Being in an office directly off the trading floor (and with a Bloomberg!) for the past 2 weeks, let me just say: things are very bad, and only getting worse. I'm honestly scared for the future of the financial system.Words to live by. Literally.
How did we get here? There are lots of reasons, but to me, the most important reason is that traders, CEOs, and even risk managers all seem to have forgotten one extremely important thing: In a financial crisis, the correlations always go to one.
Now to go off on a tangent: fun uses of the word "literally". I get a ton of blast emails from various PR people, publications, and random pundit larvae. My personal favorite came in today, headlined: "Barney Frank was in bed with Fannie. Literally."
This was too marvelous to actually read the email, so I don't know if he was notifying me that Barney Frank has come out as a heterosexual, or implying that Barney Frank had required the entire staff of one of our GSEs to sleep with him in exchange for his protection.
Well, the word is that his gentleman friend works for Fannie. This gay winger thinks the failure of the press to call him on this means that they are not recognizing the validity of gay relationships: http://www.gaypatriot.net/2008/10/05/media-downgrading-gay-relationships-by-ignoring-frank-conflict-of-interest/
and it's an interesting point.
The GOP obsession with Fannie/Freddie talking points is ... like scolding the mountain for creating the lake.
No one forced any private institution to buy anything that Freddie or Fannie had to sell. No one.
The idea that the GOP wanted stricter oversight to imply better risk taking (at FHLMC, etc.) is a canard. They wanted to cut Fannie and Freddie out, so that MORE loans could be financed by the private sector, directly.
If that's not hilarious enough, the people who were saying that these GSEs were a market intrusion, were some of the same ones that went running later to get the limits raised, so that the GSEs could purchase "jumbos", so as to restore the blown-out spreads in that part of the market. Clearly, one can say anything in pursuit of profits ...
Take care of yourself and get better. We need you to be healthy to help us get through this crisis!
"In a financial crisis, the correlations always go to one."
Can someone explain this?
Take care of yourself and get better. We need you to be healthy to help us get through this crisis!
Take care of yourself and get better. We need you to be healthy to help us get through this crisis!
Take care of yourself and get better. We need you to be healthy to help us get through this crisis!
Take care of yourself and get better. We need you to be healthy to help us get through this crisis!
Take care of yourself and get better. We need you to be healthy to help us get through this crisis!
I hate the misuse of the word "literally." But the Frank example isn't so bad. It's mostly a problem of word placement, leading to ambiguity of meaning.
Literally is fine to modify "in bed" in this case. At least it's probably a safe assumption that sharing of a bed was involved.
Incorrect if intended to modify "with Fannie."
Take care of yourself and get better. We need you to be healthy to help us get through this crisis!
Take care of yourself and get better. We need you to be healthy to help us get through this crisis!
Take care of yourself and get better. We need you to be healthy to help us get through this crisis!
Ok, I am sick of this.
Megan, I volunteer to police your comments section for free.
This font is way too small and it's drowning in an ocean of whiteness.
Whoever paid for this redesign should ask for their money back.
Lampwick:
Sully seems to like it.
Sully may like it, but I don't.
The lime-puke-account's-eyeshade green up at the top is incredibly ugly.
There are actually like four or five different fonts on this page, none of which harmonizes with any of the others.
There's no balance at all among the design elements.
And the tiny font on the pure white background is probably going to cause premature blindness.
This is genuinely bad, amateur design
I am less worried now about the financial crisis than I am about The Atlantic's design crisis. Has the magazine decide to change into a free weekly classified advertisements flier?
"In a financial crisis, the correlations always go to one."
yeah, can somebody explain this?
As for the new design: I think it's an improvement that will eventually grow on me.
The lime-puke-account's-eyeshade green up at the top is incredibly ugly.
Wait--McArdle is still blogging here? I took one look at the design and the color-scheme and assumed that she'd been replaced by Sonny Crockett.
If that's not hilarious enough, the people who were saying that these GSEs were a market intrusion, were some of the same ones that went running later to get the limits raised, so that the GSEs could purchase "jumbos", so as to restore the blown-out spreads in that part of the market.
Actually, most of the people rushing to get the limits raised were representatives from states where lots of housing were jumbos, such as California. The housing bill passed earlier this year raised the limit; the jumbo provision was strongly supported by Speaker Pelosi, understandably given her district.
"In a financial crisis, the correlations always go to one."
Ordinarily, investors tend to hedge, by investing in things that are anti-correlated. If you invest in oil, then you also invested in businesses that do well when the oil price drops. The idea is that you want to get it where no matter what happens, you win a little bit. You balance your NY real estate with your TX oilpatch real estate and then your farmland. The problem is that you can't really create a situation where you can't lose. You can make it so that the vast majority of the time you don't lose, but there's always that small percentage chance that everything loses at the same time. You can't hedge away everything.
This literally reminds me of a Matt Yglesias post about Biden's abuse of the word.
"In a financial crisis, the correlations always go to one."
yeah, can somebody explain this?
In a typical market, prices of different asset types and classes often move in opposite directions. Japanese stocks and LNG prices, for example, usually show little correlation. But (click my name for a starting point) in times of crisis, often everything goes down/gets sold off.
Here is what's coming.
1. This bailout will cause a massive increase in the money supply and a return to 20% inflation - minimum.
2. Obama will be elected. He will cancel renewal of the Bush tax cuts and raise taxes on the rich. Black Friday will not arrive in 2008 as shoppers stay home. Everyone, except the rich, will be mailed a $2000 check for Christmas by the Leader (Obama).
