on bernie sanders, the financial crises of 2008, and everything you ever wanted to ask quants, and an economic enthusiasts panel

crises.txt

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[11:25pm] mylord: milton friedman was for abolishing the fed, but against the gold standard.. what would a system wihtout the fed or gold standard look like?
[11:25pm] rmah: mylord: not a clue
[11:26pm] rmah: without a central bank managing the money supply, I'd think you'd have to base money on some sort of asset backing
[11:26pm] rmah: else banks would just print whatever the fuck they wanted (not that a gold backing requirement stopped that)
[11:27pm] blablaa: mylord, multiple currencies with fluctuating exchange rates, the physically backed ones would have negative interest rates, the bank backed would have positive rate and periodically blow up
[11:27pm] blablaa: and the usual inflation/deflation cycle
[11:27pm] rmah: mylord: competing currencies have already been tried in the USA (pre-civil war).  they were an abysmal failure.
[11:28pm] rmah: a man traveling from NYC to Chicago would have to change money at every stop
[11:28pm] mylord: given that historic failure, why was friedman for abolishing the fed (noting its many 20th centurey failures)?
[11:28pm] rmah: it was crazy and chaotic
[11:28pm] rmah: the fed had no 20th century failures
[11:28pm] rmah: unless you count the great depression
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[11:29pm] rmah: which was essentially caused by people who did not believe in a flexible money supply
[11:29pm] mylord: here’s a list https://www.youtube.com/watch?v=m6fkdagNrjI
[11:29pm] rmah: mylord: most likely he favors a government central bank
[11:29pm] blablaa: rmah, in fact it turns out in the 30s the fed did something like modern QEs
[11:29pm] mylord: he explains in “Free to Choose” how fed mistakes caused the start and continuation by contracting the money supply
[11:29pm] emmeka: at one point, when the frontier in Canada was mostly run by the large fur companies (the HBC and the Northwest Company) the two issued their own paper currencies redeemable at their trading posts. They were two "competing" currencies but it was fairly hard to figure out prices - like you'd get paid for fur/whatever in paper money, but you had no way to tell what that was worth except by the prices of goods at the trading post
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[11:29pm] rmah: mylord: what did he propose as an alternative?
[11:29pm] mylord: what’s a govt central bank?
[11:29pm] LennyKitty: http://www.bloomberg.com/news/articles/2016-04-06/sausage-spat-erupts-as-daimler-shareholders-battle-at-buffet
[11:29pm] blablaa: rmah, they "believed" like today central banks believe
[11:29pm] wintax: mylord: the fed
[11:30pm] DilloYoda: 100 Years Later, The Federal Reserve Has Failed At Everything It's Tried - http://www.forbes.com/sites/markhendrickson/2013/12/20/100-years-later-the-federal-reserve-has-failed-at-everything-its-tried/#69243a4f15ca
[11:30pm] rmah: blablaa: well, it produced the most economically powerful nation in the history of the world
[11:30pm] rmah: so I'd say it worked
[11:30pm] rmah: <shrug>
[11:30pm] LennyKitty: wintax, http://www.bloomberg.com/news/articles/2016-04-06/sausage-spat-erupts-as-daimler-shareholders-battle-at-buffet
[11:30pm] mylord: wintax: right, so what was friedman’s likely alternative?
[11:30pm] blablaa: mylord, friedman argument is based on confusion between narrow and broad money
[11:30pm] soiled: the magic of infinite credit
[11:30pm] blablaa: mylord, it's just based on confusion and hence wrong
[11:30pm] emmeka: if we abolished the fed and prohibited a commodity standard, I'm pretty sure we'd end up with company currencies again mylord
[11:30pm] rmah: DilloYoda: how anyone can claim that is ludicrous
[11:30pm] wintax: i don't know what friedman's alternative is.  shouldn't you?  you're the one bringing him up
[11:30pm] DilloYoda: "Second, central bank tampering with interest rates is the fundamental cause of, not the cure for, the boom and bust cycles; thus, the Fed should cease from tampering with interest rates. "
[11:30pm] blablaa: mylord, and he knews it, but he liked its simplicity too much...
[11:30pm] emmeka: go exchange your Walmart dollars for McDonalds dollars at an exchange post
[11:31pm] emmeka: or some bullshit
[11:31pm] rmah: the USD is the strongest, most trusted, most widely accepted form of money in the history of human civilization
[11:31pm] rmah: if that's not success, I don't know what is
[11:31pm] rmah: is the Fed perfect?  of course not.
[11:31pm] DilloYoda: read the article
[11:31pm] rmah: does the Fed make mistakes?  of course it does.
[11:31pm] wintax: DilloYoda: horrible, terrible article
[11:31pm] wintax: like laughably bad
[11:31pm] rmah: DilloYoda: I don't need to, I'm guessing it's a rant against inflation
[11:31pm] OGF: does rmah make mistakes? Of course it does
[11:31pm] OGF:
[11:31pm] DilloYoda: I guess I trust Forbes
[11:31pm] rmah: wintax: am I right?
