blundered in with stupidity after stupidity, and lie after lie. Your projection that disagreement came your way because of "supply-side dogmatism" or petty ascriptions to "jealousy" on your part pretty much revealed the barrenness of your thought, without anyone having to actually notice what you're saying was gibberish.
"In short, you're simply a liar."
I see. So if I don't actually say anything that translates, to a reasonable human being, as "all CDOs are fraud", and you say that I did say that and do hold the position--repeatedly--I'm a liar. Please, dude. Do you really expect anyone to fall for your bullshit?
"In the CDO case, the prime issue to raise is probably one of information asymmetry. But have we had an interesting discussion on this?"
Well, no. You've been too busy being a complete asshole for me to have an interesting discussion with you about anything. I've tried to engage you in an interesting discussion, and said repeatedly that I think you may have something to offer in that vein. But you've ignored all that and kept insisting that I have an "utter disbelief that it's possible people might actually know something about this stuff", in direct contradiction to what I've actually said and the attitude I've actually presented. How the fuck am I supposed to engage someone who's idea of conversation is to call me a stupid liar in every single post in "interesting discussion".
Maybe, just maybe, if you did what I requested you do about 4 days ago and wrote a post that had some actual fucking information in it and avoided the insults, it might be possible for us to have an interesting discussion. But if you refuse to do anything but write the same stupid, empty insults in every single post, I think it's safe to say that we're not going to have an interesting discussion. But the onus is on you to start that discussion.
Their relevance is precisely what I stated, and which you've quote-mined out of response, as par for your style:
These other issues are precisely what Becker's paper is all about. The economic losses associated with car theft are not the transfers that most everyone thinks of as car theft losses. (XXX BILLION DOLLARS stolen every year or whatever.) It's the everything else, as I've repeatedly stated several times now.
It's sort of, but not exactly, like a gigantic pump-and-dump scheme involving the entire economy.
As par for the course, you quote-mine out of your response the bit where you did give the impression that you think all CDOs are fraud, and then get to express your phony outrage.
Here's more of you giving the impression that you think CDOs are pretty much fraudulent:
I notice you rather conveniently did not answer the question. Probably because you don't have a standard, because, as I've pointed out repeatedly, you are obviously just making things up as you go along. That, and you have zero knowledge of Econ 101. That, and you have no interest in discussing things intelligently, since, of course, you can't.
What I've stated: follow the money. How much does each individual need a car? What are they willing to give up (hours spent at a job, possibly non-prison-time, and so on) in order to have the car?
This is basic Econ 101. You know, the subject which you know nothing about?
As for society overall and car theft overall, there is the Becker paper. You know, the one I referenced? And which, apparently, you still haven't figured out provides the answer to your question.
Seth wrote in #68 and #72:
Your first assertion is actually ambiguous. You don't seem to have noticed this.
If you have the naive pre-Becker view that the economic loss of a stolen car is the car itself, then your sentence is saying that while assets merely moved, we can agree (to use the language you were using in 68) that because the car was stolen, it's credited as an economic loss to society.
If you have the sophisticated post-Becker view that the economic loss of a stolen car is contained in society's approach to dealing with car theft, than your sentence is just a nod to this.
Your sentence in 72 is almost impossible to read in the post-Becker view. You are referring to the car itself as creating the net loss, not to theft in general.
It's your bit in 72 that I've been quoting repeatedly. I notice you switched to your 68 line.
This is a lie. You have engaged in standard creationist stupidity techniques. Your responses almost always quote-mine, quoting me but not quoting me quoting you, so you get to make my meaning be whatever silly thing you want it to be. You do not understand Econ 101 and aggressively do not want to either--when it answers your question, you simply duck and weave and fire back absurd responses, rather than make the least bit of effort to comprehend it. You have been caught making up "facts" which I refute with citations (most stolen cars end up in a chop shop/all economists believe in bubbles now) and you just aggressively claim you're still right. You do not cite sources for pretty much anything, but regarding an off-hand comment of mine on the Becker footnote (that the first approximation to what transfers do to society's overall wealth is slightly positive, not zero), you've obsessed that I provide sources, even after I told you I'm relying on proxies.
