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View Diary: Why No One’s Occupying Factories (139 comments)

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  •  You know, financial markets do add value (2+ / 0-)
    Recommended by:
    jandrewmorrison, MGross

    And so do bankers. They aren't just "rent seekers." And you can create value and wealth by proper risk mitigation. The world is uncertain. Consider this:

    Which would you rather have: $10,000,000 for certain or a 50-50 chance at $20,000,000?

    The expected payoff is the same nominal amount. But, almost everyone would take the $10,00,000 for certain. Why? Because uncertainty decreases value.

    Banks try to find ways to remove uncertainty, and the result is a world with less risk, which translates to more wealth. For real.

    Just look at what happened in 2008. An inaccurate view of risk is what caused this whole mess. Had we done that correctly, we could have avoided this massive recession. But risk is a very difficult thing to deal with. There's a ton of value in doing it right, and the people who can do it right are few and far between, and frankly, do deserve a substantial portion of the value they create when they do it correctly.

    This idea that the only people creating value are manual workers is utterly wrong, and demonstrates an underdeveloped view of the way the modern economy works.

    The obvious answers are wrong. That's why we aren't doing them already.

    by atheistben on Tue Nov 08, 2011 at 10:07:45 AM PST

    [ Parent ]

    •  Or.... the modern economy is an under- (4+ / 0-)

      developed view of how the real economy works.

      I vote for the latter.

      •  Well, it's not a voting matter (1+ / 0-)
        Recommended by:
        MGross

        There's an objective reality out there. And if you don't see that risk mitigation yields real value and wealth, I suggest you take some finance courses. Denying this is about as rational as denying global warming.

        If you want to make a counter-argument to try to convince me or other readers of your viewpoint, go ahead. But this comment is worthless.

        The obvious answers are wrong. That's why we aren't doing them already.

        by atheistben on Tue Nov 08, 2011 at 10:30:02 AM PST

        [ Parent ]

        •  Just think the financial sector.... (3+ / 0-)

          has drastically lost any contact with the real economy.  Guess I could make an argument for this, but think it's just really obvious, and if you don't see it all by yourself, you're probably not going to no matter what I say.

          Also think banks should be utilities and get back to the business of viewing money in terms of it's main intent:  lubricant of trade of real stuff.

          •  Well, it's not really obvious. (0+ / 0-)

            The financial sector is certainly tied to the real economy in my view. I would like to see an argument concluding otherwise. Perhaps I could use it to demonstrate something you are missing.

            The obvious answers are wrong. That's why we aren't doing them already.

            by atheistben on Tue Nov 08, 2011 at 10:55:00 AM PST

            [ Parent ]

            •  Betting on mathematical equations.... (2+ / 0-)
              Recommended by:
              happymisanthropy, kyril

              would be one example.

              I have no doubt that such practices could EVENTUALLY be tied to real stuff.  But the space between the equation and the real stuff is too wide.  

              •  Um, the equations are about (0+ / 0-)

                what the real economy is most likely to do and what the alternative things are that it might do, weighted by probability. And most of the equations are from Nobel Prize winners. They're good equations. They make a lot of sense out of a very unstructured world.

                I would say that when the financial markets use math (a hard science) to try to describe the way the real world works, that's not "lost contact" with the real world.

                The obvious answers are wrong. That's why we aren't doing them already.

                by atheistben on Tue Nov 08, 2011 at 11:23:37 AM PST

                [ Parent ]

          •  Don't blame the financial sector (1+ / 0-)
            Recommended by:
            kyril

            In the 1920s, financial sector wages+bonus reached unprecedented levels.  By 1929, the median salary+bonus in finance was higher, relative to the median US take home pay,  than at any time in the nations history.

            So, President Roosevelt decided to do something about it, calibrating fiscal policy to make investment banking that much less attractive.  By the 50s, the best and brightest from Stanford and Harvard were opting for careers far outside of finance.

            Well, during the last decade (but starting in the late 80s), financial sector wages+bonus once again reached the same relative level of the late 20s.  

            If you want to steer more Stanford and Harvard grads to jobs outside of finance, make those jobs less lucrative.

            Government has done that before.  And it can do so again.

            But don't blame bankers for responding to an incentive structure laid out by the federal government.

            Learn about Centrist Economics, learn about Robert Rubin's Hamilton Project. http://www1.hamiltonproject.org/es/hamilton/hamilton_hp.htm

            by PatriciaVa on Tue Nov 08, 2011 at 12:23:41 PM PST

            [ Parent ]

            •  Best of all possible worlds (0+ / 0-)

              direct Stanford and Harvard grads somewhere where they can't do any damage.

              Passengers: Feel free to rearrange the deck chairs, but please remember that the bridge is off limits.

              by happymisanthropy on Tue Nov 08, 2011 at 02:03:19 PM PST

              [ Parent ]

              •  Yeah, those super educated people are stupid... (0+ / 0-)

                Need to keep them away from the important stuff.

                Do you realize how stupid you sound right now?

                The obvious answers are wrong. That's why we aren't doing them already.

                by atheistben on Tue Nov 08, 2011 at 02:54:22 PM PST

                [ Parent ]

                •  This coming from someone (0+ / 0-)

                  who believes that loaning money to people you know will never be able to pay you back, and then selling the loans to people who don't know they're radioactive, isn't fraud.

                  Also signing back-dated affidavits isn't fraud.

                  What other frauds that I pointed out are you going to deny or overlook?

                  Who looks stupid here?

                  Passengers: Feel free to rearrange the deck chairs, but please remember that the bridge is off limits.

                  by happymisanthropy on Tue Nov 08, 2011 at 03:47:10 PM PST

                  [ Parent ]

                  •  No. Here's what I think: (0+ / 0-)
                    loaning money to people you know will never be able to pay you back, and then selling the loans to people who don't know they're radioactive

                    is fraud. That is absolutely fraud. That's just not what caused the subprime crisis.

