Saturday, December 20, 2008

Understanding the Collapse of '08 - the role of the deadbeats

I keep coming across the meme that the root cause of the Collapse of '08 was that the banks made loans to people who couldn't afford to repay them. To deadbeats, in other words.

Sometimes the implications is that this was because the banks were stupid, or evil but mistaken, and other times it's blamed on federal rules avowedly intended to end racist lending practices and to reduce poverty.

I thought stories like Michael Lewis's would slow that meme, but they haven't. So even though I wrote (emphases mine) ...
Gordon's Notes: Michael Lewis on the End of Wall Street. My God.
  1. We need to close the rating agencies down. Now.
  2. When you give 99% of the human race money and power, they cannot imagine that they don't deserve it. They are convinced they are brilliant. I know I would.
  3. The part where shorting the bad loans with credit-default swaps enabled the generation of 'virtual' bad loans involving real money is mind-boggling.
  4. I don't think this was caused by poor black people getting too many loans. Do you?...
The meme persists. Funny about that.

So let me try again.

Imagine that someone had built a massive amplifier. Huge. It takes anything it hears and it boosts it a thousand times.

Next to it, Yo-Yo Ma plays the Cello.

Everyone is happy.

Until the sound guy hits the wrong switch and the speakers connect to the microphone. The feedback loop blows the speakers, the audience, and the nationwide auditorium sky high.

So who's to blame? The sound guy? The speakers? Or the idiots who built a system that was built to self-destruct?

I guess you can tell what I think.

We'd built the mother of all firewall-free feedback loops. All it took was one thing to go wrong, and the entire setup was going to blow. If it hadn't been the sound guy, it would have been a short in the wires. The explosion was going to come -- one way or another.

Don't blame the sound guy. He's dead too.

See also:
  1. Complexity collapse
  2. Disintermediating Wall Street
  3. The future of the publicly traded company
  4. The role of the deadbeats
  5. Marked!

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