On Mon, Jun 13, 2011 at 10:50 AM, Nathan Loofbourrow <njl...@gmail.com> wrote:
> The good old market played a role here too. There are lots of investors
> whose risk profile dictates that they should be in "safe" investments, e.g.
> pension funds and old people. With the interest rates held on the floor, and
> Greenspan and Bernanke sitting on their chest, those safe investors started
> to buy up mortgages, because mortgages were big dumb investments and
> everyone paid their mortgage.

You just proved the point: the market was distorted, with private
actors acting _within_ the distorted market parameters.  Thus people
who needed to make low-risk investments did make what _seemed_ like
low-risk investments (after all, real estate had been a low-risk
investment for decades in the U.S.), but actually were not just
high-risk, but bound to fail.

You can blame the derivative sinners (pun not intended) all you like,
but there's an original sin here.  Everyone else was either fooled
into sinning, peer-pressured into it, or outright forced, and though
there surely were some who understood what was happening and sought to
profit from it, you can hardly blame them either -- we all do
something of the sort (if you see inflation coming and manage your
money accordingly, are you ripping off all those who can't or don't
know to do anything about inflation? and if so, are you a terrible
person for it?).

> After a while you run out of big dumb mortgages, and we did. So the pressure
> was on to create more of them. Once everyone has a mortgage, or maybe two,
> you start lending to folks with a risk profile that wasn't so hot anymore.
> The whole tranching process masked the fact that this was happening because
> you could still issue AAA bonds out of these and everyone bought in.
> tl;dr: everybody gets to wear a hat that says "dummy", whether private,
> public or individual.

The whole tranching thing was almost brilliant, and would have worked
out fine (securitized mortgages from the 80s seem to have done fine,
no?) if there had been no bubble (but in a bubble the securitization
helped it along), and if all the issues in tracking the underlying
loans (and thus pricing the securities) had been worked out correctly.

> ObCrypto: sorry, got nothing.

Yeah, well, we need a sub-list for OT discussions.  At Sun we used to
have lists with sub-lists named the same + a "-extra" suffix, where
people who wanted to participate in these sorts of long, flame
war-ish, OT discussions could.

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