against all that noise

so.. i get a bit fed-up/frustrated/deaf to all the blabber about market-failures - be they mortgage-based, private equity, stock-bubbles…whathaveyou. anyway, the thing - as with collective opinion in so many spheres - is that the conversation ends up as a self-reinforcing cycle of reductions at best and a bundle of loosely associated tangents at worst… (i feel the same way about the global-warming hoopla, which doesn’t detract from my belief in the phenomenon itself, but is manifest as a general skepticism that our collective dialog on complex topics is not at a point were we can yet have productive and meaningful mass communication (ie more than the, as now, meager unilateral voice of the media) ) so… tangents aside for a moment, i’ve had some thoughts on the US housing-bubble and the over-reaction at home and abroad in response - which, i’m now just going to copy out of an email i wrote to my dad a month or so ago:

i think the first (& easiest) public response is to quickly blame : 1. consumer banks for predatory lending; 2. new debt-instruments like repackaged debt obligations for hiding market risk; or 3. the government for not better regulating mortgage-lending, debt-reselling, or for not bailing people out. i think all of these are knee-jerk and reactionary for different reasons and i think, as with most problems, the error is somewhere in the mix of all these things. quickly :

i don’t think new instruments, like repackaged CDOs are to blame - combining risky liabilities into groups helps stabilize the market by taking the risk one bank would typically absorb and spreading it around (including to foreign investors - hence the worldwide “scare”). CDOs have been around since the 80s and are resold as more than just highly rated bonds… they’re often set up in tiered systems with lower-rated tiers accepting more default-risk while paying higher interest rates… you could say, as i think you are, that the combination of CDOs with subprime loans caused a market error, because subprime loans exhibited higher-than-average default rates - that’s true.
however… the banks don’t rate their offerings - rating firms do : ie moody’s and standard’s & poor - like morning star in the mutual fund sector.
so… we can blame :
1. banks for predatory lending in the subprime bracket
2. wall street for selling risky securities that under-represented volatility
3. the rating firms for over-rating CDOs composed of subprime assets
4. individuals for not doing their research
so…
i think we spread the blame around a little (just like those cdos spread risk) and learn what? our pricing strategies are approximate - just because a cdo is backed by collateral doesn’t mean it’s a risk-free investment tool. people who invested in those tools are just as naive as the duped folks trying to buy a house that they can’t afford. so… it’s tricky. i think there’s a lot to be said for a relatively unhindered system; we give people enough rope to hang themselves with (both rich and poor - think how much the investors in cdo-driven hedge funds lost…) but, on the other hand, we let people try new things. the downside is that there’s always a period of punishment and subsequent skepticism after we overreach. the upside is that the market reevaluates and next time subprime cdos will be rated more accurately. (i’d hope/expect.)

and that’s where i see the biggest opportunity for improvement in this whole debacle - better evaluation of risk in new markets. moody’s and s&p were clearly not conservative enough in their estimates of volatility in CDO derivatives and that could trickle down to the banks - who in their lending weren’t adequately introducing volatility into their appraisal procedures. i have no idea, but i’d bet that small local banks assume a pretty stable real-estate market when they’re assessing their default-risk and in a culture in which people are always trying to out-buy each other or move into bigger and better houses… that’s not a safe assumption.

anyway -
i think it’s interesting…
what is the right balance between personal freedom and security? america is still living on the frontier illusion of infinite progress and expansion (if not in land, well than in business - how many corporate forecasts call for declined market-share? how many people think that could be a good thing?). we still have the cowboy mentality: go in, try some stuff and if it works, make the laws to follow.

i’m not really sure about my hard and fast position on personal responsibility vs. external liability - but i think it’s interesting to debate. i think we could (maybe) tune our system to be more nurturing and less competitive - i’d like to be taken care of - but i think we’d lose a lot of the innovation we do have. the ultimate question seems to be: do we value innovation (do we consider it progress?) or do we value security… i’m sure it’s a happy balance in there somewhere.