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Lies, Damn Lies, & Statistics, or: Things That Weren't The Cause of The Financial Crisis
According to a recent column on Vox EU, "homestead exemptions" in state bankruptcy law helped cause the housing bubble:
For many, the US housing market was the epicentre of the
global crisis. This column suggests that the US bankruptcy code, which
in some cases protects a large section of the individual’s house, leads
to overinvestment in housing – a bias that may have helped massage the
US housing bubble in the decade preceding the global crisis.
The authors of this article would be well-served to spend an
afternoon overhearing conversations in the food court of one of our
many thousands of shopping malls (or maybe worse, Walmarts).
Were they to do so, methinks they'd quickly re-examine their thesis,
methodology, and conclusions. The average American knows about as much
about state bankruptcy law as they do about quantum computing.
Maybe some Lawyers consider the worst-case financial
scenario of personal bankruptcy when buying/paying for a home, but
Lawyers account for less than 1% of employees (if not much less), and I
find it extremely hard to believe many others even consider such an
unpleasant outcome.
This leads us to a larger and much far more important lesson:
I've
been saying for years (as have many others) that quant types (traders,
economists, structured finance peeps, etc) who seldom left the confines
of their cubicles were instrumental in enabling if not causing the
bubble that lead to the financial crisis. If some of my recent reading
is any indication, these mathletes - despite scoring off the charts on
every test they've ever taken - still haven't gotten it through their
thick skulls that even the most complex analytical techniques are
useless if not harmful when they ignore the fundamental reality behind
the data.
It doesn't matter how many degrees you have, how "complete" your
data sets are, or how theoretically rigorous your approach/analysis may
be. Numbers lie. Always have, always will.
Michael
Burry (and those who followed his thesis like John Paulson) became
unbelievably wealthy because instead of holing-up in their offices on
Wall Street, The City (or wherever) running numbers, they looked at the
underlying fundamentals. To the quant-types at banks, hedge funds, and
institutional asset managers, home prices were not and would not become
significantly geographically correlated, that just wasn't possible or
even likely.
To investors like Burry who saw the groupthink and herd-behavior within the mortgage finance industry and on Wall Street,
this mentality was absurd given what he saw both on the front lines and
within the thousands of pages of MBS (etc) prospectuses he read. Lo
and behold, when the proverbial excrement hit the fan, Burry made a
fortune while Wall Street collectively barely survived intact, and only
after extraordinary bailouts and other forms of Government assistance.
Surely there were other dynamics involved (competitive pressure
faced by bank management to meet quarterly performance numbers,
regulatory and ratings agency-enabled short-term goals,
captured/ignored auditors/lawyers, etc), but as Burry and others have
explained for the past few years, all the signs of the impending
housing collapse were there to see for anyone who wanted to look at
them.
In closing: beware wary of nerds* bearing numbers. Remember, there are three types of lies: Lies, damn lies, and (most dangerous of all) statistics...
* Many of my friends are nerds (as am I, to a point) and very few of them are of the arrogant, economy-destroying type.
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In search of a respectful name ICON? Thanks fellow traders.
There is not much point in attacking idiots who build cement walls around their brains. Someone should ask them why they think the CDS market went from nothing to over $60 trillion starting in 2004. Why do they think banks were loading up on trillions of insurance against default?
Yes, we are a society that has become addicted to quantitative versus qualitative data.
That is the very nature of a lie - it cannot be quantified; therefore, to lie in a society increasingly defined by mathematics and numbers, a tool of obfuscation and deceit becomes requisite. Statistics is that tool.
Mark Twain was on the cusp of this scientific "revolution" and said it about as succinctly as one can. I have no doubt he saw how common sense and spirit was in danger of being suffocated by numbers and sophistry.
As mark twain once said its not what you dont know that gets you in trouble. Its what you know for sure that just aint so.
A classic example of groupthink too. Smart people.sure of themselves can make the stupidest mistakes. Herding behavior and pressures to conform to the norm are the bain of politics and investing. Beware the herding behavior on zero hedge too! It caused a ton of people to miss out on a ton of money. But it is not the fault of tyler. People who always congregate with likeminded people bevause of the pull of confirmation bias will make.groupthink mistakes. Thats why i hang out here with you turds and miscreants and collapsaholics. You might be right, and i want to be the first pinstripe to know.
Well, what I have taken from this site since I started reading almost 2 years ago was silver at $12 an ounce and an oil company that follows the price of the barrel which was $14 a share then, $57.88 now! I myself am a collaspsaholic. Wouldn't classify myself as being smart......but was smart enough to know something was majorly wrong in 2004 with Real Estate and saw a shit-storm coming.
The herd mentality right now is that things are improving. I don't buy it. Taxes, demographics, huge debt burdens, declining home values, inflation, gas prices, 9% unemployment, entitlements and even the disconnect this population has from reality are just a few to mention as to why I am a skeptic.
You just have to let it go. Every thing might just be alright.
The stock markets should have went down today. But they didn't.
We may blow another bubble here. While we are getting our shit together regulating Wall St.
The housing market may lose it's importance to the banks if there is real demand for loans.
China's loss may be our gain. The oil they forego may be all we need to get this country going again.
We can do this. All is NOT lost.
Move on!
gh
Blame the nerds? Is that the best you can do?
Numbers do not lie, people do. The same numbers, "the fundamentals", alerted your hero Burry and steered him away from the same MBS, CDS, and bullshit ratings to make him a "fortune". But you make it sound as though having the mind of an uneducated dolt, a cowboy with a lick of common sense somehow supernaturally instils the gift of foresight. A complete dataset, if such a thing exists, is just that - a mathematical description of real world events. If the data is tainted by lies, the analysis buggered by bias, and strategies stimulated by sheer greed, then yeah, statistics are the lowest form of lies. If not, then you're just spinning another tiresome diatribe based on a worn out cliché.