[11:31pm] emmeka: rmah hmmmm idk about that. Pound sterling probably rivaled it at some point.
[11:31pm] rmah: emmeka: nope, not even close
[11:32pm] rmah: of course, it sort of couldn't given that global trade during the early 1900's was so low relative to today
[11:32pm] rmah: but it is what it is
[11:32pm] LennyKitty: rmah, I like how they are worried about inflation and then suggest the federal reserve have no power to control interest rates
[11:32pm] emmeka: I mean more in terms of percentage of the contemporary global market rmah
[11:32pm] mylord: blablaa, milton explains that not enough QE protracted the Great Depression: https://www.youtube.com/watch?v=jOO4kPSaD4Y&index=3&list=PL0364ACCE6C7E9D8E&nohtml5=False
[11:32pm] LennyKitty: rmah, sense there proposal is essentually ZIRP forever
[11:32pm] rmah: emmeka: nope, not even close
[11:32pm] • emmeka shrugs
[11:33pm] rmah: emmeka: during the british empire's height a lot of international trade was still barter
[11:33pm] rmah: most, in fact
[11:33pm] wintax: rmah it's actually not about inflation, but more about how the fed is autonomous and mysterious and unconstitutional
[11:33pm] blablaa: mylord, i've told you, he confuses broad money with narrow money. it's just flat out wrong argument.
[11:33pm] LennyKitty: mylord, milton was dead brah
[11:33pm] emmeka: "central bank tampering with interest rates is the fundamental cause of, not the cure for, the boom and bust cycles" lol DilloYoda
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[11:33pm] emmeka: this is pretty easily demonstratably false
[11:33pm] rmah: wintax: I see.  well, those are all true to one degree or another
[11:33pm] LennyKitty: like you realize what your suggesting is ZIRP forever
[11:33pm] rmah: but that hardly makes it a "failure"
[11:33pm] LennyKitty: lol
[11:33pm] emmeka: because boom and bust cycles predate any central bank "tampering with interest rates"
[11:34pm] wintax: correct
[11:34pm] blablaa: mylord, it's like saying gov caused unemployment because it didn't hire enough people. it's just stupid. most people are normally employed in private sector, and you can't blame public sector for now being capable of employing them all of sudden productively...
[11:34pm] wintax: also, interest rate changes are how the fed curbs inflation
[11:34pm] rmah: boom bust economic cycles have existed for as long as economies have existed
[11:34pm] wintax: we wouldn't have ZIRP if inflation were higher
[11:34pm] blablaa: mylord, s/now/not
[11:35pm] emmeka: I'm pretty curious as to how someone could possibly argue that 2008 was caused by federal tampering with interest rates
[11:35pm] rmah: it's like those goldbug morons who claim that gold money would eliminate cycles.  when, in fact, history shows that with gold (or silver) money, boom/bust are far more volatile (more intense and more frequent)
[11:35pm] LennyKitty: emmeka, you could actually
[11:35pm] LennyKitty: emmeka, you could blame greenspan for lowering rates to 1% between 2001 and 2007
[11:36pm] mylord: blablaa, did you watch the portion he discussed how the Fed restricted the money supply?
[11:36pm] rmah: LennyKitty: how so?  the fed started raising rates to cool things down a couple years ahead of the crisis
[11:36pm] LennyKitty: emmeka, forcing a chase for yield in MBS markets
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[11:36pm] rmah: if anything, the Fed didn't tamper with interest rates enough
[11:36pm] emmeka: like it's pretty easily demonstratable that it was directly caused by deregulation in finance and shitty credit rating bullshit imo
[11:36pm] mylord: emmeka, Fanny Mae, moreso, no?
[11:37pm] blablaa: mylord, no because his theory is famous and well known already.
[11:37pm] emmeka: mylord that's more symptom than cause
[11:37pm] blablaa: mylord, and well known to be wrong for reason i explained. if you find a reply to that i'll read the reply
[11:37pm] wintax: you really can't blame fannie/freddie
[11:37pm] wintax: they are by law obligated to buy MBS that meets their criteria
[11:37pm] mylord: if the govt busy 1 trillion of total shit, that will screw things up
[11:37pm] mylord: buys* 1 trillion
[11:38pm] anarkhos: emmeka, I don't recall the specifics of the manipulation, but surely the government rendered credit much more accessible, triggering the hazardous sub-prime lending (I'm quite certain that some Democrats encouraged this, as a way of assisting people who struggled economically)?
[11:38pm] mylord: and that’s what fannie/freddy was
[11:38pm] LennyKitty: except it isnt worthless...
[11:38pm] mylord: its sub prime
[11:38pm] wintax: mylord: no that didn't, if anything that helped
[11:38pm] LennyKitty: even foreclosed homes are more then worthless
[11:38pm] wintax: by providing liquidity
[11:38pm] mylord: sure, but there’s a reason banks don’t usually lend to them, right?
[11:38pm] LennyKitty: and giving crediability to the guarrentee on MBS
[11:38pm] wintax: mylord: neither does fannie/freddie??
[11:39pm] wintax: do you even know what they do?
[11:39pm] emmeka: anarkhos they did so by basically deregulating mortgage securitization.
