Mind = blown

Crucial article on how the financial collapse occurred. The crux of it being that apparently, the model that they were using to calculate the likelihood of defaults in a given mortgage-backed security really did assume that house prices would only ever keep going up! This is because the historical timescale that they were using to predict the likelihood of default only covered the last ten years, exactly the timespan of the housing boom. In other words the housing boom was used to predict the housing boom! That's incredible. And the fuckers knew this or else willfully ignored the warning signs, because they were making too much money selling mortgage-backed securities not to mention the CDS's that were used to model the fucking things in the first place. As you can tell, I'm kind of astounded by this, both by the stupidity of the whole thing and by the fact that this absurd feedback loop entirely makes sense.

Several parts of this relate back to what I was saying a couple posts ago: the power and danger of abstraction, the difficulty of keeping a complex software system stable. Because in one sense, this whole financial meltdown can be seen as a bug in the complex interconnected software system that is the global financial system. The system became too large to be easily understood as a whole; and then Li's equation entered, was quickly integrated to the point of total pervasiveness, but was subject to insufficiently rigorous testing and analysis. I guess, if there's a moral claim to made about where fault resides in this fiasco, it is there, in the lack of rigor and scrutiny that the interlocking system of mortgage-backed securities and CDS's were given. No one wanted to stop the money that was being made from these things.  It's almost capitalism's problem in a nutshell! The bankers, the modellers, the ratings agencies and the government regulators were unwilling to see past the massive profits to the massive pitfalls that lay ahead. Goddamn it was greed.

Fuck those fuckers if I lose my job because they couldn't admit to their own goddamn mistakes.