To your credit, you never did repeat the "supply-side dogmatism" charge, or the "I must think you're jealous of rich people" charge. That's about it on the plus side.
I find it amusing that you've gotten very pissed off at several negative things I've said about you and your posts with one glaring exception: you have not once countered the repeated charge of total ignorance of Econ 101.
That is extremely telling.
You really do not know anything about Econ 101! I emphasize, Econ 101 is oversimplified and possibly of dubious relevance, but it is a starting point, and an intelligent discussion would be to push beyond it. Instead, you just make up Dembski-dumb nonsense. It's more important for you to go on the attack and somehow win the debate, than to actually learn something.
I have books on CDOs/CDSs by my bedside for night time reading. High-level, professional, postdoc math/finance books. I'm interested in actually understanding them.
So here's another negative thing about you: you're pathetic.
Seeing as how long this thread is, anything I have to say has already probably been covered to death... but that won't stop me from sounding off anyway:
I don't see anything wrong with CDSes being traded on a well-regulated transparent market. If it's all kept 100% above board, CDSes could potentially help to identify bad investments rather than conceal/enable them. If the price of CDSes on a certain class of investment is rising, that's a pretty good market-based indicator that that class of investments is unsound. In the scenario as outlined here, with the hedge funds taking out CDSes on the top tiers of the CDOs they had enabled, if they had to disclose all of their CDS agreements then 1) those selling the CDS would either recognize that this was a bad idea, or else jack the price to compensate for the apparent increased risk demonstrated by the demand; and/or 2) those purchasing the top tiers would get wise to the scheme. The problem with CDSes is not so much that you can buy it on somebody else's investment, but rather it is the opacity of the market.
There's also nothing inherently wrong with a CDO, though I'm far too ignorant of the economics to know how to properly regulate them. Intuitively, though, this tranching thing seems like all kinds of wrong... that's my lay impression, at least.
Really, any kind of bubble/crash cycle is, almost by definition, caused by over-leveraging. In the 1929 crash, the over-leveraging was easy to spot: There was no regulation on margin purchases, so investments based on 90% margin were not uncommon. This is now illegal (the limit is 50%) for simple stock purchases. I think it is only a slight oversimplification to say that every major bubble/crash cycle since then has occurred when investors figured out a new legal way to bypass regulations designed to prevent over-leveraging.
An unregulated CDS market provides a means of over-leveraging. Tranching -- it seems to me -- provides another means of over-leveraging. The top tier of a tranched CDO is almost analogous to a margin purchase, with the "loan" being extended by the suckers who purchased the bottom tiers rather than by the bank. Just as with buying on margin, everything is hunky-dory if the actual value of the investment stays within certain parameters -- but as soon as it declines by a certain amount, even if the decline was due to nothing more than a random fluctuation, the bottom falls out.
One place where I differ with Mark... I have trouble mustering up a lot of rage for (most of) the people who got rich off of this. In particular, I have difficulty finding significant fault with the hedge fund managers who helped to precipitate this. They were operating within the law, and doing precisely what they were being paid to do. What else do you expect?
The bank executives deserve some blame though... in theory, they were being paid to ensure the long-term success of the bank, but because of the incentive structure many of them chose to sell out the long-term success in favor of artificial short-term success. This could be viewed as a betrayal of their responsibilities.
The hedge fund managers, on the other hand, would be irresponsible if they didn't seek to maximize profits within the law...
"It's your bit in 72 that I've been quoting repeatedly. I notice you switched to your 68 line."
And in case you're wondering what a quote mine actually is, that is quote mining. You take one quote out of the context of everything else I've said and then attack me for it.
How am I supposed to have an interesting discussion with someone who is only reading in order to find things he can attack?