[11:39pm] mylord: not exactly.. i thot they help less able borrowers get homes
[11:39pm] DilloYoda: "Controversy arises because those assets—including the MBS frequently referred to as “toxic” assets—have not simply disappeared. As seen on Chart 1, these assets are now on the Federal Reserve’s balance sheet. Put differently, the Fed now holds trillions of dollars in debt of two insolvent companies as well as the same securities that led to the 2008 financial crisis. " incompatible encoding
[11:39pm] DilloYoda: http://www.heritage.org/research/reports/2014/08/quantitative-easing-the-feds-balance-sheet-and-central-bank-insolvency
[11:39pm] LennyKitty: mylord, not exactly
[11:39pm] mylord: that the market wouldn’t allow
[11:39pm] wintax: mylord: no, they don't.  that's not even close or at all what they do
[11:39pm] greedo: https://www.treasury.gov/press-center/press-releases/Pages/jl0405.aspx
[11:39pm] LennyKitty: mylord, the guarrentee qualifying mortgages
[11:39pm] wintax: NO
[11:39pm] wintax: you don't even know what you're arguing against
[11:39pm] greedo: game over for tax inversions
[11:40pm] wintax: not even close
[11:40pm] greedo: wooooo!
[11:40pm] mylord: wintax, it’s a learning process
[11:40pm] blablaa: mylord, do you get the point? trying to do what friedman saying the fed should have done leads directly to big government... large scale investments stuff
[11:40pm] wintax: mylord: banks made the sub prime loans, not fannie/freddie
[11:40pm] blablaa: so itìs just an absurd position incompatible encoding
[11:40pm] greedo: "The Pfizer-Allergan merger, a deal that would have been worth $160 billion, has officially been scrapped — and it's bad news for investment banks. Goldman Sachs, Centerview Partners, Guggenheim, and Moelis had been advising Pfizer on the deal, while JPMorgan and Morgan Stanley were working for Allergan."
[11:40pm] mylord: blablaa i’ve yet to read about narrow vs broad money
[11:41pm] wintax: mylord: and just so you learn - fannie/freddie do not make any loans
[11:41pm] rmah: DilloYoda: so what?
[11:41pm] anarkhos: emmeka, "Fannie Mae, the nation's biggest underwriter of home mortgages, has been under increasing pressure from the Clinton Administration to expand mortgage loans among low and moderate income people and felt pressure from stock holders to maintain its phenomenal growth in profits"
[11:41pm] rmah: DilloYoda: let's say all those assets go to $0.  what happens?
[11:41pm] emmeka: mylord people getting subprime mortgages in the 2000s weren't getting them through Fannie/Freddie. They were getting them private label. And then they were being repackaged into various derivative bullshit which had been recently deregulated, and selling it on the market as a good credit security.
[11:41pm] emmeka: That was the whole problem.
[11:42pm] blablaa: mylord, basically the narrow is the fed-issued one, and broad is bank issued. When bank contracts, the fed can try to do the opposite things, but it can't counter it really.
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[11:42pm] rmah: emmeka: MBS securities were a good concept in theory
[11:42pm] blablaa: mylord, because the fed doesn't lend money directly to firms
[11:42pm] astroo-: hello people
[11:42pm] wintax: MBS IS a good concept
[11:42pm] emmeka: rmah well, I mean, they're probably a good idea if it's actually regulated.
[11:42pm] rmah: emmeka: exactly
[11:42pm] emmeka: and done properly
[11:42pm] wintax: the problem is when you rate an MBS AA when it's really BBB-
[11:42pm] emmeka: right.
[11:42pm] wintax: that's the problem
[11:42pm] emmeka: which is what happened with the private ones
[11:42pm] rmah: wintax: right
[11:42pm] wintax: not the MBS
[11:43pm] emmeka: which is more or less why 2008 happened
[11:43pm] wintax: MBS is a great concept
[11:43pm] DilloYoda: The Big Short is an absolutely wonderful movie about MBS and the 2008 collapse
[11:43pm] mylord: “The federal takeover of Fannie Mae and Freddie Mac refers to the placing into conservatorship of government-sponsored enterprises Fannie Mae and Freddie Mac by the U.S. Treasury in September 2008”
[11:43pm] anarkhos: emmeka, "<emmeka> anarkhos they did so by basically deregulating mortgage securitization." - Wait, what exactly does that mean? That subprime loans became part of other financial instruments?
[11:43pm] mylord: “A government-sponsored enterprise (GSE) is a financial services corporation created by the United States Congress. Their intended function is to enhance the flow of credit..."
[11:43pm] DilloYoda: http://www.imdb.com/title/tt1596363/
[11:43pm] emmeka: anarkhos yes, and then they got AA credit ratings
[11:43pm] anarkhos: emmeka, Ok...