This article stinks of deflection - first and foremost, the credit crisis and its consequences originated in the USA with the fraudulent repackaging of subprimes and a whole host of related derivatives which even the sellers had trouble identifying wtf they were. Vox Eu is clearly right about that, the rest is rationalisation.
So if the euro breaks apart or if the overleveraged european banks.fall off a cliff, if europe has massively slow growth this next decade due to their financial problems you will blame.the us.for that? The crises may have started here. Our crooks may have been extraordinarily brazen, but what is happening in euroland would have happened anyway eventually. If the us werent.the catalyst something else would have come along eventually due to flagrant eu treaty violations if nothing else, or the demographic problems.
No & no argument. I only refer to what has happened already - the global swindle planned, designed, and implemented by Wall St. on the unsuspecting world, & not what might happen. I only wrote of ORIGIN. As you wrote if the EU central banks do fall off a cliff sometime in the future, Europe has only itself to blame. Whether it would have happened eventually is still conjecture, even though I agree that a similar model of growth based on leverage is/was being employed in the EU states as in the US, and there have been abjectly cretinous treaty violations by countries like Greece.
Given that almost all the investment banks in the EU still have gaping black holes left by the subprimes derivatives on/off their books, American finance houses are entrenched over here, and the inter-bank lending shock still reverberates, deflections from blame of this type should be called as such. The US started it, the mess still flows outwards, and nothing I have seen so far gives any indication of regret, responsibility or repairing the damage from the crooks over on the other side of the pond. Far from it, almost every day on the MSM, the global financial crisis is blamed on everyone else - China, EU, Japan, Australia - anyone in fact except the fuckers who started it.
.
"The average American knows about as much about state bankruptcy law as they do about quantum computing."
That may be so for most Americans, but those of us who split our days between Wal-Mart watching the BigSisTattleOnYerNeighbor'sTrailerVideo and Home Depot browsing the sheet rock selection do in fact understand quite a bit about quantum computing.
We are very well aware that for every particle of matter that we get in pay there are multiples thereof of anti-matter unleashed by the gubamint nullifying the entire raison d'etre of the work and living experience.
And the proper terminology is to repo a mobile home, not foreclose on it.
The wheels do indeed have a purpose.
"homestead exemptions" in state bankruptcy law helped cause the housing bubble:
For many, the US housing market was the epicentre of the global crisis...
As a first hand participant in this fiasco in CA, USA, personally, I'd like to say "Homestead Exemptions" never entered into the equation.
I attribute it to the wholesale marketing of the "good faith and credit" of the heretofore "American Middle Class" with a faulty "qualitative / quantitative" analysis. (Thanks Barney)
Centuries ago the problem was addressed as a question of whether the temple made gold valuable or vice versa. Our current dilemma is evidence to the general consensus to the latter.
Wrong.
imo
The mis priced put option in non recourse states was a big problem. Those puts were exercised!
Didn't see the VOXEU piece but when I put the question to the folks at Irisheconomy they were of the opinion that it was US non recourse loans that were the main difference between default rates in the US and Ireland, i.e, we have about 3 times their rate even though housing prices have declined about the same.
Morgan Kelly, notably, suggests that won't hold for much longer though and I agree. Many of the underwater Irish are hanging on ( barely) by means of government subsidies which will disappear under the EU/IMF/ECB bailout deal. Given Irish unemployment rates closing in on 15% we shall see just how the Irish homeowner manages to pay his mortgage recourse or not.
Since I do not believe it will be possible for large numbers of Irish ( and in turn Spanish) homeowner to pay their mortgages I suspect the default rates will start to climb towards US levels with all that implies for bank loses. IOWs the EURO is not anywhere near recovering no matter what current exchange rates or bond spreads may indicate.
Love the image, because they are the "brilliant young minds of tomorrow", or at least a segment of that population, and they - our children - are being robbed and pillaged of any hope for a future by the predatorclass "den of vipers and thieves" you mention. Unless of course they are the children of the predatorclass and then - those select few are bestowed extraordinary advantages, and apparently endless largess, appeasement, advantage from the spaniels in the socalled goverment.
An ounce of perception
A pound of obscure
Process information at half speed
Pause, rewind, replay
Worn memory chip
Random sample, hold the one you need
- Neil Peart
http://www.youtube.com/watch?v=R56qgreCRhQ
We are either pawns or mass murderers.
http://www.youtube.com/watch?v=37Dvt2EqXF4
This column suggests that the US bankruptcy code, which in some cases protects a large section of the individual’s house, leads to overinvestment in housing
Uh, sorry, this is just plain false. The U.S. bankruptcy code at 11 U.S.C. Section 522(d) creates an exemption of about $20k. Unless you live in Arkansas, this is not a "large" section of an individual's house. It is STATE exemptions (Florida and Texas, e.g.) that allow debtors to protect "large sections" of an individual's house, i.e., O.J. Simpson, Ken Lay. These exemptions apply both in and outside of BK and have existed for decades. If the author's premise was correct, why did the overinvestment occur only recently?
And while we're on the subject of revisionist history, if Fannie and Freddie and Acord and CRA caused the bubble, why were identical bubbles in Spain, Portugal, Greece, Ireland, Iceland, etc? I'm sorry, but the evidence is clear that a combination of central banking, fraud and private leveraged speculation are THE cause of the housing bubble.
great article but fluffing paulson and burry while bitch slapping the nerds does not help your thesis (sorry).
praise be the bernank. may he ease a thousand years.
Objective research? Reality? Due Diligence?
Not listed ingredients on the Koolaid packages.
Quick, deploy the fentanyl gas!