Comment by jbooth | Hacker News Reader

Comment by jbooth | Hacker News Reader

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Well, I certainly can get behind your definition more.. but a gigantic 10 year bubble sticking out to the side and then bursting doesn't seem efficient by that definition. You'd think the wizards of the market, with the billions of dollars in pay they're collectively bringing home, would've corrected for that sooner, no?

This concept that in 2008 the market was responding to incentive misalignments created by government regulation.. what regulation? All we did was deregulate from 92 onwards. Are you gonna claim that a billion in fannie/freddie loans to minorities caused the problem? What about the overleveraging, the AAA credit ratings? Those were government problems?

It seems like a whole bunch of individuals played the "greater fool" theory as long as they could, and what we wound up with was the opposite of efficient, by your definition. I'm not necessarily saying more regulation would've prevented that, aside from generally being a brake on everything, but it's a hell of a bad case for the wisdom of markets.

This concept that in 2008 the market was responding to incentive misalignments created by government regulation.. what regulation? All we did was deregulate from 92 onwards.

This is false. The Community Reinvestment Act, passed in '92 and periodically ratcheted upwards thereafter, forced banks to increase loans to minority groups. It issued guidelines on how lenders should evaluate borrowers for these purposes:

Affirmative-action policies trumped sound business practices. A manual issued by the Federal Reserve Bank of Boston advised mortgage lenders to disregard financial common sense. "Lack of credit history should not be seen as a negative factor," the Fed's guidelines instructed. Lenders were directed to accept welfare payments and unemployment benefits as "valid income sources" to qualify for a mortgage. [1]

While not a regulation issue as such, it's also true that attempts to rein in Freddie Mac and Sallie Mae (semi-governmental entities both) were rebuffed by Congress; even when we knew there was potential trouble, the regulators wouldn't allow market concerns to dictate to their beast.

[1] http://www.boston.com/bostonglobe/editorial_opinion/oped/art... (note this link took forever to come up in my browser)

The Big Short tells us "In Bakersfield, California, a Mexican strawberry picker with an income of $14,000 and no English was lent every penny he needed to buy a house for $724,000." Nothing in the CRA ever demanded that obvious inability to pay be disregarded. Once Wall St. started believing bogus CDO ratings and it became possible for mortgage banks to unload 100% of the risk, they weren't being pressured into writing stupid loans, they were eager to stuff the channel by writing as many as they possibly could before the music stopped, and used every trick they could think of (teaser rates, negative amortization) to get each buyer out the door and through the first months of a loan they knew was doomed.

"but a gigantic 10 year bubble sticking out to the side and then bursting doesn't seem efficient by that definition."

Where was the enormous arbitrage opportunity left behind, and why didn't you (or anybody else) exploit it?

Maybe you can answer that, but if you can't, you're not arguing for "inefficiency", you're still arguing "not good".

You also appear to be conceiving of regulations as something you simply have "more" or "less" of, which is not a useful mental model. What matters about regulations is their content, not their quantity. And what the content of our regulations created was A: mandating that banks make loans they would not have made without them and B: an implicit government backing for those bad loans.

Have you looked at the balance sheets for Fannie & Freddie lately? They're not bleeding a billion here or there.

Also, yes, the credit rating agencies are government creations as well. There are regulations (ahem) that require certain entities to take certain actions based on the word of the rating agencies, causing them to no longer just be groups of people stating their opinion, skewing their own incentives and raising the incentives others have to game them.

The original contention was "extremely close" to optimal. I'm merely contending that the markets fuck it up big occasionally here, pretty low hanging fruit for me. As for why I didn't exploit it? I don't know, I don't work on Wall Street, don't play that game? I could've told you that the mortgage thing was a problem long before the ratings agencies, apparently, but everyone knew in hindsight.

Anyways, 10 years is pretty darn not good in my opinion. I'd call it inefficient, as far as pricing is concerned.

Agree on "more or less" regulations being a not-useful mental model. It seems to follow from that contention that "regulations!" isn't a one-word answer to any question of who to blame for anything, or how to solve anything.

RE: Fannie and Freddie I have not looked at their balance sheets. I'm under the impression that whatever the problem is with them, it's dwarfed by the size of the financial crisis, ergo they're not primarily at fault for the crisis. Moreover, the program to lend to minorities had been in place for decades. Seems hard to blame it for the 2008 meltdown, why not sooner?

It does seem that any regulations putting institutional faith in the ratings agencies are wrong-headed.

jbooth, if you're going to accuse others of ignorance and "turning off their brain", you should probably educate yourself about the issues you are talking about. The size of Fannie and Freddie's balance sheets were around $500 billion and taxpayers have so far lost about $300 billion on the bailouts of the GSEs. So, they were not insignificant contributors to the crisis, and reasonable economists disagree about the share of blame that the GSEs own. The mortgage interest tax deduction is about another $100 billion of subsidy to the mortgage market annually. Some people question the wisdom of these measures and the government's role in propping up the bubble.

Housing subsidies directed at minorities were increased over time in the Clinton and Bush administrations, but weren't large compared to the massive overall portfolio.

I slogged through much of the Financial Crisis Inquiry Report (http://fcic.law.stanford.edu/). One of the conclusions was that while mandating loans didn't help, they weren't numerous enough to be a major cause. Once the mortgage-backed securities engine got churning, there was an enormous demand for more loans to feed it. That provided most of the incentive for the bad loans, not government mandate.

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