The more you read about CDOs, synthetic CDOs, Credit Default Swaps, Tranches, and the absurd lack of reality on the part of our financial elite, the more you wonder just how dangerous it is to leave our lives in the hands of the elite.
I’m a big fan of the movie “Idiocracy,” where the premise is that it is the dumbest who will procreate and supplant the intelligent. (the movie is better viewed as critique of the institutions entrusted with transmitting our culture than it is a Darwinist Future).
The amazing thing is that a nation run by Sarah Palins and Joe-the-Plumbers (perceived as dumb, when in fact they are merely people who haven’t had their common sense ‘edu-ma-cated’ out of them) could scarcely do worse than the “big brains” from Haaaavaaad and Goldman Sachs that destroyed our banking system and economy.
For proof of what I mean, please read the article linked below. My middle class radio audience in Waukegan saw this coming in early 2006, but the top 5% of the top 5%, blinded by an equation that a 8th grader could poke holes in, couldn’t figure it out.
For five years, Li’s formula, known as a Gaussian copula function, looked like an unambiguously positive breakthrough, a piece of financial technology that allowed hugely complex risks to be modeled with more ease and accuracy than ever before. With his brilliant spark of mathematical legerdemain, Li made it possible for traders to sell vast quantities of new securities, expanding financial markets to unimaginable levels.
It was a brilliant simplification of an intractable problem. [Bruno's comment - sort of like the simplistic nonsense of "single payer...but I digress] And Li didn’t just radically dumb down the difficulty of working out correlations; he decided not to even bother trying to map and calculate all the nearly infinite relationships between the various loans that made up a pool. What happens when the number of pool members increases or when you mix negative correlations with positive ones? Never mind all that, he said. The only thing that matters is the final correlation number—one clean, simple, all-sufficient figure that sums up everything.
Forget that the sum is horribly wrong…
“Everyone was pinning their hopes on house prices continuing to rise,” says Kai Gilkes of the credit research firm CreditSights, who spent 10 years working at ratings agencies. “When they stopped rising, pretty much everyone was caught on the wrong side, because the sensitivity to house prices was huge. And there was just no getting around it. Why didn’t rating agencies build in some cushion for this sensitivity to a house-price-depreciation scenario? Because if they had, they would have never rated a single mortgage-backed CDO.”
Proving my point that “rating agencies” full of MBAs aren’t as smart as angry white males in Waukegan?
I would strongly suggest you read the entire linked article. It really explains the meltdown, both mathematically and sociologically.