If this is true, then the author's claim (mix-up of cause and effect) must be correct.
She states:
>Rather, the entire industry crucially depended on the false models. Indeed they changed the data to conform with the models, which is to say it was an intentional combination of using flawed models and using irrelevant historical data (see points 64-69 here for more).
So C(corruption) directly leads to B(bad model). She does not argue that A(everything falling apart)<-C anywhere in the piece. Silver is claiming that A<-B. He is not commenting about C. So while Silver's claim may not identify the absolute root cause, the author does not actually prove that his cause and effect analysis is flawed. If anything, she has shown that it may be incomplete.
mathbabe is saying that fixing B is not straightforward, because B<-C, and fixing C is very, very difficult. Bad models exist because people have incentives to make them bad.
She's also saying, I think, that fixing B by itself won't fix A, because B is not the root cause; C is. Fixing B without fixing C just means that C will manifest itself somewhere else, and A will still happen. In other words, there are many causal routes from C to A, and fixing B by itself only blocks one of them. So A<-C is true regardless of the state of B.
What, specifically, isn't true?
So C(corruption) directly leads to B(bad model). She does not argue that A(everything falling apart)<-C anywhere in the piece.
The point of the piece is that the financial meltdown stemmed from corruption, not from models. If this wasn't her point, then why else would she have written this piece?
She doesn't appear to be disputing the idea that following bad models caused the crisis — instead, she just seems to be saying Silver missed the fact that the models were deliberately bad rather than simply a poor application of math.
A few quotes from the author herself:
"the entire industry crucially depended on the false models."
"Silver gives four examples what he considers to be failed models at the end of his first chapter, all related to economics and finance. But each example is actually a success (for the insiders) if you look at a slightly larger picture and understand the incentives inside the system."
She's not disputing that the models were false or even that acting in accordance with the models is what caused the crisis. She's disputing that this was accidental.
An argument doesn't have to contain a false statement to have no baring on the discussion.
And more generally it's quite possible for a thing to have multiple causes, and in this universe this is generally true for everything we witness. So if A causes C that doesn't mean that B can't also cause C "by definition". I'm not aware of any serious philosphical framework that says that events must have only a single cause, though many philosophers from Aristotle onwards[1] but great stock in the "final cause" of things, but that would be either "God" or "The Big Bang" depending on your religion or lack thereof and nobody was arguing for those.
And as an aside, the words "by definition" in an argument that isn't on it's surface about definitions is generally a bit of a red flag.[2]
[1]http://en.wikipedia.org/wiki/Teleology [2]http://lesswrong.com/lw/nz/arguing_by_definition/
If I choose to shoot you with a gun, and have a variety of appropriate guns, it is not the fault of the specific gun chosen that it was used to kill you. I had motive, opportunity, and alternate means available.
If I smashed your head in with a hammer, would people claim the hammer was the cause of your death? Is "hammer caused death" the end of the story, or even particularly important to the related series of causes and effects?
She's arguing that it's not, that Silver's cause and effect analysis is irrelevant because his purported cause is purely incidental. Intentionally inaccurate models were simply an instrument designed to further the self-interest of individuals.
(And further, she doesn't need to provide a "proof" to make this claim. But she does offer a compelling argument.)
Everything falling apart would be hyper-inflation in addition to capital control and gold confiscation : )
That could be 'D'.
Latter or sooner we'll learn if D <- A ; )
That said, I didn't read the book so I have nothing to say about whether or not Nate Silver actually does this.
The modeling error in question was independence; that is, if you have five mortgages, each with a 5% change of default, then these can be packaged up as an AAA security as follows: you only lose your money if all five default. A bit riskier package is that you lose if 4/5 default. And so on, each with different returns.
If they are independent, the p(default) = 1/20^5. If they are dependent, it is 1/20. Now multiple mortgage pool size by a 100 or 1,000 or 10,000 (?) and see how far off the estimated risk is. :)
Now combine this with a 30-to-1 leverage when buying these "AAA" securities.
(This was quite a good problem to work through with my daughter to see what that little "independence" assumption means. :)
His main point here was that modeling failures are typically due to out-of-sample conditions; when the housing bubble broke, the markets were might more tightly coupled across the country than the modelers assumed. While they could have seen this kind of dependence if they looked to Japan, there was no such precedence in the US in recent history.
My personal belief is that they knew of the flaw of the models but did not care since their personal incentives were more profitable if the model was not fixed.
But the kids in Business School would constantly write him and ask him for new ways to rig the game.
The simplest explanation is that she was, in fact, arguing that corruption caused the financial crisis.
This is faulty reasoning. A pool ball may go into a pocket because it was hit by a cue ball. In this case the cue ball hitting the other ball is the cause of the other ball falling into the pocket. Yes, you can look back into the chain of causes to find one further back, e.g., the fact that a person used a pool cue to hit the cue ball into the other ball. This doesn't mean that the first cause you found was not a cause, and certainly doesn't mean that "by definition".
If a corrupt and fraudulent system could have brought about the financial crisis by some means other than causing bad models (which I assume is true), then you can say that the bad models were not a necessary part of the causal chain. But you can't say that they weren't part of the causal chain at all. As a matter of fact (at least according to assumptions everyone is making in this topic's thread) they were.
If the models had been more accurate - for example, if they had more properly reflected the way that the value of a bundle of mortgages will suddenly lose value as housing prices decline - banks would not have been able to pile up such huge risks and high leverage.
You can only justify things like 30X leverage if you believe the securities in question have essentially no risk - because at that leverage, a 3% loss in value means you're wiped out.
Sure you can. The root cause of the crisis was people gaming the system. There are many ways to game the system; faulty models are only one of them.
All routes to that particular method of gaming. There are other methods.