The Big Lie (..that Fannie and Freddie are to blame for causing the financial crisis)

I've been reading Nassim Nicholas Taleb's 'The Black Swan' recently. Quite interesting.

http://en.wikipedia.org/wiki/Black_swan_theory

The black swan theory or theory of black swan events is a metaphor that encapsulates the concept that The event is a surprise (to the observer) and has a major impact. After the fact, the event is rationalized by hindsight.

The theory was developed by Nassim Nicholas Taleb to explain:

The disproportionate role of high-impact, hard-to-predict, and rare events that are beyond the realm of normal expectations in history, science, finance and technology
The non-computability of the probability of the consequential rare events using scientific methods (owing to the very nature of small probabilities)
The psychological biases that make people individually and collectively blind to uncertainty and unaware of the massive role of the rare event in historical affairs

Unlike the earlier philosophical "black swan problem", the "black swan theory" refers only to unexpected events of large magnitude and consequence and their dominant role in history. Such events, considered extreme outliers, collectively play vastly larger roles than regular occurrences.[1]

...


Black swan events were characterized by Nassim Nicholas Taleb in his 2007 book (revised and completed in 2010), The Black Swan. Taleb regards almost all major scientific discoveries, historical events, and artistic accomplishments as "black swans"—undirected and unpredicted. He gives the rise of the Internet, the personal computer, World War I, and the September 11 attacks as examples of Black Swan Events.[2]

The term black swan derives from a Latin expression—its oldest known reference comes from the poet Juvenal's characterization of something being "rara avis in terris nigroque simillima cygno" (6.165).[3] In English, this Latin phrase means "a rare bird in the lands, and very like a black swan." When the phrase was coined, the black swan was presumed not to exist. The importance of the simile lies in its analogy to the fragility of any system of thought. A set of conclusions is potentially undone once any of its fundamental postulates is disproved. In this case, the observation of a single black swan would be the undoing of the phrase's underlying logic, as well as any reasoning that followed from that underlying logic.

 

I have a picture of two black swans swimming together, taken in London. Show the pic to 100 people, 99 will look at you blankly and the 100th will laugh. Finance geek humor.

 

In the state of Texas, property taxes are extremely high. This dampened home prices. Furthermore, Texas experienced a tremendous housing bubble during the '80's. Many laws were enacted to ensure that would not happen again.

There are multitude of reasons why the crisis developed. To say general advocacy was not one of them is partially correct. When bubbles develop, conventional wisdom becomes an immutable fact.

There are many people to blame, but the people I hold in serious contempt are the flippers. I came across a few during the height of the bubble and they were the most arrogant pieces of crap. They really felt they were something special.

 

Repealing the Glass-Steagall provisions allowing commercial and investment banking under one corporate roof is to blame.

Next question?

 

BTW, for anyone interested Wallison has responded to Nocera’s OPED: Why the Left Is Losing the Argument over the Financial Crisis

 

That's a very big part of it. The thing about it is that it's folly and a waste of time to look at an event, look at the set of occurrences that preceded it, and point to one saying "IT'S BECAUSE OF THAT!" There are myriad reasons why this happened and it serves no purpose to try to blame one specific one.

One of the major reasons was obviously the repealing of Glass-Steagall (which was just one aspect of the HORRIFIC deregulation that had begun a while before and had continued up until the crisis, with plenty of help from Mr. Clinton as much as any of the others). The aforementioned deregulation/conflicts of interest permeated all levels of the financial world including government-appointed positions, committees, and regulatory organizations. If I were to point to a specific aspect of it all (at least, all the actions taken by the government), it would have to be that: deregulation and conflict of interest.

I think it is also folly to say it's "because of Fannie and Freddie" because, as has been stated on this thread numerous times, while their contribution to the housing bubble is certainly significant, it is unjustifiable to point to it and say it's "their fault".