                    ...and I'm not saying there wasn't a minor level of fraud that occurred. When I got my home loan, they put there was a typo in the interest rate on one of the like 75 pages I had to sign (which all had the right interest rate). I went back two days later, resigned and backdated the page. Is that fraud? Perhaps. But it didn't cause the 2008 subprime meltdown. So, I don't know what you're talking about when you say back-dated affidavits were being signed. I really don't know what that's about.

                    But I know that's not what caused the subprime crisis, because I know what did cause it. It's something a lot bigger than back-dating some documents. It was a systemic failure of risk assessment. It was a failure of financial incentives to loan officers. It was an exposure of a flawed relationship between ratings agencies and investment banks. It was a quirk about how the shorting of mortgage securities generated cash flows that could be packaged into the mortgage securities themselves - which is a big part of why it was so disasterous.

                    But fraud wasn't the main element. The banks were issuing more and more mortgage securities because they were in high demand. The banks had people begging to buy mortgage securities. They weren't pawning them off on people - they were doing their best to meet market demand for their investment products.

                    I could write dozens of pages on this stuff. I've done graduate school cases on this crisis already - which is why I'm greatly insulted by people here who present an argument that amounts to nothing more than "They're a bunch of lying fraudsters! Tear 'em down!" without knowing the details or being able to weight causality and while criticizing the people who have spent a lot of time in school and studying to really learn about the intracies of what happened. It's embarassing for this community.

                    The obvious answers are wrong. That's why we aren't doing them already.

                    by atheistben on Tue Nov 08, 2011 at 04:05:14 PM PST

                    [ Parent ]

                    •  It was fraud. (0+ / 0-)

                      Not little nickel and dime fraud, I agree.

                      It was a big fraud.

                      It was the idea that finance can create wealth.

                      It was the idea that computer models can make risk go away.

                      It was the idea that the nastiest of people, acting with the basest of motives, can be trusted with our nation's economic future.

                      It was the biggest fraud of all.

                      Passengers: Feel free to rearrange the deck chairs, but please remember that the bridge is off limits.

                      by happymisanthropy on Tue Nov 08, 2011 at 04:09:25 PM PST

                      [ Parent ]

                      •  (adding, obviously) (0+ / 0-)

                        that the little nickel-and-dime fraud was absolutely necessary to make the big fraud look legitimate for as long as possible.  So no, an examination of the big collapse cannot afford to overlook the little frauds.

                        Passengers: Feel free to rearrange the deck chairs, but please remember that the bridge is off limits.

                        by happymisanthropy on Tue Nov 08, 2011 at 04:11:25 PM PST

                        [ Parent ]

                    •  Even the congressional paper that came out... (0+ / 0-)

                      some time ago cites fraud.

                      And you're missing the part where banks bet against their clients.  They knew the stuff was radioactive.

                      Just how widespread was this?  Well, a real investigation might help in clarifying this.  But that hasn't happened, has it?

                      Gee, wonder why that is.

                      •  Towards the end, some banks (0+ / 0-)

                        had some conflicting interests. Often the really smart guys in the investment arm at the bank figured out that MBSs had a resonable possibility of blowing up, so they bought CDSs to protect against this possibility while their lending arms didn't think there was a problem and continued lending.

                        At the top level of "bank," there's the obvious conflict of interest and allegation of fraud. And a bank only had one employee both selling and shorting MBSs, fraud would be the most likely explanation. But, as I've said elsewhere, banks aren't monoliths. They have different people who work for them who have different opinions and assessments of the value of securities.

                        The obvious answers are wrong. That's why we aren't doing them already.

                        by atheistben on Tue Nov 08, 2011 at 04:38:27 PM PST

                        [ Parent ]

                •  I didn't say they were stupid (0+ / 0-)

                  I just wish competence were assessed on what people know, rather than who your frat brother is.  

                  There should be a law in gov't that nobody can hire anyone who went to the same college they did, unless they can objectively prove they're the best candidate.  Ideally, that would cut out a lot of the nepotism and intellectual incest.

                  Passengers: Feel free to rearrange the deck chairs, but please remember that the bridge is off limits.

                  by happymisanthropy on Tue Nov 08, 2011 at 03:54:59 PM PST

                  [ Parent ]

                  •  True, but it would also cut the ability for (0+ / 0-)

                    people to hire the well qualified people around them. Personally, I'm not in any frat or anything like that. I go to school at night after work. I know some really smart people at my school whose resumes aren't nearly as good as some of the not-so-bright people at my school. Since I'm around them quite a bit, I can distinguish, but that's not something I could easily do looking at C/Vs. So, there are drawbacks to such a law. But as you mention, there are positives, too.

                    I think you just have to let it go, and hope the people who engage in the nepotism and intellectual incest get out-competed by the people who can hire the smart people from their schools instead of their friends. /shrug

                    The obvious answers are wrong. That's why we aren't doing them already.

                    by atheistben on Tue Nov 08, 2011 at 04:11:21 PM PST

                    [ Parent ]

    •  The issue isn't banks per se (5+ / 0-)

      it's how they are run and who runs them.  We could have a country with no "banks" and just credit unions and federal and state run banks.  I think this would be ideal in many ways, taking the profit motive out of the picture.

      There revolution will not be televised. But it will be blogged, a lot. Probably more so than is necessary.

      by AoT on Tue Nov 08, 2011 at 10:36:46 AM PST

      [ Parent ]

      •  But the profit motive is the biggest (0+ / 0-)

        incentive for process improvement. Why would anyone improve anything if they didn't get a slice of the value they create by improving it? Often, people like to learn and master a process, and forcing them to engage in a new and better process is met with resistance.

        Profit motive is also the biggest incentive for risk-taking. And risk-taking is a big part of what advances the economy. Sometimes risks don't pay off, but sometimes they do. Reconsider my example above, but as a certain $8M vs. a 50-50 chance at $20M. I'm still taking the $8M, but on average, more wealth is created when people take the gamble. Profit allows people some of the reward for taking the risk should it pan out. Profit motive is essential.

