It depends upon what mainstream lead industry advisors and consultants recommend.
It depends upon what mainstream lead industry advisors and consultants recommend.
All of that is true, and George's recommendation for "risk testing" is impractical and probably not even desirable.. But let's not forget that much of what was involved in the financial crisis was outright fraud, not financial risk. And much of the rest, while not outright fraud, was a tantamount to fraud. For example, allowing multiple "insurance" claims on the same asset.
If we can't detect and deal with fraud, we have a bigger problem. The whole financial system has a problem.
Huh? In many reshoring cases, it's a reaction to direct, personal experience. For example, the injection-molding industry soon learned what kinds of tooling *not* to contract to Chinese moldmaking shops, when the tools built in China, which should have run 1,000,000 parts, crapped out at 30,000.
As the last few years have shown, even those with degrees in finance have trouble tracking market manipulations and other chicanery. There was a misplaced level of trust in the banking industry to not screw the depositor/investor.
Oddly, that was seldom recommended by the banksters.
Yet you seem to expect it to be within the ability of individuals.
And it would be administered by the same sort of bankster who put us in the hole we're in now.
David
Huh. Brian Arthur [1], who is much smarter than I am (and who *is* an economist) has described models with multiple equilibria, path dependence, positive feedback and other features pretty much in direct contradiction to the current wisdom (or dogma).
I think he may be much excoriated in venues where egos or careers are dependent on genuflecting before the corrent wisdom.
- Mike
[1] Quotes, excerpts and squibs:
Getting my son to talk much about it when he's on vacation is not very fruitful. "Hey, Dad, I don't want to think about work today."
However, we had some good discussions about "behavioral economics" a year or so ago, and this was my takeaway:
Doing econometrics requires data, and the available data does not lend itself very well to models of complexity or to the varieties of human behavior. Big Data holds some promise in that regard, but the state of the art is still a matter of modelling what you can from the data that is available.
Existing modelling methods work perfectly well to answer a majority of economics questions, particularly the kinds of narrower questions that businesses will pay to have analyzed. The ones we discuss here on this NG, however, such as where an entire country's economy is going or what's going to happen to people's buying habits as an economy evolves, are much more difficult to model -- maybe impossible, with the tools available today.
That's where the range of human behaviors, and sensitivity to initial conditions, and the rest of the panoply of complexity and chaos theories come into play -- with mixed success. For example, the failures of behavioral models in finance to predict the crash. (Although some of the quants *did* predict the crash. The point is, other quants disagreed, and no one knew who was right.)
All of this makes for great academic fodder. If you need a PhD thesis topic, this is your meat. But most of the paying work in econometrics is not of that type.
The money that was driving house prices upward came from private investors that were looking for high rates of return from high risk investment.
The govt doesn't prevent investors from gambling with their own money. Before the bubble and after the bubble almost 100% of mortgages were financed by either in-house loans from deposit taking facilities or by government sponsored loan guarantees and pass troughs.
During the bubble there were about $6 trillion in loans that were not financed in this traditional way. The money for those loans came from private investors who were looking for high-risk high-return investments. Most of the reckless lending was funded by those private investors. How do we know they funded most of the bad loans? because that is where most of the loan losses were. According to Moody's analytics the actual realized loan losses from 2006-2012 are:
Fannie $77 Bn Freddie $51 Bn Privately backed $713 Bn
It was recommended to anyone seeking a low risk investment.
Are you saying free markets don't work? Are you saying the invisible hand is bullshit?
There seem to be a lot of people nowadays who think that it is govt's job to be the investor's nanny.
Or a "gig" in "the field".
I'm starting to realize that I soon may be starting to be getting too old for the factory floor gig to be a viable option much longer.
Deep sigh.
-- pyotr filipivich "With Age comes Wisdom. Although more often, Age travels alone."
A few simple rules would make a huge difference. You can do anything you want between individuals. Any investment available to the general public must be attached to physical assets...all the way down to the deal built on the deal built on the deal. Transparency and accountability. No shell corporations. I want my broker to get 10% of my gains and share 10% of my losses.
Every usenet thread needs some personal stories. I went to a seminar marketed to baby boomers. Had to do with investment in shopping centers and had great return numbers. And he was there to help for free. So, I went to the personal consultation. He was really disappointed that I wouldn't pull the trigger, but I took the brochures and did some research. Deep in the verbage was a paragraph that could have been totally replaced by "ponzi scheme"...but it was full disclosure.