It's everybody's fault, and that means it's really the government's fault, because you have to expect corporations and people to be short-sighted fools when there's obviously a bubble, and it should have been the government there to regulate it. This graph is ridiculous:

 

The left isn't going to lose that argument even if it deserves to lose the argument. The Republicans had the White House and Congress from 2001 to 2006, and the White House in 2007 and 2008, so they're going to get the blame for 2008. Which is fair enough, as they certainly would have taken credit if 2008 had been a great year.

 

The title isn't mine. Perhaps you should read the article?

 

I know that. Doesn't negate my comments. Wallison's job is to sell Republican. So of course he's going to say that the left is losing. But he's not going to get this sale, any more than the left will get credit for toppling the Soviet Union.

 

Well you obviously didn't read the artiicle. Fannie and Freddie were under selling the risk on the books by a magnitude of hundreds. And these are govenment numbers.

 

The Republicans had 6 years to fix that. They were in charge. I wouldn't dream of giving them an out, any more than I would give the Dems an out for what happened in 1999.

 

<sigh> You obviously don't read the links provided.

So what happend in 1999? We partied like is was 2008?

 

If you reduce this discussion to republican vs democrat, you're being obtuse. I made that point in my post (which everybody ignored), in that both of them are responsible (Clinton repealing Glass-Steagall and appointing conflicts of interest, as well as all the republicans performing various deregulating as well). If I had to say which ones are worse, I would have to say the republicans because they so blatantly work solely for the corporations. But it's useless, as they're all working for the corporations anyway.

 

Ugh, not again. The repeal of G-S had absolutely nothing to do with the crisis. The banks that collapsed first were all investment banks with no commercial banking at all. It's a completely irrelevant red herring.

 

Sounds a bit like the 'Private Eye' sketch of Samuel Beckett's first draft. He's sitting in front of a typewriter scratching his head. The typewriter has a piece of paper with the words...

'Act 1

Scene 1...

Enter Godot'

For us literary aficionados that's comedy gold right there

I think most of the damage in establishing the conditions for the crisis had already been done before then but when you say, 'nothing to do with the crisis', I'm not sure it's quite that simple.

http://en.wikipedia.org/wiki/Glass–Steagall_Act#Events_following_repeal

Anyway, as you've suggested elsewhere, there's plenty of blame to go round.

 

Wikipedia only has conjecture - it doesn't actually say WHY the repeal made a difference - because it can't. For instance, Citi is mentioned. But City is not a pattern. The institution that best survived the crash was JP Morgan, which was also a commercial bank with an iBank arm, like Citi. Meanwhile, the crisis effectively destroyed the independent iBank with a balance sheet model, as Bear and Lehman went bust, Merrill had to sell itself and Morgan Stanley and Goldman became commercial banks to survive. Given that the iBanks were completely unaffected by the repeal, what did it have to do with the crisis?

 

But isn't that simply because, in ANY kind of crisis, some people will survive by picking over the bones of those that don't. In the past I've bought distressed assets of other companies in my field but the fact I survived whilst they didn't can't be used as a means to explain how well that sector is doing.

To be clear, it MIGHT be doing well or it might be doing badly but you can't ascertain the fact from one company surviving and one disappearing.

But just as a matter of interest, (and I realise I'm probably asking you to go over old ground again... sorry for that), why do you say it had no effect whatsoever?

I ask because it's hard to see how allowing a conflict of interest in that area wouldn't have had SOME effect, even if only at the margin.

 

But wasn't the whole crisis that precipitated TARP caused by the fear of each major investment bank in the domino chain- Bear Stearns, then Lehmann, then Merrill, then Citi etc - tanking the system's ability to roll commercial paper? I guess I was never clear on whether investment banks held commercial paper before the G-S repeal.

TBF, the firms that went down first just didn't properly account for the toxic assets. G-S had nothing to do with that.

And as for AIG...I still don't know how any government agency could have prevented that but I don't work in the insurance biz.