[11:43pm] emmeka: when it was actually a bundle of subprime loans
[11:43pm] wintax: mylord: right, do you know what that means?  do you think that means they lend?  because it doesn't
[11:43pm] mylord: that seems in line with my statemen, in essense.. or please form a better categorization
[11:43pm] emmeka: because we didn't regulate this shit
[11:43pm] mylord: wintax: they dont’ lend
[11:43pm] rmah: anarkhos: subprime loans are an important part of the financial system
[11:43pm] wintax: mylord: they don't lend
[11:44pm] mylord: i’m speaking in shorthand
[11:44pm] mylord: that’s fine
[11:44pm] rmah: unless you feel that poor people should never ever be allowed to get a loan
[11:44pm] mylord: but the effect is more credit
[11:44pm] wintax: yeah and?
[11:44pm] wintax: what's your point
[11:44pm] rmah: mylord: that's a good thing when done prudently
[11:44pm] mylord: to these sub prime loans
[11:44pm] wintax: there you go again
[11:44pm] mylord: so the banks decide on that?
[11:44pm] wintax: YES
[11:44pm] mylord: right.. but
[11:44pm] wintax: god damnit, yes
[11:44pm] rmah: but what?
[11:44pm] emmeka: Yeah the thing is neither MBS, nor subprime loans, were the problem. Both of these have existed for a long time.
[11:44pm] mylord: if the govt is helping credit, they take on more risk than they might
[11:44pm] DilloYoda: The 'tranche' system allowed the creation of some truly ugly but high-rated MBS products
[11:45pm] rmah: mylord: "helping" how?
[11:45pm] rmah: how does the gov "help"?
[11:45pm] mylord: "enhance the flow of credit"
[11:45pm] wintax: do you even know what that means
[11:45pm] anarkhos: emerge, I don't deny that this securitization of subprimes made it all worse, but on the other hand, if for instance the Clinton admin had not encouraged hazardously lending money to people who by all probabilities would not re-pay, then that could have contributed to things going better also?
[11:45pm] mylord: wintax, do you?
[11:45pm] emmeka: mylord they sell mortgage-backed securities. Not mortgages.
[11:45pm] wintax: yeah! i do
[11:45pm] rmah: DilloYoda: yeah, but you can't get rid of tranches and superiority levels on debt instruments
[11:45pm] wintax: i know wha fannie/freddie do
[11:45pm] rmah: they are entrenched
[11:45pm] wintax: you appear to not know what you're arguing against
[11:46pm] mylord: I know what credit means, I think
[11:46pm] wintax: ...
[11:46pm] rmah: anarkhos: it wasn't the securitization per se, it was the poor understanding of systemic risk and poor risk ratings by agencies
[11:46pm] anarkhos: rmah, Ok.
[11:46pm] wintax: anarkhos: sure but that has nothing to do with securitization
[11:47pm] emmeka: mylord ok so in layman's terms: with historically low rates and recent deregulation of the derivatives market, banks were giving out subprime loans, repackaging them as a derivative, and then selling them as a security with extremely good credit when in reality it was basically a bundle of subprime loans
[11:47pm] wintax: don't blame securitization for a problem it doesn't cause
[11:47pm] rmah: anarkhos: here's the thing, when taken *individually*, each MBS (when rated honestly) was rated correctly given the then current understading
[11:47pm] rmah: what they were missing was cross-asset class risk correlation
[11:47pm] OGF: !bonds
[11:48pm] emmeka: Fannie Mae's role is basically to purchase mortgages, package them into a derivative, and then sell them on the open market as a security.
[11:48pm] EconBot: OGF:  2 Year 0.73% -13  5 Year 1.20% -17  10 Year 1.75% -12  30 Year 2.58% -11   (monthly change bps)
[11:48pm] rmah: and cross-tenor and cross-rate correlations
[11:48pm] anarkhos: wintax, Yeah, but emmeka highlighted the problems pertaining to securitizing X. If X did not exist in the first place (which it did, big time), then it could not have been securitized. That was my point.
[11:48pm] emmeka: The problem is this was being done by a lot of private firms
[11:48pm] emmeka: not just Fannie Mae
[11:48pm] rmah: but we understand that now
[11:48pm] mylord: understood that emmeka, but another question is why was there more(?) sub prime loans floating around?
[11:48pm] rmah: and most derivatives risk evaluation now includes such things
[11:48pm] mylord: that, i thot, was cuz of fanny/freddie
[11:48pm] rmah: mylord: because the economy was doing well
[11:48pm] wintax: anarkhos: that's fine but has nothing to do with securitization
[11:49pm] wintax: mylord: no
[11:49pm] anarkhos: wintax, What? Did you take issue with anything emerge said related to this?
[11:49pm] rmah: mylord: during a boom cycle, people have more positive outlooks on their futures
[11:49pm] anarkhos: wintax, emmeka I mean.
[11:49pm] mylord: wintax, does anyone think it was cuz of fanny/freddie.. i see articles suggesting this
[11:49pm] rmah: they are more willing to borrow to purchase large assets like homes
[11:49pm] emmeka: mylord it was boom time. Lots of mortgages flying around for everyone.
[11:49pm] mylord: yes, i understand its political and argued about
[11:49pm] wintax: mylord: only people whoa re idiots that don't understand fannie/freddie's business
[11:49pm] rmah: banks are more willing to lend.  because outlooks look good.
