No. We picked winners and losers, and we never let the economy go into a depression.

I'm not sure how this could be argued otherwise. But I'm open an an informed rebuttal.

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Posted by Doc Fenton

New York, NY

Member since Feb 2007

52698 posts

Posted on 8/10/16 at 9:02 am to Lou Pai

quote:
I have read that much of the issues with valuation could have "easily" been accounted for via models, but I confess that I don't know anywhere near as much as you seem to know... but that would be my interpretation.

Probably so. Bank modelers tend to prefer to use internal data from whatever their current database collection system is. It can be sort of a pain to account for external data sources, or make corrections to database collection systems from the distant past. It's nothing fatal to the modeling process. It's just a headache to have to do extra data scrubbing, make extra assumptions to fit the old data, etc.

The next generation does tend to forget the crashes of the previous generation, but that certainly hasn't happened yet, and even when it does happen, the models will not be able to get around including real-world worst-case input data from the 2008 crisis.

By the way, none of what I am saying here is meant to give reassurances that we are not in another housing bubble now. I tend to believe that home prices are now overvalued, along with just about every other asset class. The fact that we might suffer through another bubble despite the improved models serves to underscore my main point in this thread: the poor derivatives ratings and valuation models were not the inherent problem. The real drivers of asset price over-inflation process lie elsewhere.

quote:
In general, my concern isn't with the "little guy", at least not directly.

I admit that I probably shouldn't have used that term.

quote:
Lest we forget that this little tangent was borne by my lack of satisfaction with the conflict of interest bit, which I still think is an issue within the system. Maybe not a necessary evil, but probably a frustratingly unjust one without an obvious alternative.

I can agree with this to some extent.

quote:
And I do think it can be a systemic risk, perhaps not as big as previously.

I suppose it can be, but I would argue that the dot-com bubble was a much cleaner example of biased research helping to drive a bubble. But even then, what could have possibly been done differently? Assuming some silver bullet regulation was in place in the late 1990s to enforce a more unbiased form of equity research, would anyone have listened?

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