"I have books on CDOs/CDSs by my bedside for night time reading. High-level, professional, postdoc math/finance books. I'm interested in actually understanding them."
That would be very valuable to the discussion if you spent any time talking about their content instead of insulting me. Why don't you try that?
"What I've stated: follow the money. How much does each individual need a car? What are they willing to give up (hours spent at a job, possibly non-prison-time, and so on) in order to have the car?"
This is sort of my point, William. When I say that there is a net economic loss, I'm talking about the same exact things that you are talking about when you talk about a net economic loss. The only thing from preventing you from seeing that you not only agree with me on this precise point, but that you have been agreeing with me from the beginning is your insistence that I can't possibly have this level of understanding.
"Here's more of you giving the impression that you think CDOs are pretty much fraudulent:"
No, that was more evidence that I think that there was some fraud in the CDO market. I think that's largely understood, at this point, to be a reasonable conclusion. Even by you. That doesn't mean that the CDO itself is a fraudulent product or that everyone trading in CDOs was or is a fraud. I stated that specifically when I wrote: "While there are genuine cases of outright fraud, it's clear that the market itself failed to self-correct in time to avoid economic disaster."
Which means, again, that you agree with me on the key point that CDOs are dangerous but not specifically fraudulent by nature.
The reason we can't have a substantive discussion, as I've pointed out many times, is that you are too busy trying to prove my ignorance and stupidity and dishonesty to actually have a conversation with me.
William, I'll likely be called an idiot for this, but I think you're misreading Becker. He says that superficially the transfer is not an economic loss. (I.e., the car remains a car.) But in fact, because we make and enforce laws against it, the theft is not simply a transfer. The probability of arrest and conviction makes possession of a stolen car less attractive than possession of a legally owned car. Indeed, we deliberately set up the system so that most people do not expect the act of stealing a car to increase their welfare.
As a result, the theft itself results in a direct loss of net social welfare. It is not a simple transfer. It deprives one person of a valuable asset (a legally owned car) while compensating another with a less valuable asset (a stolen car). The reason it is less valuable is because of law enforcement and such, but it is undeniably less valuable to the thief than to the lawful owner.
Thus the total social cost of car theft is the sum of the costs of social measures to deter and punish car theft as well as the direct loss of value (in light of those measures) that results from the thefts that still occur.
I'm sicking of the two of you just calling each other names. This argument has long ceased to have any actual content to it. It's just the two of you repeating yourselves and flinging insults back and forth. So stop, now. Whoever adds another comment here calling the other one a liar, idiot, or anything similar gets banned.
"One place where I differ with Mark... I have trouble mustering up a lot of rage for (most of) the people who got rich off of this. In particular, I have difficulty finding significant fault with the hedge fund managers who helped to precipitate this."
It depends on the hedge fund manager. Some managers are not being accused of anything except taking positions on some products, and of course that's their job. Others are being accused of taking an active role in the creation of extremely risky products, hiding the risk by assuming the riskiest portion of the product and then hedging against that, which may be ethically questionable, but it isn't a case of fraud. Some managers are accused of taking an active role in the creation of CDOs that they expected to fail, taking no stake in those products, and then betting against them. It seems probable that at least one such manager, John Paulson, will be charged with fraud if the Goldman case is successful.
In the last case, I think that some righteous anger is in order. In the second case, the defense "Hey, it was my job" is only relevant if there was an expectation that the CDOs might succeed... while it may be technically true, it could be argued that the job of a hedge fund manager is not to knowingly destroy wealth in order to make money... and if it is, than we should be angry at the entire system that rewards this kind of behavior and I am personally disgusted by the people who participate in it.
In the first case, the people would just be hedging, and hedging is their job.
"Whoever adds another comment here calling the other one a liar, idiot, or anything similar gets banned."
I'll just go ahead and ban myself. I haven't called William a liar or an idiot, and I've been trying to engage him in a discussion by pointing out areas where we agree. But if you're going to put my comments in the same category as his comments, I'm gone.