3. Winter 2008 will be very severe and there will be a nationwide shortage of home heating oil and natural gas. Everyone will agree this is caused by Global Warming and emergency legislation will be passed to reduce carbon footprints by banning coal, oil drilling and nuclear power.
4. Solar power farms and wind farms will take over fields used to grow corn and wheat. Obama will freeze food prices. Food shortages will be
blamed on greedy grain traders and corrupt commodity markets.
5. Changing weather patterns caused by cold winter temps and the massive PDO parked off the west coast will cause a 1930's dust bowl on Great Plains in 2009. Gasoline and water will be rationed. Unnecessary travel will be forbidden and enforced by system of internal passports.
6. Obama will make daily announcements. "The only thing we have to fear is fear itself". Congress will pass an emergency law outlawing Fearmongering.
7. XMAS 2009 will be colder than XMAS 2008.
8. The name of Christmas will be officially changed to XMAS (supreme court decision).
Happy Holidays.
Dear Megan:
I read a book that has saved me a lot of money - The (Mis)behavior of Markets, by Mendelbrot. I read the book in late 2006, and went from a 20% cash position prior to reading the book to 50% cash in March 2007 to 70% cash in Jan 2008.
He makes the same point as your friend - the volatility of markets cannot be captured by Gaussian statistics, because financial events are not uncorrelated. His section on insurance company failure seems devastatingly prescient now.
I highly recommend the book, although, because this is Mendelbrot, the work presented is phenomenological and not deductive. But given that theory, "conditional variance" notwithstanding, has done so poorly, a purely empirical take seems worthwhile.
Since correlation is a simpler concept than assymetrical information, there's very little to add to the subject of the blog.
It seems that the 1985 design that was dusted off and pasted on the Atlantic site is the way of marking the DJIA slide back into the 20th century. May be not all the way to 1985, but kind of in that general direction. (The summary on the re-design topic: the Atlantic should get rid of the intern, who came up with this Miami Vice rip-off.)
On a separate note, Megan, please do get better. Best wishes on speedy recovery.
How come Megan got stuck with lime green? It's very hurty on the eyes.
Sully got dark blue, Douthat got cyan, Ambinder got a forest green ... it's a lefty plot to drive traffic away from her blog. Or maybe an anti-feminist plot.
The 1950's design screams, "The Atlantic has a rich history beyond its competitors'." And that is true. The Atlantic predates the vast majority of its competitors.
The new design scheme makes sense to me.
Amicus - The idea that the GOP wanted stricter oversight to imply better risk taking (at FHLMC, etc.) is a canard. They wanted to cut Fannie and Freddie out, so that MORE loans could be financed by the private sector, directly.
Well, I'm still working to wrap my head around the whole thing, but can you give any specific example of how the 2005 amendment and the politics behind it matches your assertion? It seems to limit the CRA and increase rather than diminish regulation.
Somehow, I think this redesign is a clever ploy to compel James Lileks into a lifetime subscription. My only fear is that the site may, in fact, become subject of his next book.
I guess could learn to like the general tone of the redesign, disjointed fonts not withstanding. However, I will never learn to love green eggs and ham. That's just the way things are.
Correlation really is key in this crisis.
Correlation refers to how likely random events are to occur together. It is usually measured by a correlation coefficient, which is +1 for perfectly correlated events (e.g. being the CEO of a Fortune-100 corporation and being male), 0 for uncorrelated events (e.g. my getting a raise this month and Mars being in Leo), and -1 for perfectly anti-correlated events (e.g. winning the lottery this month and going bankrupt this month).
A lot of risk models assume that events are uncorrelated. If a given mortgage has a 3% chance of default, but that is uncorrelated with defaults on other mortgages, then in a large package of mortgages it is quite likely that ~3% will default but extremely unlikely that ~100% will default. But if defaults become highly correlated, then there is a ~3% chance that ~100% of my mortgages will default. MBS risk models assumed (correctly, at the time they were written) that mortgage defaults were only slightly correlated events.
When correlations go to one, extremely unlikely events become not so unlikely.
Amicus: I'll certainly grant that the Republicans were not time-consistant in their approach to the GSEs. (Nor, of course, were the Democrats.)
What, though, is bad about their previous goal of getting the government out of the mortgage business? The US is the only big, industralized nation to set up a system that attempts to push down mortgage interest rates by hiding the default risk from the people that fund mortgages. That does make mortgage interest rates typically 50-100 bp lower in the US. Yet home ownership in the anglo-saxon countries are all very close (about 68%, with the exception of Ireland, where the home ownership is even higher). Most also don't offer tax benefits at anywhere near the level the US does.
Why would anyone want a GSE system in the first place?
David Wright,
You are missing a key difference between the U.S. and other 'Anglo-Saxon' countries: we have more non-Asian minorities, who tend to have lower amounts of human capital (so they have less earning power). Financial engineering was necessary for a ~65% white country to have home ownership rates (and other economic stats) competitive with ~90% white countries. Now the house of cards has fallen apart. Folks with average IQs of 85-90 generally don't earn enough to be able to afford median homes.
Juan,
Do you own your own home?
Or are you just a racist cunt who lives with his parents, and drains them instead?
If you're going to use Sailer's inane statistics, at least acknowledge it, so people don't have to waste time.
If you're going to come up with racist bullshit, at least be original.
cuntface