[11:50pm] mylord: but that, most likely, it;s mostly the positive economic outlook
[11:50pm] rmah: mylord: it's not political, it's psychological/sociological
[11:50pm] mylord: k
[11:50pm] wintax: fannie/freddie have to work with the market that exists
[11:50pm] emmeka: The short answer is that 2008 happened because we weren't regulating derivatives well enough.
[11:50pm] mylord: *have* to
[11:50pm] rmah: there were policy decisions made that *effected* the boom certainly
[11:50pm] wintax: have to, yes
[11:50pm] wintax: by law
[11:50pm] rmah: but they were not the underlying cause
[11:50pm] rmah: emmeka: that's one way to look at it, yes
[11:50pm] mylord: it’s a govt program, so it might not *have to* exist
[11:50pm] wintax: and???
[11:50pm] wintax: you're implying that fannie/freddie created more subprime loans
[11:51pm] wintax: that is incorrect
[11:51pm] mylord: and, was it a “bad” law/program
[11:51pm] mylord: that’s the question
[11:51pm] emmeka: I mean, if you need to reduce something as complicated as the cause of a recession to a soundbite that's about it rmah
[11:51pm] mylord: in short
[11:51pm] wintax: it's not
[11:51pm] rmah: mylord: um, mortgage lending will exist whether fannie/freddie exist or not
[11:51pm] wintax: it's a great program
[11:51pm] mylord: fine, but why are those mentioned in particuar?
[11:51pm] wintax: have you ever wondered why mortgage rates are low?
[11:51pm] mylord: wintax, not in this case, it seems
[11:51pm] rmah: mylord: why do you hate hardworking poor people?
[11:51pm] emmeka: mylord you realize private label MBSs were outtrading those offered by Fannie/Freddie right
[11:51pm] emmeka: like this was part of the problem
[11:52pm] wintax: mylord: get it through your head: fannie/freddie have little if anything to do with the problem you're crusading against
[11:52pm] blablaa: mylord, because it's unconfrotable for economiscs people to admit society sometimes goes crazy and borrows too much or too little
[11:52pm] blablaa: mylord, so you've to find some gov agency to blame
[11:52pm] wintax: hahaha
[11:52pm] wintax: have to find someone to blame, look at the government.  answer: fannie/freddie
[11:53pm] emmeka: people were taking higher-risk securities which themselves were not adequately labelled for how risky they were, and offsetting the risk using credit default swaps which were also not labelled for how risky they were, and so everyone was buying all this shit without really knowing it was garbage
[11:53pm] mylord: wintax: calm yourself
[11:53pm] emmeka: so when the house of cards collapsed, it did so quick and devastatingly, because nobody was prepared for it to do so
[11:54pm] emmeka: this had basically nothing to do with Fannie/Freddie except that they too were players in this market (though certainly not dominating it)
[11:54pm] mylord: any lessons to learn to reduce future problems like this?
[11:55pm] emmeka: yes: regulate this bullshit
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[11:55pm] rmah: mylord: the actual default rates for subprime mortgages never exceeded 20%, which was well within the forecast models for defaults during a deep recession
[11:55pm] emmeka: which we kind of learned
[11:55pm] rmah: mylord: but what that caused was a panic sell of MBS when margin requirements could not be met
[11:55pm] rmah: why couldn't margin requirements be met?  because other asset classes also fell
[11:55pm] menwithHill: 1,000 US corpses in Panama Leak—out with it!
[11:56pm] emmeka: 1000 corpses?
[11:56pm] rmah: mylord: so while your MBS holding might be seeing 20% defaults, it's value would fall by 50%
[11:56pm] emmeka: or corporations 
[11:56pm] menwithHill: emmeka: same thing
[11:56pm] rmah: mylord: which caused all sorts of other problems
[11:56pm] rmah: mylord: through it all, most less-well off people who had sub-prime mortgages kept paying their mortgage
[11:57pm] mylord: rmah: so, your prescription would be?
[11:57pm] wintax: stop BBB- MBS from being rated AA
[11:57pm] rmah: mylord: and just as an FYI, FHA loans saw much *lower* default rates, on order of 5% during the crisis
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[11:58pm] mylord: The ratings are *supposed* to be independently set, right?
[11:58pm] rmah: mylord: better risk models, increased due-dilligence by buyers of MBS, better requirements for disclosure on the part of MBS sellers
[11:58pm] emmeka: they are independently set
[11:58pm] mylord: and regulation, rmah?
[11:58pm] rmah: mylord: the MBS seller hires the rating agency
[11:58pm] emmeka: the problem was that via derivatives we were taking shittily rated securities
[11:58pm] emmeka: and making them better rated
[11:59pm] emmeka: when they shouldn't be
[11:59pm] rmah: mylord: the things I said *are* the regulations
[11:59pm] rmah: emmeka: except that's how it works
[11:59pm] rmah: when you diversify you lower risk
[11:59pm] emmeka: yes well it probably shouldn't
[11:59pm] mylord: right, so industry should just take it as a learning process? and what about bailouts, prevention of “too big to fail” etc..