David--that was my point of citing Becker! The pre-Becker analysis, which (most? all?) pundits still take for granted, assumes that the loss of the car by a "legitimate" member of society is the economic loss associated with car theft. That naive thinking was implicit in Mark's original post, and then made explicit by Seth when he made the car theft analogy in the first place.
Scam artists who rip people off do cause economic loss to society--but it's not the dollars themselves that they swindle that is the loss. Along these lines, it's an interesting exercise to figure out just what it is about counterfeiters that is the economic loss to society. Even more interesting is to figure out the status of overseas counterfeiting that stays overseas.
Milton Friedman was famously in favor of legalizing insider trading. He believed the costs associated with its illegality and information suppression far outweighed the fairness the laws and pseudo-efficiency were meant to implement. And yes, Friedman was of course aware that some people get cheated by insider trading.
What's the point? You react to basic Econ 101 assertions with "accidental theorizing", as Krugman so delicately put it once. (I hope this is acceptable to Mark--I'm not as clever as Prof K, not even close.)
Your distinguishing between needs, implicitly redefining "genuine need" to be something along the lines of "morally acceptable need" or "legally acceptable need" or the like (it was never clear just what--you provided no references, for the simple reason, I believe, that they don't exist) led to a string of bizarre economic theorizing about theft on your part. Economists from Becker onwards have found there is absolutely no need to postulate anything different about criminals.
No, you were clearly not. You distinguished between what I called "genuine needs" in explaining economic loss, meaning little more than someone wants something, and your sense of "genuine needs", which singled out criminals and fraudsters as not actually having a "genuine need", be it for the fruits of their illegal activities or even their legal acquisition of criminal tools.
It would be like someone talking about the economics of the antebellum slavery South as being all about white people, and what profits and losses and trades and so on that white people engaged in, and never once noticing the giant hole in the balance sheet regarding the black people. It's quite possible to do so and get econometric values out, but such numbers have, despite appearances, pretty much nothing to do with the economics of the antebellum slavery South.
A similar kind of worthless analysis can be found in pretty much any "economic" analysis of marijuana legalization done by an amateur. The number one gain trumpeted always seems to be We-Can-Tax-It, woohoo! Well, yes, but that's not a gain, it's a transfer. And like all taxes, it's inefficient, and hence has an associated deadweight loss. The true gain here is that this efficiency loss will not be as big as the current deadweight loss associated with the criminal status of marijuana. The "We-Can-Tax-It is a gain" mentality derives from having no understanding of economics, but by thinking of Us-Decent-Folk is what economics is about, and all Those-Potheads-Out-There don't count.
(I picked marijuana since I presume we all agree that it causes no serious harm. The question of legalization of actually dangerous drugs involves many more issues. If we don't all agree, well, whatever.)
Bottom line: if you or anyone you know engages in trade with one of them, you're both part of the economy.
It would not surprise me if the next Gary Becker is out there, uniting animal rights with human economics. There exists a fairly large literature on animals as economic agents. Down the road, future generations of economists will look upon our current treatment of animals as grossly inefficient, because we are optimizing the wrong social welfare function. (This theme was essentially the point of the Becker paper: not to coddle thieves by promoting them into economic agents, but to identify what actually matters in society's response to theft.)
My point of these analogies is this: theoretical economics itself cannot tell us which are the legitimate agents that have a say. Society at one time did take the view that thieves don't count, just like it at one time took the view that black people don't count, and like many people view today regarding animal, drug abusers, and hedge fund managers. The pre-Becker treatment of thieves as outside of economics forces the modeller to go to incredible extremes to economically analyze crime, so much so that no one really did.
That was what was wrong from the get-go with your criticisms. Hedge fund managers are, in fact, active participants in our economy, and an analysis of economic gains and losses has to work with that, not define them into some box and then leave a million undefined and unexplained variables hanging around.
Your context does not help you. It was "accidental theorizing", and added up to pretty much nothing coherent. Let's fill in some background.