        The obvious answers are wrong. That's why we aren't doing them already.

        by atheistben on Tue Nov 08, 2011 at 10:53:30 AM PST

        [ Parent ]

        •  this question is telling (4+ / 0-)
          Recommended by:
          Chi, RichM, renbear, kyril

          "Why would anyone improve anything if they didn't get a slice of the value they create by improving it?"

          in that it totally elides the fact that the vast majority of people who improve things do not reap the profits for doing so, either because those improvements do not turn a direct profit, or because that profit is appropriated by rentiers or ownership.

          it is a dishonest and blinkered vision of the way things work. the people taking profit these days are not the ones who improve things, and increasingly they are people who actively make things worse for society, the economy, the environment and the world while they skim value off the top.

          •  Well, I answer that this way (0+ / 0-)

            Most people do get a slice of the profit they create, just not directly. The reason is that in most circumstances, the production is fairly stable and the real profit you are helping to create is measured against the company finding another worker to make that profit. So, workers that aren't really on the frontier of innovation tend to get paid a rate commensurate with the opportunity cost of hiring someone else with a similar skillset. This is the basic mechanism that leads to software developers being paid more than janitors.

            But as you approach the frontier of innovation, you see a lot more profit sharing. That's one reason why startups tend to offer more profit sharing than stable companies. That's why C-level executives implementing big reorgs or SDTs or costing models, etc get profit sharing. That's where the innovation is.

            The people taking a slice of profit these days are the people who are innovating or are the people who are directly paying people to innovate.

            And by the way, I'm all in favor of higher taxation of the people who are paying other people to innovate (like shareholders). But nonetheless, this is a good process, and the basic structure of it needs to be left alone.

            The obvious answers are wrong. That's why we aren't doing them already.

            by atheistben on Tue Nov 08, 2011 at 02:07:48 PM PST

            [ Parent ]

            •  Absolute nonsense (1+ / 0-)
              Recommended by:
              kyril

              If you really think people get a fair slice of the profit they create then you simply haven't been paying attention.  That's what it means when wages are stagnant and profits are on the rise, people aren't getting a fair slice.

              People taking the bigger slice now are people who aren't really doing any good or innovating except in the real of innovative bookkeeping.

              There revolution will not be televised. But it will be blogged, a lot. Probably more so than is necessary.

              by AoT on Tue Nov 08, 2011 at 06:09:09 PM PST

              [ Parent ]

              •  But why should real wages rise for the same work? (0+ / 0-)

                If you are a receptionist, say, why should your wages be increasing? You're answering the same types of calls, day in and day out. You having the same people fill out the same paper work over and over again. Sure, you get a little raise every now and then because you've gained experience and whatnot, and that moves you a little higher in the distribution of receptionist salaries. But why should all receptionists have their aggregate wages growing faster than inflation? That just doesn't make sense to me.

                Why would "fair" mean that receptionists (in aggregate) get a slice of the profit other people in their organizations are creating?

                The obvious answers are wrong. That's why we aren't doing them already.

                by atheistben on Wed Nov 09, 2011 at 08:41:24 AM PST

                [ Parent ]

                •  This all assumes that people are being paid (0+ / 0-)

                  fairly for their work.  Which is exactly the issue here.  When there is more wealth being created and less or the same number of people working then real wages should rise.  The problem is that we have steadily increasing productivity and stagnant wages. We have people working more for less.  If you can't see that then you must live in a bubble.

                  There revolution will not be televised. But it will be blogged, a lot. Probably more so than is necessary.

                  by AoT on Wed Nov 09, 2011 at 09:52:14 AM PST

                  [ Parent ]

                  •  Well (0+ / 0-)
                    When there is more wealth being created and less or the same number of people working then real wages should rise.

                    In aggregate. But not for everyone. The wage of the receptionist is determined by the forces of supply and demand for receptionist labor. When an engineer figures out a better process for making something that saves the company a bunch of money, the receptionist isn't entitled to any of that money. Why would you think it would be fair if the receptionist did get some of this money?

                    Also, the productivity gains over the last few decades have largely been due to capital investment, and technological improvement. Take my wife's accounting office. Fifteen years ago, they had very little in the realm of automated/computer accounting systems. Consequentially, everyone at the office knew accounting pretty well. Now, everything is automated, and the new people don't know shit except where to copy and paste numbers. But they're still more productive, due to the investment in software. Still, they don't deserve to be paid more. In fact, they should be paid less, because that quality of labor is a lot easier to find than good accountants. Plus there was the cost of the software that the company had to absorb. So the first thing is that you need to do decouple productivity and wages in your mind. Productivity doesn't drive wages up. It often drives wages down, because it lessens the amount of labor you need, thus reducing demand for labor, and thus lowering the equilibrium price for labor.

                    Look, economics isn't an applied science as much as it is a discovery. Labor rates are determined by supply and demand for that type of labor. There are ways you can tweak it around the edges, but supply and demand for labor is the primary driving force of wages. It is inescapable. If you want to improve wages, you have to understand that system and work within that system.

                    By the way, I'm impressed that I'm seeing responses to my recent replies to yesterday's threads. You must know some secret DailyKos way of seeing a list of "most recent replies" to your comments. If that's the case, where in the world is that? :-)

                    The obvious answers are wrong. That's why we aren't doing them already.

                    by atheistben on Wed Nov 09, 2011 at 10:14:25 AM PST

                    [ Parent ]

                    •  I use the comments page in my profile (0+ / 0-)

                      to look for recent comments :)

                      As for the market determining rates, sure that's one aspect, but there are numerous other aspects as well, including government regulations and unions.  When you talk like that it sounds like someone who would oppose the minimum wage.  I full well understand market forces and other such things, the problem is that the market has been horribly distorted.

                      There revolution will not be televised. But it will be blogged, a lot. Probably more so than is necessary.

                      by AoT on Wed Nov 09, 2011 at 10:45:59 AM PST

                      [ Parent ]

        •  This is nonsense in practice (6+ / 0-)
          Recommended by:
          Chi, jandrewmorrison, RichM, katiec, AoT, kyril
          But the profit motive is the biggest incentive for process improvement.