[11:59pm] rmah: emmeka: it actually does work
[11:59pm] rmah: mylord: better risk models are being developed now.  as we speak.
[12:00am] mylord: on related note, what are your thots on bernie sanders policies, from what we can tell of them?
[12:00am] rmah: in fact, I'm consulting on a project to develop a better risk model for certain OTC derivatives (rate swaps, fx swaps, commodity hedges, and such)
[12:00am] rmah: which will be used by all banks worldwide
[12:00am] blablaa: rmah++ 
[12:00am] rmah: assuming it gets approved by the SEC and Basel
[12:00am] blablaa: makes the world a safer place!
[12:01am] rmah: blablaa: it makes my head hurt is what it does
[12:01am] blablaa: hehe
[12:01am] rmah: mylord: a large part of the project is properly calibrating correlations between asset classes, tenors, currency movements, etc
[12:01am] rmah: i.e. "systemic risk"
[12:02am] mylord: what about the problem(?) of risk being taken on by taxpayers?
[12:02am] rmah: mylord: except it's not
[12:03am] mylord: that’s good to hear.. how not? cuz bailout loans are repaid? what’s all this about QE trillions mean, in terms of paying thru ‘hidden tax’ of inlfation and all those complaints from the left?
[12:03am] wintax: the taxpayers don't take risks
[12:03am] mylord: please excuse me if i mispeak.. i’m trying to learn, not present arguments
[12:03am] rmah: mylord: the bailout of the 2008/2009 crisis was done by a variety of means: loans, purchase of toxic assets, purchase of stock, forced mergers, etc, etc
[12:03am] blablaa: mylord, the QE is largely based on the same narrow/broad money confusion we discussed earlier
[12:04am] rmah: mylord: overall, the US Federal Gov made a profit from it
[12:04am] rmah: not much of one, but some
[12:04am] blablaa: mylord, it largely does nothing
[12:04am] rmah: unless you count the toxic asset purchases by the Fed
[12:04am] mylord: “purchase of toxic assets” sounds like a liability/loss, but it isn’t? because why?
[12:04am] rmah: then it's still up in the air
[12:04am] rmah: mylord: because they sold them later at a profit
[12:05am] rmah: mylord: banks needed liquidity
[12:05am] mylord: ok, so, basically, nothing really bad happened, the system’s robustness was actually shown, and, some improvements are being made to models to help prevent it next time?
[12:05am] rmah: mylord: a lot happened
[12:05am] rmah: the US financial system almost collapsed
[12:06am] mylord: right, and even tho it was that dangerous, it was saved, by corrective actions.. however, that’s dangerous as those decisions might not have been taken, and anyhow were not sure-thing fixes.. we lucked out?
[12:06am] rmah: mylord: if the gov and fed had not taken action, we would have seen a depression worse than the great depression (IMO and the opinion of many others)
[12:06am] mylord: and.. the best we can do, is dev better models
[12:06am] rmah: mylord: risk models are critical
[12:06am] mylord: as opposed to alter the system more fundamentally"
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[12:07am] rmah: mylord: what fundamental alterations do you think should be done?
[12:07am] rmah: ban home loans?
[12:07am] wintax: what fundamental change would we do?
[12:07am] wintax: lol
[12:07am] rmah: I mean, come on
[12:07am] blablaa: mylord, more or less yes. also the non-robustness, or fragility, of fixed-exvhange-rate systems was shown in europe.
[12:07am] mylord: dunno, not an expert.. just asking
[12:07am] menwithHill: "... forming shell companies has become a cottage industry in Wyoming, Delaware and Nevada ..."
[12:07am] blablaa: mylord, euroarea proved the converese statement
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[12:07am] rmah: menwithHill: that's been true for 50 to 100 years
[12:07am] wintax: why do you hate poor people?
[12:07am] rmah: nothing new
[12:07am] rmah: mylord: people like to be able to buy houses and cars without saving up for decades on end
[12:07am] mylord: wintax, why do i hate poor people? i don’t, and i don’t know why you’re asking
[12:07am] rmah: and IMO, that's a good thing
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[12:08am] rmah: mylord: because that's what "subprime lending" is for
[12:08am] wintax: ^
[12:08am] mylord: yes, i figured he’s asking cuz of that. that’s fine, if its not a systemic threat
[12:08am] rmah: to allow people who have stable jobs but don't make a lot of money to be able to get loans at reasonable rates to buy homes
[12:08am] mylord: if you say it isn’t, that’s good to hear
[12:08am] wintax: well too much of anything is bad
[12:09am] rmah: look, all "subprime" means is "higher risk than prime" and "prime" essentially means "non-poor people"
[12:09am] mylord: i think this has been a very good conversation for ‘laymen’ interested in the topic to read the FAQ
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[12:10am] mylord: i might copy/paste it and share, if that’s ok.. i’ve not referred to irc logs much before, if those exist here, lmk
[12:10am] rmah: mylord: do bankers make too much money?  sure.  is there too much speculative trading going on?  sure.