Economics is a broad subject, part science, part philosophy, part politics, part mathematics. One of the famous classicists, FrÃ©dÃ©ric Bastiat, described the power of the Invisible Hand with a simple question: "why doesn't Paris starve?" The challenge is to come up with a model that answers the question. The Walras-Wald models of the late 19th/early 20th century, and then the Arrow-Debreu-McKenzie models of the mid 20th century, provided an answer. They are, ultimately, just mathematical theorems.
The WW pure exchange models are fairly straightforward, second-year calculus. You set up individual agent utilities and endowments, and then you maximize the grand social welfare function, subject to endowment constraints. One then proves there is an optimum, using Lagrange multipliers. One shows that, in a natural sense, the Lagrange multipliers are prices. And most important of all, one shows that the optimum is the exact same optimum that would have been found if each agent optimized his own personal utility: the Invisible Hand.
(As an aside, it always appalls me that very few mathematicians are aware that Lagrange multipliers even have a meaning. They simply put a cost on violating the constraint at the optimum.)
The economist working on such theorems is part-mathematician. He is harmless. There are endless ways of pushing them. Why? To the extent that these equilibrium models answer Bastiat's question, they are quite successful. The economist who works on these issues is part-scientist. He is also harmless. But to the extent that the models resemble reality, well, there are endless ways of questioning them and challenging them. Arrow himself viewed his theorems as pointing out how little we understand real-world economies, and was one of the first to add fillips (like insurance) to the basic model.
Unfortunately, there's a breed of economist who pretends to be part-scientist, but he is actually part-politician. His mantra is "markets are always right", and his justification is these theorems and the large amount of confirmation that has accompanied them. He won't notice the large amount of disconfirmation that has also accompanied them, let alone suffer pangs about grossly unrealistic assumptions. A most basic issue: the models are all "convex", which basically means there is no such thing as economy of scale. Another most basic issue: the models all assume "perfect competition", but most of the US economy seems to be oligopolistic. Another most basic issue: the models ignore the government!
If you want to get more realistic, something sad happens. You lose most of the mathematics. Very few beautiful theorems, but make due with lots of messy half-theorizing, half-theoremizing. This is where John Maynard Keynes went in the mid-30s when he invented, more or less, macroeconomics. He made a simple observation, that while quite obviously true, has split economists ever since: people aren't potatoes. If potatoes are overproduced one year (say, because the demand for potatoes has dropped), why, the Invisible Hand pushes their price down, or perhaps it's just cheaper to dispose of them. But wages turn out to "sticky", and people disposal just isn't supposed to be done anymore. And so on and so on.
Keynes' model was actually an inconsistent hodgepodge. But no one really cared--it worked so well. Until the 70s, when stagflation came to stay, as warned by Milton Friedman and modelled by Robert Lucas. The Rational Expectations revolution--lots of good mathematics!--was successfully trumpeted as the Death of Keynes, and for quite some time, Keynesians were in full retreat. Never mind that alternate RE models were quickly constructed that were compatible with Keynes. They were Ignored.
Today, Keynesians are back, but the RE attitude is still quite strong. You have a large number of serious economists denying that bubbles exist, that involuntary unemployment exists, that something bad is even happening. And they do have one point: no one really knows how to model these things from the ground up, unlike their RE models and the like that were so neato-keen 40 years ago. And this is where part-philosophy comes in: Get To Work!
I gave two answers about the "value" of CDOs/CDSs: one was fairly concrete, they provide liquidity/exposure control, and the other was abstract, they offered greater choice, and people were willing to buy them.
I notice no one contradicted the direct answer. I am not astonished that anyone would contradict the indirect answer. As the descriptions above indicate, just what is "value" is incompletely understood. But I am astonished that the contradictions came from meaningless trashing of what we do know. Boiling an objection down to an unknown and unidentifiable price years in the future that's actually the correct price is the same as not having an objection at all.
Seth, how would you go about identifying which CDOs are fraudulent, based on your "accidental theory" of future prices?