          It is an incentive to increase revenues and cut costs by any means necessary.  In the past quarter century, that has specifically meant not investing in process improvement.  Or when invested, so short-changing the effort in the name of reducing costs that major improvements are never made.

          Profits have been generated mostly through outsourcing, accounting tricks, and layoffs.  Even before 2007.

          Most ROI calculations are BS created to justify what managers have decided to do.  And there is no real methodology for accounting for the real after-the-action contribution to return on investment.

          The profit motive causes the manager to low-ball the salaries of his subordinates so that he can high-ball his own.

          The profit motive is not essential.  It is implicit in the system.  What is essential is checking the profit motive in ways that do more than return accounting profits.

          Most risk analysis winds up creating work for lawyers and fine-print typesetters.

          50 states, 210 media market, 435 Congressional Districts, 3080 counties, 192,480 precincts

          by TarheelDem on Tue Nov 08, 2011 at 01:25:06 PM PST

          [ Parent ]

          •  Really...? (0+ / 0-)
            Most ROI calculations are BS created to justify what managers have decided to do.

            Statements like this are laughable. There's no way you have data or evidence to support this. You're just talking out your ass.

            The profit motive causes the manager to low-ball the salaries of his subordinates so that he can high-ball his own.

            No. Outside of very small manager-owned small businesses, managers don't set their own salaries in practice.

            And companies that don't invest properly will be outcompeted by the companies that do. That's why companies actually do dedicate appropriate resources to investment.

            The obvious answers are wrong. That's why we aren't doing them already.

            by atheistben on Wed Nov 09, 2011 at 08:45:22 AM PST

            [ Parent ]

            •  What you think happens (0+ / 0-)

              ...and what I've seen happen are different.  Your dismissive tone tells me that you are attached to your dogma so much that you probably are not seeing what's going on.  And your arrogance shows your inexperience with real decision-making.

              And companies that don't invest properly will be outcompeted by the companies that do. That's why companies actually do dedicate appropriate resources to investment.

              The greatest return on investment right now would be for companies to hire workers and begin training them for the market that will appear when the recession is over.  The fact that the companies that are best known for their investment strategies are not doing that makes it clear that your statement is not true.

              Part of it comes back to what one means by "investing properly".  Too often it is only determined in hindsight and is as wrong as planning the fight the last war.

              50 states, 210 media market, 435 Congressional Districts, 3080 counties, 192,480 precincts

              by TarheelDem on Wed Nov 09, 2011 at 03:48:43 PM PST

              [ Parent ]

      •  I agree that there have been some (0+ / 0-)

        management failures in banking. I can talk quite a while about the incentives bank management was trying to create and how those incentives drove unanticipated behavior and excessive risk-taking. I can also talk about how banks are not monoliths, and how, say in Goldman Sachs case, one area of the bank figured out the true nature of risk being underwritten while another department didn't. And the uncertainty around which side was right at the higher levels of management.

        But you can't just mandate that banks get it right all of the time. It's just not going to work like that. Here's the most crazy thing about our economy:  it's a juggling act, and the more balls we can keep in the air at once, the faster the economy grows and the more wealth gets created. Occasionally, we throw too many balls in the air, and we drop some. But we're better in the long run trying to stay right around that maximum leveraging.

        And the profit motive is single most critical incentive to keep us there. I worked for non-profits and for-profit companies. The differences in quality of management are stark. For-profit companies do it much better.

        The obvious answers are wrong. That's why we aren't doing them already.

        by atheistben on Tue Nov 08, 2011 at 11:12:54 AM PST

        [ Parent ]

        •  There has not been management failure in banking (2+ / 0-)
          Recommended by:
          Chi, AoT

          ...There has been outright fraud.

          You write like a first year economics student enthralled by the simple, clear, theoretical grandeur of competitive market theory.

          The world ain't like that.

          I've worked for non-profits, local governments, and for-profits.  My most recent experience was a quarter century in IT for for-profit large corporations.

          The quality of management was independent of whether the organization operated for profit or not, or was funded out of taxes.  There were lousy managers and good managers in all of those.  I have a seen a for-profit corporation that predictably (to me) went bankrupt because the management was not getting accurate multi-divisional and international accounting roll-ups to make accurate decisions, that tolerated all sorts of accounting games to make the numbers each month, quarter, and year--timing activities as to when they were booked.  And I have seen extremely efficient and effective non-profits that could document measureable results in what they did that were actually not BS figures.

          I've seen manager in public, non-profit, and for-profit organizations who could not manage people and those who were exceptional at getting results from their people.

          Parading the dogma that only for-profit companies are efficient does not stand up to what is actually going on.

          50 states, 210 media market, 435 Congressional Districts, 3080 counties, 192,480 precincts

          by TarheelDem on Tue Nov 08, 2011 at 01:38:25 PM PST

          [ Parent ]

    •  Also insurance (2+ / 0-)
      Recommended by:
      katiec, lostinamerica

      Health and otherwise.  It is the flip side of the same coin.

      There revolution will not be televised. But it will be blogged, a lot. Probably more so than is necessary.

      by AoT on Tue Nov 08, 2011 at 10:37:39 AM PST

      [ Parent ]

    •  No value is created... (8+ / 0-)

      When wealth is obtained by trading off of financial instruments that have no bearing on the real economy.  The banks have essentially 'de-risked' investment by not investing in anything that involves innovation, employees, or real markets.  How risky is it to charge fees on financial transactions?  Zero.

      And - young financiers are only looking to show return on investment long enough to cash out.  If the risk shows up 6 years from now, but their bonus is based upon a five year investment, as long as the can keep the scam going, they will walk away with the cash and leave someone else holding the bag.