[12:10am] wintax: yes it is important that laymen know that 2008 wasn't caused by the fed and bill clinton and fannie/freddie drinking too much kool-aid
[12:10am] rmah: but that shit is all just a side effect, not a driver (IMO)
[12:11am] rmah: and trust me, bankers do NOT control the regulatory agencies
[12:11am] rmah: I'm on conference calls a few times a week where bank reps talk about "what will the SEC think?!?"  "we can't do that, Basel will veto it" etc
[12:11am] rmah: if anything bankers are afraid of them
[12:12am] wintax: SEC and FINRA
[12:12am] emmeka: as they should be.
[12:12am] wintax: tho FINRA is more annoying than scary
[12:12am] rmah: on the flip side, it is the industry that is developing the this risk model
[12:12am] rmah: but it *must be* approved by regulators.  and having seen the feedback from the regulators, they go through this shit with a fine toothed comb.
[12:13am] rmah: personally, I think some of their objections and requests are bordering on silly
[12:13am] rmah: but I guess it's their job to be paranoid.  <shrug>
[12:13am] emmeka: tbf, they have fairly good reason to be paranoid
[12:13am] blablaa: rmah, examples?
[12:13am] rmah: and I guess I shouldn't complain since all it does is generate more for me and thus more money 
[12:13am] rmah: blablaa: for example, they wanted an analysis of comparisons between the currently used standard grid model vs the new model on a per asset class
[12:14am] rmah: erm, per asset class basis
[12:14am] blablaa: rmah, makes sense no? when buying new thing, you want to compare with old?
[12:15am] blablaa: but it adds to costs i guess 
[12:15am] mylord: do you think regulation hampers innovation etc as friedman and free enterprise advocates might complain against?
[12:15am] rmah: or, another one was that they wanted us to try a different method of aggregating the curvature risk component.  it's silly because that part has an effect of, on average, around 2% or 3% of the total margin requirement
[12:15am] mylord: what would be the + and - of less/no regulation?
[12:15am] rmah: mylord: I don't know if I'd call this stuff innovation, per se
[12:16am] emmeka: heh
[12:16am] emmeka: innovation
[12:16am] blablaa: mylord, you can sacrifice some growth in the name of stability/safety
[12:16am] rmah: blablaa: the point of this new model is better handling of systemic risk, so decomposing it is sort of silly, IMO
[12:16am] DilloYoda: a good clip from The Big Short about what went wrong with MBS tranches - https://www.youtube.com/watch?v=3hG4X5iTK8M
[12:16am] rmah: blablaa: from a class to class comparison, I mean
[12:17am] blablaa: rmah, ah i see
[12:17am] mylord: so, the argument for/against regulation isn’t particularly interesting in this space? it might be akin to that of FDA, or ICC, or anything else?
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[12:18am] rmah: mylord: what's necessary are better regs and more consistent enforcement
[12:18am] rmah: not more/less
[12:18am] FAuUiDkld: !market
[12:18am] EconBot: FAuUiDkld:  Dow 17,716.05 +0.64%  Nasdaq 4,920.72 +1.59%  S&P 500 2,066.66 +1.05%  FTSE 100 6,162 +1.16%  DAX 9,625 +0.64%  Nikkei 225 15,715 -0.11%
[12:19am] blablaa: mylord, i'll let rmah answer on that... anyway, i think broadly speaking the point is "free market" is very efficient on the local thing... on the global thing, it's not efficient... nobody really has a global view, not even the gov
[12:19am] rmah: blablaa: well put
[12:19am] rmah: though I'd use the terms "systemic" rather than "global"
[12:20am] blablaa: well it's same idea
[12:20am] mylord: if no one has systemic view, how can you well-regulate it?
[12:20am] rmah: yeah
[12:20am] rmah: mylord: you do the best you can
[12:20am] mylord: or you mean, individuals don’t, so they need oversight, with big picture perspective?
[12:20am] rmah: theoretically, the gov cares about systemic effects.  individual companies never well.
[12:20am] blablaa: mylord, you make it illegal for individuals to do things that in aggregate lead to lot of confusion
[12:20am] mylord: like 1000 pepole running off a cliff, while busy arguing with each other over which shoes look better
[12:21am] mylord: ie, like the climate change argument
[12:21am] mylord: ie, “greedy algorithm” as it’s called in computer science - short term optimization
[12:22am] mylord: so, really, the consensus of the #economics channel, is its not 1 size fits all, and you need good regulation on a global scale, without hampering local innovation etc, too much (and it depends more or less on industry)
[12:22am] blablaa: mylord, more or less... probably it's more systemic/global vs individual/local instead of short vs long term
[12:23am] blablaa: individuals try to act long term rational
[12:23am] mylord: and, how dangerous would it be to simplify things, and just generally aim towards no regulation?
[12:23am] mylord: what are the updsides and downsides
[12:24am] reavengrey: Eye of newt and drop of the palsy; with this beanshoot, fix the economy!
[12:24am] rmah: mylord: not possible
[12:24am] • reavengrey waves wand with a flourish
[12:24am] mylord: how many here would likely say towards no regulation is preferable?
