Timmy Elsewhere

At the Register.

How to stop sub prime happening again.

6 thoughts on “Timmy Elsewhere”

  1. Tim, your proposal would be an improvement, but I’m not sure it would be sufficient. As some of the comments on the Register said, there is a lot of bias in the system to lend money and get bonuses now, and damn the long term consequences. Government policy also favours increasing house prices: taxes on housing are low, interest rates have been kept too low, and social engineering has often required stupid lending, e.g.

    http://21stcenturyschizoidman.blogspot.com/2008/03/keeping-government-out-of-marketsand.html

  2. No mention of computer models? as with climate they don’t understand the real world of risk.

    The main problems was and is with the securtiization system failed because it relied on automated underwriting techniques developed by Freddie in the mid-1990s.

    Essentially, that was a computerised method of determining if a loan applicant was an acceptable risk based on how similar applicants and loans had performed in the past.

    When scientists, journalist, and ideologues get off from believing they know the future, the world will be a much better place, unfortunately it seems we are hard wired for inductive thinking.

  3. Just doing some research for a legal article I’m working on and thought that you’d enjoy this in the context of sub-prime lending and all that:

    From S Schwarz, “The Alchemy of Asset Securitization” (1994) 1 Stanford Journal of Law, BUsiness and Finance 133

    “The article … addresses its core question: is the securitization process a zero-sum game or does it truly reduce net financing costs? The short answer is simple: securitization is an alchemy that really works.” (p 134)

    and

    “Securitization, in short, brings to financial technoqlogy what the sought after philosopher’s stone promised to bring to base metals – the ability to turn them into gold!” (p 154)

  4. Thanks for more details but I’m still not sure how it works in the real world. We’re agreed most homeowners can’t use it (surely not just because of the contract size but because of the margin requirement problem) but how would it work with 3rd parties.

    I decide prices are overvalued, or as it would have to be ‘more overvalued than the market’ and so I pay an insurance company to go short on the housing market. It’s 2005 say. Prices rise by 30% and the insurance company charges me? Or just takes the hit?

    Second, I’m not sure about this idea that a housing market predicting a recession would have such a great dampening impact. There were lots of influential voices predicting a house price decline from about 2003, and it doesn’t seem to have a made a difference.

  5. Passerby is about as close as it’s necessary to get. Not much different, in that aspect, from the ignorance (specifically, of the incomprehensibility of the non-neutrality of money by mathematical models) behind the (Nobel-prize-winning) LTCM disaster.

    A fiasco of the LTCM type will not be likely to happen again. Nor will one of the S&L “crisis.” Nor of the “subprime mortgage” meltdown. Each of these types (and previous others unmentioned) can have their shortcomings and weaknesses exposed and patched.

    But these occurrences are all, themselves, but inevitable (except as to form) consequences of the regular function of all governments in the area of monetary policy. Even the very idea of “monetary policy” itself, the concept of “legal tender,” the idea that government is the authority ultimately and legitimately concerned with the establishment of values to be assisted by the coordination of the processes of banking and creation of both currency and credit–can but lead to more of the same in the future, except enlarged as to magnitude and scope.

    With no offense meant to the religious, I’d put it that the U.S. coinage should have borne the only-slightly-different motto: “IN GOLD WE TRUST.”

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