      Nobody (at least very few people here) is saying that banking is not necessary or doesn't supply value.  What we are saying is that the deregulation of banking has allowed the wealth to suck all the capital out o the system and basically make money on transactions of ordinary people.  This supplies no value to the system.

      The 'Free Market' will decide. It will decide that the United States cannot consume 25% of the world's resources and the upper 1% cannot control 50% of the wealth.

      by RichM on Tue Nov 08, 2011 at 10:39:48 AM PST

      [ Parent ]

    •  what are you talking about (3+ / 0-)

      "an inaccurate view of risk"? There was fraud. And all of these high-finance products slicing and dicing debt and bundling these risky loans, with fraudulent AAA ratings, etc. etc. they were making a mint off of risk--on both ends--by selling bad debt and shorting. They are not minimizing risk--they are displacing it elsewhere on those that can least afford it, and capitalizing on that displacement.

      There are moments when the body is as numinous as words, days that are the good flesh continuing. -- Robert Hass

      by srkp23 on Tue Nov 08, 2011 at 11:12:53 AM PST

      [ Parent ]

      •  No, it wasn't fraud (0+ / 0-)

        Think about this. If you loan someone $200,000 for a mortgage at 5%, what are the risks that you won't get that 5% interest each year? Up until 2008, the most likely reason you wouldn't get that 5% was if the homebuyer refinanced and paid off the loan early (and coindentally, they're probably going to refinance at a time when interest rates are low, so you aren't going to earn shit on the money you now have to reinvest). That was perceived to be the biggest risk.

        But there's also the other type of risk - the homebuyer could default. At the time, default rates were pretty stable and predictable. The relevant question to mitigating the risk was correlation. In other words, how likely were all of the loans to go bad at teh same time. If correlation is low, risk is mitigated. If correlation is high, risk is not mitigated. Risk assessors determined correlation to be low when it was really high. It was a misjudgement of risk.

        The people didn't rate the securitized loans AAA because of fraud. They did so because of a lack of understanding.

        At some point, a few people and ibanks figured this out (or at least some elements within the ibanks did - whether the banks as a whole knew is debatable) and tried to rectify their own risk exposures.

        But the problem at its core was a misjudgement of risk - not fraud.

        The obvious answers are wrong. That's why we aren't doing them already.

        by atheistben on Tue Nov 08, 2011 at 11:20:34 AM PST

        [ Parent ]

        •  there is a fine line..... (1+ / 0-)
          Recommended by:
          happymisanthropy

          When you choose (and are chosen) to play the game at the level of Lehman Bros. & Goldman Sachs, you know the consequences of your actions (and the rewards) are far greater than most of the population can ever comprehend.

          You also know there is a fine line between "misjudgment of risk", "lack of understanding", and negligence which does massive harm to the worlds economy.

          Personally, I don't care whether it was fraud or negligence, or 'simply a mistake'.  If we can't rely on the current super wealthy bankers to keep the economy reasonably stable and productive (which those currently in those positions have proven we can't), then we need to allow the thousands of other applicants for the position of "in charge of so much damn money that I can change the world" a shot at the job.

          "We would never shoot nuclear weapons at Decepticons, ever." - Lt. Col. Jack Jacobs (Ret.)

          by jandrewmorrison on Tue Nov 08, 2011 at 12:08:21 PM PST

          [ Parent ]

          •  But consider this: (0+ / 0-)

            What if they're doing the best job we as a species can do?

            Why should we think that the people who scored lower on the standardized tests and who didn't go through years of graduate school would do a better job? Why would people without decades of experience in creating and trading securities be better than those who do have that experience? Why wouldn't they just make the situation worse?

            If the reason for the collapse was fraud, the answer to that question is easy. If the reason for the collapse was misjudgement, there's not a reasonable answer to that question.

            The obvious answers are wrong. That's why we aren't doing them already.

            by atheistben on Tue Nov 08, 2011 at 02:17:48 PM PST

            [ Parent ]

            •  I'm not seeking a "reasonable answer".... (0+ / 0-)

              I am not advocating for a global change in the banking system to correct all the world's injustice.  I just propose that there be some consequences for the individuals who failed (whatever the reason either through human failure or negligence or greed or whatever.)  I don't believe for a second that the 351,000 individuals that control 40% of the nations wealth and use it to influence public policy are the best, or the most skilled, or the only ones capable of playing that role in America today.  Just like mob bosses and movie stars, there are plenty of other people with the same skill set waiting for an opportunity to do the job.

              If you are one of the highest achieving people in the nation, and your goal is to accumulate wealth and power, and as a result of your actions, the global economy is hurt badly, you don't get to stay in charge.

              I'm simply advocating that those currently in those positions be faced with greater challenges than they now have so that there is a greater chance of change among the individuals at the top.  

              "We would never shoot nuclear weapons at Decepticons, ever." - Lt. Col. Jack Jacobs (Ret.)

              by jandrewmorrison on Tue Nov 08, 2011 at 02:50:10 PM PST

              [ Parent ]

        •  Bullshit. (2+ / 0-)
          Recommended by:
          RichM, katiec

          They rated them AAA because they were being paid to rate them AAA.  If they didn't rate them AAA, they didn't get paid.

          MERS's very existence is a fraud.
          Selling loan modules with the knowledge that they didn't meet underwriting standards is fraud.  
          Failure of due diligence is fraud.
          Robo-signing of affidavits is fraud.

          Passengers: Feel free to rearrange the deck chairs, but please remember that the bridge is off limits.

          by happymisanthropy on Tue Nov 08, 2011 at 02:12:53 PM PST

          [ Parent ]

          •  They were being paid to rate them (0+ / 0-)

            They agreed with the misjudgements presented to them, so they gave the top tranches of mortgage securities AAA. It was perfectly reasonable if you made a minor miscalculation of the correlation between cash flows.

            Why was that mistake made?

            Because the people at the ratings agencies are the people who weren't smart enough to get jobs at the investment banks. They did their due diligence. They did their analysis. They were just wrong. Have you ever been wrong before? I have.