[12:24am] rmah: mylord: only the crazy libertarians
[12:24am] mylord: k
[12:24am] wintax: yeah
[12:24am] mylord: are there many of them here?
[12:24am] wintax: why do you keep asking about "no regulation"
[12:25am] blablaa: mylord, problem of regulations are special interest groups etc etc. One can say in principle they can do good, but also say in practice they do harm...
[12:25am] rmah: mylord: the financial system is complex because our economy is complex.  that complexity is necessary to increase efficiency, manage risk, etc
[12:25am] mylord: cuz i was just watching “free to choose”
[12:25am] blablaa: mylord, the more flexibility you've in gov, the more space for abuse...
[12:25am] rmah: mylord: libertarians, imo, have a naive view of the world that is childish and unrealistic
[12:25am] mylord: what do you make of the huge growth of the financial sector relative to GDP in the recent decades?
[12:26am] rmah: mylord: the US financial sector is so large because it provides services for a large % of the world now
[12:26am] rmah: instead of just the USA
[12:26am] mylord: is it sub optimal in the sense that Peter Theif describes as “indefinite optimism” ?
[12:26am] blablaa: mylord, this si the "core" point of libertarians... all this fine tuning will be abused
[12:26am] mylord: Theil*
[12:26am] rmah: don't get me started on Theil
[12:27am] mylord: oh, would love to here your thots
[12:27am] mylord: i’m not a fan, per se, just recently read Zero to One, is all
[12:27am] rmah: he is a hypocrite of the first order
[12:27am] rmah: he tells kids to skip college but only hires grads from the top schools
[12:27am] rmah: etc, etc
[12:27am] blablaa: hehe
[12:28am] mylord: a bernie sanders presidency, good or bad?
[12:28am] rmah: that would depend on who you ask, don't you think?
[12:29am] rmah: if he wins, ask again in 10 or 20 years
[12:29am] rmah: we should have at least an idea by then
[12:29am] mylord: i’m asking you guys 
[12:29am] mylord: “that would depend on who you ask, don't you think?” — yes, I know that’s a tautology
[12:29am] rmah: I think he would be ineffectual and we'd see four more years of gridlock
[12:30am] mylord: and if he’d be effectual?
[12:30am] rmah: he won't be
[12:30am] rmah: he has zero allies in congress.  he has no power base.
[12:30am] mylord: ok, and, theoretically, if he would be? are his ideas helpful or harmful?
[12:30am] rmah: IMO, mostly harmful
[12:30am] rmah: a few good ideas, but mostly bad
[12:30am] rmah: again, IMO
...
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[12:57am] mylord: right, status quo isn’t some horrible N Korea or something
[12:57am] blablaa: greedo, https://en.wikipedia.org/wiki/Median_household_income
[12:58am] blablaa: note the first table shows *gross* media income, not disposable income
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[12:58am] mylord: Bernie wants to “break up banks”. What does that mean, and what are the effects?
[12:59am] mylord: seems like the important thing to do is lower debt
[12:59am] mylord: i don’t think bernie is looking to do that
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[01:00am] rmah: mylord: in 1933, during the great depression, a law was passed Glass-Steagall, that prohibited banks from providing both banking and investment banking/brokerage services as the same company.
[01:00am] rmah: mylord: in 1999, that act was repealed
[01:00am] mylord: right, read about that
[01:00am] mylord: but does he mean beyond that?
[01:00am] rmah: immediately, many US commercial/retail banks merged with investment banks and brokerages
[01:00am] rmah: forming much larger companies
[01:01am] rmah: this led to a concentration of banking business in the US
[01:01am] mylord: ok, and was there a problem with that, in reality?
[01:01am] mylord: did this create ‘too big to fail”?
[01:01am] rmah: well, if JPMorgan Chase fails, the US economy is fucked
[01:01am] rmah: or Citi
[01:01am] rmah: or any of the really big ones, say the top 5 or 6
[01:01am] mylord: and with GS act?
[01:01am] mylord: same problem?
[01:01am] rmah: G-S prevented that sort of concentration to some degree
[01:02am] rmah: banks were consolidating before G-S was repealed, but the repeal really lit the fire and accelerated things
[01:02am] rmah: note, the US banking industry is still far less centralized than most other nations
[01:02am] mylord: why not bailout the subprime borrows instead of the banks, so they stay in their homes, instead?
[01:02am] rmah: in comparison to germany, japan, france, uk, canada, etc. US banks are highly distributed
[01:02am] mylord: wintax ^
[01:03am] rmah: mylord: mostly too much overhead, in ability to do so immediately, hard to choose who to bail out, etc
[01:03am] greedo: breaking up the banks ihmo would be a good thing
[01:03am] greedo: thus I like Sanders
[01:03am] rmah: greedo: europe should go first
[01:03am] mylord: EU unity, good or bad, and for who?
[01:03am] rmah: 'the counter argument is that US banks need to be this large to effectively compete against european and japanese (and soon chinese) banks
[01:03am] rmah: which is a valid point
[01:04am] mylord: love this channel
[01:04am] wintax: mylord: what rmah said, it's much harder logistically