David Li's paper "On Default Correlation: A Copula Function Approach" (2000) was the first appearance of the Gaussian copula applied to CDOs, which quickly became a tool for financial institutions to correlate associations between multiple securities. This allowed for CDOs to be supposedly accurately priced for a wide range of investments that were previously too complex to price, such as mortgages. However in the aftermath of the Global financial crisis of 2008–2009 the model has been seen as fundamentally flawed and a "recipe for disaster". According to Nassim Nicholas Taleb, "People got very excited about the Gaussian copula because of its mathematical elegance, but the thing never worked. Co-association between securities is not measurable using correlation"; in other words because past history is not predictive of the future "anything that relies on correlation is charlatanism."
Definition of ‘Moral Hazard.’
The risk that a party to a transaction has not entered into the contract in good faith, has provided misleading information about its assets, liabilities or credit capacity, or has an incentive to take unusual risks in a desperate attempt to earn a profit before the contract settles.
As we wind down into the last days of the biggest Ponzi scheme ever created a few banking details that are now common will seem so absurd in just a few years. We will look back at these days and wonder how this generation could be so insane.
We all know the answer deep inside, people like to believe they can get something for nothing. Politicians, bankers, and Wall Street put out the bait, riches, benefits, the lifestyle, like a drug dealer offering free crack cocaine. At first people are curious, they pause and wonder…
Soon some begin to take the drugs, the freebies. Nothing happens, they feel good. They tell others. Soon there is a mad rush for the freebies. The freebies are made into law. The law is glorified. And the drug addiction sets in, skillfully placed there so carefully by politicians and bankers who now have the ability to plunder millions from the economically illiterate citizens.
Once addicted to the freebies reason disappears and all that remains is the constant drive for the high. The addicted citizens will pay any price to keep the freebies coming, the addiction consumes them.
The world disappears all around the victims as they focus on getting high, nothing else is relevant. Get high, get more freebies than the next guy, and make it through another day, maybe a week, but keep getting high. More Social Security, Medicaid, Medicare, education, college, birth control, the list is endless. The quest for financing the sickness reaches epoch proportions. The dope must be delivered!!!
That is were we are today. Wall Street, Washington, Europe, China, Japan, begging for just one more fix of “dope,” money, liquidity, quantitative easing, mortgage swaps, credit swaps, discount windows, money, money, money. The dope must be administered to the finance Wall Street junkies, retires, welfare recipients, food stamp recipients, the dope MUST be delivered at all cost! Dope, dope, dope, we need dope!
The Federal Reserve will be there to satisfy the junkies. And the Central Bank of Japan, the Central Bank of China, the European Central Bank, all there to create the dope that the world’s financial elites, and dependents crave and must have to survive.
Below are some observations from some people actually working in finance, some on Wall Street, who see the insanity for what is…suicide. The quotes are actual with interpretations as well as cleaning up the language.
The first one is from “Stak Edwards”
“I think to myself how ridiculous the “official” story of the financial collapse is. We the people are supposed to believe that after hundreds if not thousands of years of banking history by which to go on, that all of the sudden some physicist (David Li) came up with a formula by which prudent underwriting of loans was no longer needed. And that we should abandon prudent underwriting now as it is no longer necessary.
Yeah right.
What a line of bull. Now we can lend to people with no job and poor credit virtually any amount, because this physicist came up with a new formula that can somehow distribute this risk. It could not possibly be that since the big banks were using Other Peoples Money and therefore had no stake in the outcome that they really could care less as long as they got their fee out of the deal. It is such a crock of crap.”
The moral hazard here is federal government is afraid to come out and say our biggest financial institutions are run by crooks. Furthermore, these crooks own the FED, so we are apparently SOL.
Unfortunately for the citizens who suffer we now condone fraud to benefit these bankers because they just cannot secure sufficient wealth for themselves by running legitimate banking operations. No, as is typical of our federal government they would rather lie, obfuscate, deny, and generally cover up the banks wrong doing. Oh, and give em a few hundred billion for their hard work, of taxpayer money no less. What a sad state of affairs. Or throw some fines on them and also provide taxpayer money to pay said fines. Move money from the left pocket to the right pocket in a show of solidarity with the citizens.
BTW, I don’t think the deadbeats were the victims here. No they got the couple years free ride they are used to getting. The victims IMO were the prudent that put big down payments and now find themselves not only without equity but deep underwater. They find that not only that, Bernanke has decided to further financially repress said people by not allowing them to earn any interest on their savings.”
Authors comment; The Federal Reserves zero interest rate policy (ZIRP) punishes savers, many of whom are the elderly on fixed incomes. Standard banking procedure would be to set the interest rate 2% to 4% above the inflation rate or 2.9% + 3% = 5.9% in today’s climate.
Continue on with Stax Edwards;
“They find that they have lost their jobs and must spend their retirement money to get by.
Thomas Jefferson called it when he said first by inflation then by deflation….The banks will inherit the earth. For the deadbeats, we have federal government programs to relieve them of responsibility. For the prudent, the banks have their assets to attack if they walk.
I only wish Fisher were serious when he said he supports breaking up To Big To Fails (TBTF’s). I fear this was lip service since they are the shareholders he reports to. Got to go vomit now, I am getting physically ill.”
From fnord88;
Authors note; Prior to 1913 and the creation of the Federal Reserve inflation was virtually zero. For thousands of years gold and silver were used as the medium of exchange because it was portable, limited in supply, easy to verify value by weight, store of value and a unit of account. When there is no inflation economic decisions by everyday people are simplified tremendously,
do I spend,
do I save,
do I invest.
Continued with fnord88;
“Exactly, capitalism based around constant inflation is the biggest fu…… scam in the history of the world. It forces everyone to become speculators. And the more I read and think, the more I become convinced that speculation is the root of many of our problems.
Not just because it forces people to gamble with money they should be able to save, but because speculation is based around two competing emotions: fear and greed. Spend long enough with those two emotions dominating your personality; you turn into a psychopath. Seriously.
I should have been clearer. For those of us the enjoy risk, speculation is fine, its a way of getting ahead using brain power rather enslaving oneself to some company that does not give a crap about you.
For people like my mother though, who just retired after 45 years teaching disabled kids, who have only self funded superannuation, it’s fu….. evil.
Inflation before 1913 was virtually zero. There is no need for this chart before 1913.
Government in Australia forces you to put money into super, which is then ripped of by money managers with ridiculous fees, and then invested in the stock market only to lose most of it. Instead of being able to retire and live comfortably after a life of putting others first, now she, and her family, have to stress and worry about money probably until the day she dies. Makes me want to shoot somebody in the fu…. head.”
Authors note; The problem for the United States started in 1913. That was the Woodrow Wilson administration, not Reagan, Bush, or Obama. That was the year we started the Federal Reserve, ended state legislature elections of senators, and instituted the federal income tax.
With the coming worldwide collapse of the fiat currency, 2 years, 6 years, everyday people need to understand sound money and our current unsound fiat money. Some clear goals should be followed when our society is rebuilt after the bankruptcy.
1. Federal governments restricted to consuming no more than 11% of the GDP.
2. Gold/silver used as bank reserves.
3. No central bank, let banks issue their own currency. With modern communications this would be very simple task.
Getting banking and money out of the worlds federal governments hands would ensure balanced budgets, balance trade, promote essentially one currency worldwide, eliminate theft by politicians, elites, and other parasites.
There would be a end to economic distortions in the economy and people could go back to being free and productive. Their economic choices would be simplifies into;
1. Do I spend my money?
2. Do I save my money?
3. Do I invest my money?
I think we can all handle that.
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