            Making a incorrect judgement when there is insufficient data present and in a system with great uncertainty is not fraud.

            This may come as a shock to you, but humans don't know everything. You can't just sit on your sofa and expect that the people in the most difficult and critical jobs to our economy to just get it right, always. If you have a better way to do it, go apply for a job. Or start your own business doing better ratings. There's certainly a need in the market for it. But you can't do this, because the ratings people still do a better job than you would do.

            The obvious answers are wrong. That's why we aren't doing them already.

            by atheistben on Tue Nov 08, 2011 at 02:24:57 PM PST

            [ Parent ]

            •  The problem (1+ / 0-)
              Recommended by:
              RichM

              is exactly what you've pointed out:  They think they're smarter than everyone else.  They think they're worth multimillion dollar salaries.

              That was always a favorite method of con artists. "Not everybody's smart enough to see the brilliance of my business plan.  But you aren't like everybody else, are you? Yeah, I know your parents told you to never put money into schemes like this.  But your parents never got rich.  Your parents died poor.  Unless you're smarter than your parents, you'll never get rich either."

              Every huckster had lines like that.  "I can make this whole town rich, I just need you to sign this fraudulent affidavit.  Think of those poor kids with no shoes and not enough firewood.  Think what this deal will mean to them.  I know you're smart enough to see what a great deal this is.  Don't you want to get in on the ground floor?"

              Passengers: Feel free to rearrange the deck chairs, but please remember that the bridge is off limits.

              by happymisanthropy on Tue Nov 08, 2011 at 02:51:15 PM PST

              [ Parent ]

              •  The people at Moody's or the other ratings (0+ / 0-)

                agencies aren't paid million dollar salaries. They were making $80k.

                It just turns out that the market has a bigger need for quality independent security rating than they were willing to pay for it. Considering that lots of people lost lots of money, you're going to see demand for quality rating to increase, meaning the ibanks will pay more for quality rating, meaning there is more money to recruit people who are actually talented and figuring this stuff out. That's the way the market works.

                The obvious answers are wrong. That's why we aren't doing them already.

                by atheistben on Tue Nov 08, 2011 at 03:02:30 PM PST

                [ Parent ]

                •  And when you intentionally mislead... (1+ / 0-)
                  Recommended by:
                  happymisanthropy

                  Someone  - it's called fraud.

                  The 'Free Market' will decide. It will decide that the United States cannot consume 25% of the world's resources and the upper 1% cannot control 50% of the wealth.

                  by RichM on Tue Nov 08, 2011 at 03:24:36 PM PST

                  [ Parent ]

                •  asdf (0+ / 0-)
                  Considering that lots of people lost lots of money, you're going to see demand for quality rating to increase, meaning the ibanks will pay more for quality rating, meaning there is more money to recruit people who are actually talented and figuring this stuff out. That's the way the market works.

                  You're missing the point.  Wall street wants favorable analysis.  The very last thing they would ever want is accurate analysis.

                  The ratings agencies serve the people who pay their bills.  They will never be honest if Wall Street pays them to be dishonest, and Wall Street obviously has no incentive to deal honestly.

                  Passengers: Feel free to rearrange the deck chairs, but please remember that the bridge is off limits.

                  by happymisanthropy on Tue Nov 08, 2011 at 03:39:46 PM PST

                  [ Parent ]

                  •  And this statement demonstrates why people (0+ / 0-)

                    here are utterly ill-equipped to regulate Wall Street.

                    Wall Street isn't and doesn't want to be a casino. Contrary to your beliefs, Wall Street does want to play honest. They do want accuracy in reporting.

                    The obvious answers are wrong. That's why we aren't doing them already.

                    by atheistben on Wed Nov 09, 2011 at 08:53:56 AM PST

                    [ Parent ]

            •  There are paper trails that many people involved.. (0+ / 0-)

              in rating knew they were crap.

              Look up the congressional paper that came out some months ago.

        •  LOL... (0+ / 0-)

          Yes there was.  They poisoned the derivatives with sub-prime mortgages and then lied to the investors or more specifically Fanny and Freddy and left them holding the bag.  The investors got away because their principle was insured because the ratings agencies were paid off.  FRAUD.

          The 'Free Market' will decide. It will decide that the United States cannot consume 25% of the world's resources and the upper 1% cannot control 50% of the wealth.

          by RichM on Tue Nov 08, 2011 at 03:22:34 PM PST

          [ Parent ]

    •  You need to ask yourself (6+ / 0-)

      who or what caused that 'inaccurate view of risk'...It certainly wasn't people outside the industry. It was the industry itself which lied to us (and themselves) about the risk level that was being offered.

      The fact is, people in the drivers seats with billions of dollars at their disposal set about creating exotic financial products that were basically repackaged loans that were very VERY risky, then they got the ratings agency to give those repackaged boogers a AAA gold star rating --which suckered in everyone else.

      So where's your value? The assholes who put this together were supposed to be the 'smartest guys in the room'....They were liars, thieves and arrogant dealers of basic lemon products. Used car sales hacks--that's the mentality we're looking at.

      Now if we can't separate these characters who are obviously engaged in unethical if not criminal behavior from 'everyone else'; the whole profession is going to get slimed. If folks in the investment classes and financial industry don't like that, maybe they ought to start practicing a little self-policing.  How many people knew those CDS were garbage and sold them off anyhow because they were the latest thing for fast turnaround? Hundreds, thousands of brokers? Probably more.

      If these assholes are encapable of self policing (which seems to be the case) then we have to create laws like Glass Steagall to make their stupid ideas illegal and to basically police their profession for them. Because they are too fucking greedy and arrogant to do it themselves.
      My two cents.

       

      •  Yes, (1+ / 0-)
        Recommended by:
        Chi

        but for those motherfuckers to sleep at night, they have to believe what they do is worth billions of dollars.

        Which requires them to believe they've actually solved some problem worth solving, or made something worth making.

        To believe they're worth billions of dollars, they HAVE to have a pathological view of the world, one in which risk has *poof* gone away.  