Turns out that for his free advice, the company paid him 9% off the top. But he was well up in the chain and got another 9% as district manager. The corporation was a tall and wide stack of shell corporations, each of which provided services to the endeavor and charged a fee plus real estate commissions. And at the top of each one was the same one person as sole owner.
I didn't find anything I'd accuse of being illegal, but it was very misleading. The part that should have been illegal was selling this stuff.
He had baby boomers fighting for the opportunity to give him their entire retirement fund. He oughtabeenshot.
Odd that the ones who ended up with upside down mortgages were NOT those private investors, but rather those who the private investors took advantage of. People trusted by those who lost their homes.
And other peoples money, as well.
Also looking for someone else to bear the burden when those risks turned out badly.
Recommended by reputable investment advisers, but we aren't talking about them, are we?
They work well for those at the top, not so much for those with the most to lose.
Maybe not for Ricky Jay, but Adam Smith expected a higher level of ethical behavior than the banksters understood.
Few investors expect to be preyed upon just because they trust ones who care only for lining their own pockets first.
There are many legal ways to become very, very rich. The number of honest ones is very much smaller.
David
By 1996, I'd gotten to the point when my back was no longer able to support my making parts on a machining center. I found a job programming CNC LASERs and that's served me well.
Al least until the end of March when I become a full time Gentleman of Leisure.
VBG!!
David
Nobody was forced to take a loan and considering most of the loans required no down payment, what was lost was mostly imagined wealth.
Many people who lost their homes were also gambling. They were buying much bigger homes than they could afford. They were gambling that appreciation in price would pay for a large chunk of the loan. They knew the loan would be unaffordable if prices went down.
The majority of the loans financed by private investors were second liens where the borrower was trying to cash in on the price increase. Those borrowers could have figured out that if you extract the equity on your house and spend it and then the price goes down your mortgage will be under water.
Investors paid people to gamble with their money. That doesn't absolve the investor of responsibility.
Who else would bear the burden?
Investors knew or should have known they were gambling. The govt provides safe investments for those who wish not to gamble.
USA and the rest of the world needs to learn something from the Canadian banking system
I do not think it is within the ability of individuals to analyse the risk of all investments. But I think it is within the ability of individuals to analyse the risks of investments that they have or investments that they a re contemplating. If you do not have a clue of the risk, then maybe buying that investment is not a good idea. Or at least not a good idea to put in more money than you can afford to lose.
So we agree that trying to have the government rate the risks of investment s is a bad idea?
Dan
Another problem is that as soon as you have a good model , every thing changes because you ( and the world ) now have a new idea of what will happen.
Dan
Doesn't matter which model you use. People will soon develop ways to scam the system under the new model. It's like computer viruses. Fix one and another pops up.
Why would anyone trust a stockbroker? I am not saying that stockbrokers ar e not honest and trustworthy, but I am saying that investors should do some investigation them selves. Intel not only gave us Moores Law, but also fr om Andy Grove " Only the paranoid survive. "
Dan
Again, it depends on what kind of model you're talking about. Two projects ago, my son worked on a model to streamline and boost the cost efficiency of a military aircraft supply chain. From that, contracts will be set. There isn't a lot that's going to change during the course of the contracts.
His last project involved optimizing rates and the overall programs for car loans. That one will change with the evolution of consumer behavior, but the program is being monitored monthy and the variables adjusted as they go. The number of possible variables is very limited.
Those are typical econometrics jobs in the consulting business today. There were many billions of dollars involved in each of them, so the margins one obtains with a good econometric model, as a percentage, are fairly small. But the dollars can be huge. In the first, my son's team saved us taxpayers an estimated two billion dollars.
I think you have some misconceptions about the vast majority of econometric models. Most of them are mostly mechanical and are based on descriptive statistics. They don't involve opportunities, nor, in most cases, incentives, to "scam."
The majority of what my son worked on, when he was working for a think tank, was analytical models of health care. The models were prescriptive but didn't involve a lot of human decision-making by the objects of the studies. Their behavior was highly predictable and, after several years, have proven to be solid.
changes because you ( and the world ) now have a new idea of what will happ en.
Sorry, I intended the remark to be on models used for investing. Things li ke the end of the year effect in the stock market or the advice to buy the Dow Jones dogs. As soon as you say buying small business stocks in Dec and sell in January is a sure fire way to make money, then it no longer works as too many people try it.
Dan
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