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Noteworthy News – February 13, 2012

Economy:

How Economists Contributed to the Financial Crisis – Forbes

How Not to Revive an Economy – New York Times

Employment Rate For Young Adults Lowest In 60 Years, Study Says - Huffington Post

What Dollar Store Locations Reveal About America – The Atlantic

Bernanke Says Housing Slump Is Holding Back Fed’s Efforts to Boost Economy – Bloomberg

Markets:

Where is the Best Place to Invest $102,000 — In Stocks, Bonds, or a College Degree? – Brookings

Have Americans Given Up On McMansions? – The Atlantic

The insiders are selling heavily - Marketwatch

Politics:

Even Critics of Safety Net Depend on It Increasingly – New York Times

Banks:

The mathematical equation that caused the banks to crash – The Guardian

Banks Not Off Hook With $25B Mortgage Deal - Bloomberg

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Posted in Economics, Markets, Media, Politics.


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  1. Ellen O'Day says

    I am surprised that you included the misguided article by Ian Stewart – The mathematical equation that caused the banks to crash – in your reading list. Incidentally Stewart is a well known left wing professor in the UK.

    Stewart erroneously ascribes the underlying reason for the collapse to the Black-Scholes option equation. This is incorrect. The key formula was the Gaussian Copula Formula developed by David Li as part of his PhD at the U. of Waterloo in Ontario Canada. Li’s copula formula proved that bundling sub-prime mortgages together with regular mortgages could not fail.

    Li worked for a while at CIBC world market and then Morgan Stanley (I believe) where his theories were widely disseminated. He has subsequently fled back to China and is shielded from scrutiny by the Chinese government.

    But Li’s formula was only one of the last links in a chain of errors. In the 1990s Clinton’s Community Reinvestment Act pushed the banks (reluctantly) at first in the direction of granting sub-prime loans. It was also helped along by ACORN’s involvement. An activist organization that, as you may know, Mr Obama represented.

    Then along came the Gaussian Copula Formula that allayed all concerns at the banks and so the flood gates were opened. Greed was unleashed unfettered by concerns about risk since Li’s formula allowed bankers to sleep at night.

    Certainly a far cry from Stewart’s glib analysis.

  2. SurlyTrader says

    To be honest, I do not believe that any formula deserves too much credit for the crisis. Besides, any formula is only as good as the assumptions that go into it along with the way it is used. I often include articles that I do not agree with or find incorrect, if only because the articles are getting attention in the media. I remember when the bankers brought in their models to try to sell me on CDO’s and I asked, “how are you at all confident in your correlation assumptions?” Always a blank stare.

    You can refer back to some of my old, early thoughts on the matter:
    http://www.surlytrader.com/financial-weapons-of-mass-destruction-and-the-credit-crisis/
    http://www.surlytrader.com/regulatory-arbitrage/



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