The dark side of financial innovation
Sunday, September 28, 2008 at 04:42PM
Skeptic in Financial innovation, Sub-prime Mortgage Melt-down
How they explained it:
Mortgage backed securities reduce risk by spreading it throughout the financial system.
How they built it:
Highly integrated systems are more subject to catastrophic failure than are compartmentalized systems. The total risk was not reduced. It was increased and partially externalized. Congress is expected to continue socializing the costs tomorrow.
Update on Wednesday, October 1, 2008 at 11:29AM by
Skeptic
This is how a theoretical physicist says it in NYT, with lots and lots of words criticizing mainstream academic economists for not using computational tools to study systemic risk and other ideas that challenge their core belief that markets tend toward equilibrium. I suspect George Soros, author and promoter of the theory of "reflexivity," would heartily agree.
Article originally appeared on realitybase (http://www.realitybase.org/).
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