Morgan Stanley CEO: The probability of another financial crisis is close to zero

Well, if you consider the amount of coke consumed by executives in this industry, his statement could actually make sense.

> This is actually BS. SEVERAL people alerted to the housing bubble

You're correct, but they mostly went unheard. I remember around 2007 The Economist doing a special issue on the whole CDS thing (with a nice magazine cover and all), there were 32 pages of how great these new financial products were and about how they were "spreading risk" so that we'd have no big financial crisis to speak of in the near future.

Around the same time they also published a small, one-column article in the financial section about the house-price index which was strongly hinting (the article was) that all this was a in fact a bubble which might have nasty consequences. But people preferred to pay more attention to the nice cover and the 32 "in-depth" pages than to that small article, and that goes for most of the media and its followers.

"There were MANY warnings".

This graph, showing the 25 year decline in mortgage rates has been the biggest clue. We've been priming the economic pump for 25 years, masking systemic flaws.

Biggest warning: http://mortgage-x.com/images/graph/fhfb_contract_rate.gif

This.

The same set of cognitive defects that are responsible for statements like this are responsible for belief in homeopathy and in the power of prayer to cure cancer (despite taking chemotherapy drugs).

People are remarkably bad at understanding the differential power of evidence with respect to their beliefs. That includes experts. Being right about what the evidence is doesn't mean we account for it correctly.

This quote, from the MS guy, is prompting me to work out the math on Bayesian updating in an incompletely hypothesized space, tonight, because I for one would like to know how/when I can rationally update my absolute and relative beliefs about hypotheses in response to weak evidence, and if this implies anything about how I should select for less mysterious hypotheses.

This seems like a really basic idea, but as a 31 year old, I am only now wrestling with the process of making less stupid decisions. I suspect the same is true for many of you.

And for that reason alone, I can't really hate on the Morgan Stanley guy, because in my heart of hearts, I think he's probably not the sharpest tool in the shed, and it should not surprise me that he develops confidence in other places that probably aren't warranted.

I can, however, hate on the world that allows people like this to be in a position to impact the world economy, just like I can be angry that there isn't a mandatory 'using evidence in making policy' training program for members of congress.

This argument is a good way of justifying systematic incompetence.

If you claim that an individual was just doing their job, their superior should be held responsible for creating that job (up to and particularly including the CEO).

We absolutely do throw people in jail for being bad at their jobs.

If an engineer signs off on design work which then fails and injures/kills someone due to their incompetence they can and are charged with professional negligence and sent to jail.

Although financial incompetence doesn't kill anyone, it does effect a much much larger number of people, so I don't see why we shouldn't take the same approach and make the directors of financial firms personally liable for the outcomes of their actions.

Used to work on several trading desks. Bribing your risk desk wasn't just common - it was expected. I doubt anything has changed.

Deliberately assumming a position in which you act and bet (yes, bet) with other people's money and in which you assume NO RESPONSIBILITY is an unjust position which you accept deliberately.

Yes, it is hard to say but no, you cannot behave unjustly even if other people want you to. You cannot get a slave even if the other person wants you to get him as a slave. You cannot harm an inocent person even if he wants you to.

The problem with Lehman was, essentially, that of lack of responsibility. And this is inherently unjust.

So: with the letter of the law, they "do not need to go to jail" (say Lehman's board of directors), but with a reasonable understanding of justice, they acted in an unjust way. Wittingly.

The problem is that his claim just isn't very plausible. It takes a great deal of optimism to believe that everything that happened in (in particular) the origination, packaging and rating of US subprime mortgages (including the stated-income mortgages which industry types were referring to as "liar's loans", at the same time they were making and processing them) was a product of simple ignorance and incompetence.

They are penalized. They declare bankruptcy, have the cars and homes taken from them and generally have a significant stain on their credit for a substantial time period.

Alternatively, financial companies, especially in the 2008 crisis, receive small wrist slaps in the form of tiny fines and public rebukes while now, 5 years later, they are returned to record profits.

These days, almost all of us, individuals and corporations alike, live off credit in some form. The difference between individuals and the banks is that when individuals mismanage their credit, something bad actually happens to them.

They do mean something, and are in fact worrying.

I presume that the HN crowd will understand why, otherwise I'll gladly explain.

The bulk of Japanese debt is to large Japanese pension funds, so yes theoretically the government could just declare that the Japanese people wouldn't get their pensions and simply steal them, but somehow I don't think that's going to work...

Btw. There's an interesting problem with the Japanese debt - if you look at Japanese demographics the population is aging rapidly. This means that the pension funds that hold the debt will have to sell out because the money needs to be paid out. Who will they sell to? Every major institution in Japan is already stuffed to the gills with bonds, so there are two options: print money or sell to foreign investors. Printing money is balancimg on a knifes edge ( which is what the Bank of Japan is currently doing). Currently Japan pays an interest of less than 1%, and yet they spend 25% of their turnover just on interest payments. If you print money inflation and thus interest rises. When they reach 4% they will spend 100% of their income just paying interest on their loans. They can of course print more money and keep depreciating their currency, but history shows us that that doesn't end well. Alternatively they can try to sell bonds to foreigners, but somehow I doubt that there are any takers unless the interest rate goes up. As a comparison Greece pays around 8%.

I'm not saying that Japan will definitely go bankrupt, I'm just saying that there are some pretty big red flags, and maneuvering around them is going to be damn hard. Since there are equally hard problems elsewhere in the world economy (as I hinted at above) there's a real chance that something somewhere goes awfully wrong.

This is a vastly overly facile analysis.

Let's look at the mortgage debt crisis in the US through this same lens. It's just the US owing debt to itself, so you could just wipe it off the table with no consequences. And in large part what happened was a lot of people in the US walking away from their debt. Allowing their underwater mortgages to go unpaid, letting their houses be foreclosed. It turned out to not be particularly good for anyone involved.

Japan's debt to itself won't go any better if it is written off either. There are people, human beings, on both ends of that debt, snapping the cord will have real-world consequences, it's not just numbers on a balance sheet.

Facile indeed, full of loose talk.

> and the only effect will be to devalue the yen, if anyone cares, which they don't.

So if the yen is devalued to $0.0000001 they won't care? With what will they pay for imported oil? Japan might prefer a weaker currency; not worthless, but stable. Many japanese entities have foreign denominated debts, and exporters also rely on imports in some form.

> Everyone knows it's unpayable, if it had to actually be repaid, which it doesn't.

The national debt of any country is not expected to be repaid. Japan is no different. Nor is the Japan the only country writing a bunch of cheques to itself. That's the essence of QE.

Japan is heavily in debt. Were they to write off that debt overnight, it would still be heavily in debt because the write-off would show up in the accounts of the bond-holders, many of whom would be made insolvent. Foreign entities would then refuse to trade with Japan. You'd merely be taking from one hand and giving to the other. There's no trickery or matrices, there's nothing unreal about any of this. The accounting practices may be absurd, but there is real value at stake, and destroying it is to be avoided, not posed as a solution.