Greedy banks; not enough regulation; too much regulation; flippers; Wall Street greed; Republicans; brokers; Democrats; ratings agencies, developers; oil prices and foreigners. These are all reasons, definitively claimed by those citing them, as the sole reason for the “mortgage crisis” currently in the headlines. Anything garnering so much attention, particularly in an election year, is ripe for misunderstanding and poor presentation of the facts. I can’t think of a more timely topic on which to apply financial skepticism and truly understand the crisis’ underpinnings.
To understand where we are today, we need to start by understanding how the mortgage market operates. Historically, when one wanted to buy a house they went to their local banker, presumably one they knew, and asked for a loan. The banker would assess the potential borrower’s credit, require a large down payment, check all their documentation and then decide if they were worthy of a loan. In those days, banks earned money by borrowing cheap (deposits) and lending it out to worthy borrowers at a higher rate. As long as the loan didn’t default, the bank kept the difference as profit, so making “good” loans to capable borrowers was the goal. The bank’s greatest risk came if there was a regional downturn. If the local plant closed, how were all those formerly good borrowers going to pay? As a bank, you had risk concentrated geographically. Continue reading
John Maynard Keynes also famously once said “when the facts change, I change my mind. What do you do, sir?” The retort was in response to a questioner who pointed out that Keynes had been wrong about an economic prediction made some time earlier. There is a difference between predicting the future of complex systems with random variables when human emotions are involved, and understanding why the system works the way it does. Keynes, like all good skeptics, realized dogmatically defending an earlier position which turned out to false would be, well, intellectually dishonest. His quote emphasizes what all good skeptics understand: the truth is bigger than your ego.
It is my goal to help de-mystify finance and economics. One can easily be overwhelmed with jargon, acronyms or unfamiliar concepts which render trying to learn these subjects from context difficult. At least in America, financial decisions are becoming more complicated and more important to one’s well-being at the same time. Traditional pensions are are disappearing while self-directed 401Ks are on the rise. Businesses, salespeople and politicians twist, bend and contort economic statistics to sell you products or ideas. How can we tell fact from fiction? Continue reading
Why do it? Why add yet more noise to the cybertubechatterspace that already won’t leave us alone with its ‘male enhancement,’ its ‘acai berry blast’ and its constant commentary on everything and everyone, then commentary on the commentary, and commentary on the commentary on the commentary?
Because the world needs a skeptical blog about finance and economics, that’s why. Because the dismal science is truly dismal, because human beings just seem to have no innate ability to understand even the most basic principles of probability and statistics, because I get dozens of Nigerian 411 scam e-mails every week, and because I just love to see my name up on the internet, that’s why.
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