        A person who believes that his mind is worth a billion dollars is a person who is incapable of comprehending reality or accurately judging risk.  Of course they fucked everything up.

        Passengers: Feel free to rearrange the deck chairs, but please remember that the bridge is off limits.

        by happymisanthropy on Tue Nov 08, 2011 at 02:15:54 PM PST

        [ Parent ]

      •  No: (0+ / 0-)
        It was the industry itself which lied to us (and themselves) about the risk level that was being offered.

        It wasn't lies. It was mistakes. The banks believed in the risk assessments. Most banks lost a shitload in the collapse. Lots of banks went under. IndyMac. Washington Mutual. Sometimes companies make decisions that don't pan out. This was just one of those times.

        You are engaging in fundamental attribution error.

        The obvious answers are wrong. That's why we aren't doing them already.

        by atheistben on Tue Nov 08, 2011 at 02:28:42 PM PST

        [ Parent ]

        •  No, (1+ / 0-)
          Recommended by:
          RichM

          they just believed that somebody else would eat the losses.  They knew the deals would explode and blow somebody up, they just didn't think it would be them.

          Yes, competent bankers would have realized that when the mortgage bombs blew up, the foreclosed houses wouldn't be worth shit.

          Competent bankers would have known that redistributing risk doesn't make it go away.

          But that doesn't change the fact that mortgage bombs were made fraudulently.

          Passengers: Feel free to rearrange the deck chairs, but please remember that the bridge is off limits.

          by happymisanthropy on Tue Nov 08, 2011 at 03:07:55 PM PST

          [ Parent ]

          •  Or... (1+ / 0-)
            Recommended by:
            happymisanthropy

            If they spread the risk around nothing would happen.  They were only concerned about the next quarter's bonus, not on the long term viability of any financial instrument.

            The 'Free Market' will decide. It will decide that the United States cannot consume 25% of the world's resources and the upper 1% cannot control 50% of the wealth.

            by RichM on Tue Nov 08, 2011 at 03:26:15 PM PST

            [ Parent ]

          •  No. They just weren't tracking the metrics that (0+ / 0-)

            indicated that these mortages would soon start failing. For one thing, the banks weren't tracking levels of NINJA loans in securitized packages. The metrics they were using just weren't giving the banks an accurate enough picture of the riskiness of their loans. The banks thought they were making the loans with relatively similar riskiness, but they weren't.

            They weren't knowingly making bad loans. And if they didn't know, it wasn't fraud.

            The obvious answers are wrong. That's why we aren't doing them already.

            by atheistben on Tue Nov 08, 2011 at 03:47:55 PM PST

            [ Parent ]

            •  fraud or not fraud? (0+ / 0-)

              Passengers: Feel free to rearrange the deck chairs, but please remember that the bridge is off limits.

              by happymisanthropy on Tue Nov 08, 2011 at 04:04:39 PM PST

              [ Parent ]

            •  These packages were (0+ / 0-)

              sliced in diced with a percentage of bullshit mixed in with other less risky loans. Yet the mixed packages were given AAA status.

              That was the initial lie. At minimum the rating agency should be slapped with a fine and senior players perp walked.

              They banks themselves probably knew exactly what was going down, but think they have deniability--which by the way --YOU are arguing they should have.

              Why?

              If it's not fraud, it's incompetence.

              So from my perspective here are the choices. Send these fucks to jail for fraud, or nationalize these fucks because their too incompetent to run the show themselves.

              Which would you prefer?

              •  Let's be clear, a "slice" or tranche of the (0+ / 0-)

                mixed package got AAA rated. Other slices got much worse ratings. The relevant issue is correlation. They miscalculated that number, resulting in AAA being a lot more risky that thought.

                And yeah, midway through, some people started realizing that, and some people inside the banks did what they could to brace the banks for the impending collapse.

                And by the way, if you think you can find someone better to run things, you're wrong. It's not a job any Joe off the street can do.

                The obvious answers are wrong. That's why we aren't doing them already.

                by atheistben on Wed Nov 09, 2011 at 09:17:40 AM PST

                [ Parent ]

    •  But not every action they take adds value..... (2+ / 0-)
      Recommended by:
      happymisanthropy, RichM

      I don't disagree with you that financial services can add value to the economy, and when performed ethically and with a level of competency usually do.

      I don't buy your later premise that no-body at any of the large financial institutions was smart enough to see the problem in 2006 when families were moving out of 2 bedroom apartments where they were consistently late on rent and into 4 bedroom homes with no money down.

      Either the bankers were negligently unenlightened about where this tidal wave of new mortgages that Fannie and Freddie no longer wanted to back were coming from, or they simply found the business too profitable to quit.  Either way, it was not a good thing for the economy and was the fault of the banks.

      The "monied elite" will always exist.  The problem isn't their existence, it is the fact that the current generation of them is either too greedy or too stupid to keep the economy running smoothly.  Time for the government to impose regulation to make it more difficult to hold on to large sums of money unless you are smart enough to figure out how to invest it in the future.  This will weed out the "timid" and punish the "greedy" giving a chance for the next generation of "monied elite" to grab the reins for a while.

      "We would never shoot nuclear weapons at Decepticons, ever." - Lt. Col. Jack Jacobs (Ret.)

      by jandrewmorrison on Tue Nov 08, 2011 at 12:01:36 PM PST

      [ Parent ]

    •  Bullshit, bullshit, bullshit. (1+ / 0-)
      Recommended by:
      Chi

      Risk never goes away, it's just redistributed.  

      Yes, the banksters have greater risk tolerance than a typical human.  They use this to make themselves richer and everyone else poorer.  

      When their high risk investments win, they take all the profits.

      When their high risk investment fail, the declare bankruptcy and walk away from their obligations, leaving everyone else  to clean up their messes.

      The phenomenon you identified is one of the biggest causes of malignant wealth stratification between the top 0.1% and the non-parasitic classes.

      Passengers: Feel free to rearrange the deck chairs, but please remember that the bridge is off limits.

      by happymisanthropy on Tue Nov 08, 2011 at 02:00:02 PM PST

      [ Parent ]

      •  Diversification reduces risk (0+ / 0-)

        Assume you have $100. Assume the world only has two investment you can make:

        Investment #1: Buy shares of company A
        Company A sells shares for $50. In one year, that share will be worth either $40 or $80 (equal probability).

        Investment #2: Buy shares of company B
        Company B sells shares for $50. In one year that share will be worth either $45 or $65 (equal probability).

        How should you invest to reduce your risk?

        Obviously, the $45-$65 is the lower risk investment. You might think that you should buy two shares of company B. If you did that, you'd have 50% chances of payouts of $90 and $130 (standard deviation of $28). But consider what happens when you buy one share of each:
        25% chance of $85
        25% chance of $105
        25% chance of $125
        25% chance of $145

        Not only do you increase your expected value (from $110 to $115), you reduce your risk (standard deviation) to $26. But this only works as long as the separate investments aren't correlated.

        By banks choosing to make loans that are uncorrelated to their current portfolios, they can reduce the risk in the whole system - even if individual investments are risky. What matters is correlation. This allows an enormous degree wealth generation across our economy. That we have people fairly capable of doing this is a big part of the reason we live in a modern economy.

        This isn't stuff that's up for debate either. Nobel prizes were given for this stuff in the early 1960. Modern finance for the last 50 years is built upon this stuff. This is not debatable. And if you don't understand it, you really don't have much to offer in the discussion about what our economic system should look like.

        The obvious answers are wrong. That's why we aren't doing them already.

        by atheistben on Tue Nov 08, 2011 at 02:49:37 PM PST

        [ Parent ]

        •  Yeah, but so what? (0+ / 0-)

          an individual can modify his risk withing a system, but the total risk within the system stays the same.

          If a company goes bust, it's the same loss whether the loss is eaten by one sole proprietor or a million shareholders.

          If lack of total capital available for investment were a problem for our economy, then increased leveraging potential would be a great boon.  It isn't.

          Risk assessment can change where the bombs are buried, but it can't make the bombs go away.

          And, when cheap unregulated insurance covers the risks, firms have incentive to take huge risks rather than settle for industries with boring single-digit ROI.

          The kind that actually grow the economy.

          Passengers: Feel free to rearrange the deck chairs, but please remember that the bridge is off limits.

          by happymisanthropy on Tue Nov 08, 2011 at 04:54:05 PM PST

          [ Parent ]

          •  The total risk in the system does not stay the (0+ / 0-)

            same, because the choices about what the system invests in takes into account how performance of that investment correlates to the system's performance. You're missing the big picture the example is supposed to illustrate.

            And besides that, spreading risk, so that people can pay a small premium to account for their risk, means that risk has less impact on the system.

            Think about your car insurance. You buy it because there's risk you will wreck your car, and it would be a big impact for you to have to replace it. Instead of bearing this risk, you buy risk mitigation from people more willing to bear the risk - but this comes at a cost (and in today's society it is usually a small cost). On average this increases economic output and wealth.

            The obvious answers are wrong. That's why we aren't doing them already.

            by atheistben on Wed Nov 09, 2011 at 09:23:38 AM PST

            [ Parent ]

            •  and if owning insurance (0+ / 0-)

              made me drive more recklessly, or leave my car unlocked with the motor running, it would actually increase the impact of risk on the system.

              Passengers: Feel free to rearrange the deck chairs, but please remember that the bridge is off limits.

              by happymisanthropy on Wed Nov 09, 2011 at 09:43:34 AM PST

              [ Parent ]

              •  Well, perhaps, but it is unlikely that increase (0+ / 0-)

                in risk would outweigh the gains made by diversification. In the car example, people don't drive more risky because their lives are at stake too. And it's a hassle to replace a stolen car, so people generally don't want their cars to be stolen despite having insurance. Things like this keep the system in check. In area where there are less of these demotivators, you'll see higher premiums that people have to pay to offset the change in incentives.

                The obvious answers are wrong. That's why we aren't doing them already.

                by atheistben on Wed Nov 09, 2011 at 09:53:21 AM PST

                [ Parent ]

                •  asdf (0+ / 0-)

                  when the risk exposure changes, behavior changes.  When behavior changes, risk structure changes.  When risk structure changes, the old risk assessments are obsolete and can't update itself without reexamining its fundamental assumptions.  Which computers can't do.

                   

                  but it is unlikely that increase (0+ / 0-)
                  in risk would outweigh the gains made by diversification

                  are we talking micro or macro?

                  In the car example, people don't drive more risky because their lives are at stake too. And it's a hassle to replace a stolen car, so people generally don't want their cars to be stolen despite having insurance.

                  Please don't take the metaphor so literally.  Because banks are insured against loss, they take bigger risks.

                  Which means two things:

                  1) the total amount of risk ingested by the banks increased.  That risk doesn't go away, it's just passed on to someone else.

                  2) because insurance is cheap, banks prefer risky investments to safer ones.  Thus, since 2000, there's been plenty of capital for ponzi schemes, subprime housing bubbles, and credit cards, but businesses and even well-qualified homebuyers have been cut off from capital.  Why build a factory that might make a 6% profit when housing prices are doubling?

                  Things like this keep the system in check. In area where there are less of these demotivators, you'll see higher premiums that people have to pay to offset the change in incentives.

                  No, premiums rise to offset the insurer's perceived change in risk exposure, based mostly on historical default data.  Failure to look at "changed incentives" is a good chunk of the reason why shitty deals were given AAA bond ratings.

                  If insurance were enough to deter risky investments, then it would no longer be cheap insurance and it would no longer have the benefits you enumerate.

                  Passengers: Feel free to rearrange the deck chairs, but please remember that the bridge is off limits.

                  by happymisanthropy on Wed Nov 09, 2011 at 10:42:26 AM PST

                  [ Parent ]

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