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Out of Bounds

Thanks to a link from Arthur "supergee" Hlavety, I just found out something about myself. I've been holding my breath, and didn't know it. There was something I was waiting breathlessly for, something I just couldn't move on without. And I hadn't consciously noticed that I was doing so, even though I guess I've probably been doing so for over a month now, until it finally arrived: Michael Lewis has written a short sequel to Liar's Poker, for the latest Conde Naste Portfolio (dated 11/11/08), entitled "The End."

There was a lot of scandal, a lot of exposure of bad people behaving badly, in Michael Lewis' 1990 book about his years at Solomon Brothers in the mid 1980s, but very little of that stuck with me. No, the part of Liar's Poker that has stuck with me for almost twenty years since I first read it, the reason I still occasionally recommend it to people, is what Lewis' former bosses on Wall Street taught him about one of the oldest, and thorniest, and still hardest problems in economics, and that's what's called "the question of value." I was well primed for it when I saw it in Liar's Poker. I had a far, far better teacher of economics in high school than almost anybody ever got; not only had most American high schools ceased teaching economics long before I got to that age, but of all the people teaching economics in America in the 1970s at any level, he was one of the only ones who kept correctly demonstrating his economic abilities by making money at them. (Teaching at a Christian fundamentalist college-prep private school was just a hobby for him, part of his contribution to the takeover of the Republican Party by the Christian anti-communist caucus that I've written about before. Fascinating man.) But even before that, I saw it where many of you probably saw it for the first time, in Robert Heinlein's award winning (and still controversial) science fiction novel Starship Troopers, where Heinlein's knee-jerk anti-Marxism resulted in his authorial-stand-in character taking what I think is the wrong side of the question of value. It stuck with me, it was one of the very few notes in that book that rung false to me, so the question has fascinated me ever since I was a fairly small child:

Does a thing have an actual value that can be measured or computed, a correct price that actually exists in the real world that can be determined as a matter of objective fact? Or, is it true, as the opposite side of the question says, that "the value of a thing is the price it will bring"?

When Michael Lewis was first hired, right out of college, as a salesman at Solomon Brothers, his instinctive belief that things have an actual value was something that got relentlessly mocked by his coworkers. In his early days on Wall Street, they explained to him that there is a pecking order in the financial services industry. For a variety of cultural and regulatory reasons, investment firms are required to have people working for them who are experts at calculating the actual value of an investment based on current mathematical models and best available data. Their department is called "Quantitative Analysis," and the people who work there are derisively called "quants." Quants have the lowest prestige jobs in the entire industry, draw remarkably low salaries considering the level of education you have to have to get those jobs and the long hours and the awful working conditions, and Lewis says that they are routinely and cruelly and ruthlessly snubbed by the other half of the business. Those are the people whose specialty is sales. And at the absolute top of the pecking order, Lewis taught us, are the people who were called the Big Swinging Dicks, people who demonstrated the superiority of their manhood by being able to sell anything, however worthless the quants said it was, for however much the company needed it to sell for.

How does a BSD make his money? First, he starts by asking, "what do I have available to me to sell?" How much of it is there? Now divide that into his assigned sales goal. Add in the cost to sell it. That tells him what the thing he has to sell has to be worth; for it not to be worth that is flatly unacceptable. Which leads to the next, and last, and hardest part: what lies does he have to tell to himself to convince himself that it really is worth what he needs to sell it for, and how does he fool himself into believing his own lies? That's the only use that any BSD has for a quant: once in a very, very rare while a quant says something to him that, if he ignores the caveats and footnotes and fine details, he can twist into a justification. The quant doesn't have to have been right. Even if the quant was right, the salesman doesn't even have to accurately remember, let alone accurately pass on to others, what the quant said. He just needs to be able to believe that he is honestly representing what the quant told him when he quotes some bit of (what is to him) quant bullcrap about what the investment is "really worth" when he's on the phone to the client. And he really, really has to believe it, himself, even if he used to know that he was lying, even if he used to know that he was making this stuff up out of whole cloth. Humans kid themselves that they're good at detecting it when people tell them things that aren't true. They aren't. But to the limited extent that they are, they're really only good at detecting one thing: whether or not the other person believes what they're saying. So the ultimate BSD is the guy with the greatest talent for figuring out what he needs to believe in order to get you to give him money, and then making himself believe that, and believe it really hard.

After the savings and loan crisis. After the dot-com meltdown. After the mortgage bubble. People who trust me to follow these stories, friends of mine who were only vaguely following the news but still knew enough not to buy into earth-shatteringly dumb investments have always asked me, "how did anybody not know?" How in the hell does a lie, a lie that says that an investment that's actually worth zero dollars and zero cents is actually worth tens or hundreds of thousands of dollars, get believed? And once I explain the above to them, they admit that okay, J. R. "Bob" Dobbs was right: as dumb as the average person is, half of 'em are even dumber than that. And that means that as long as there are con men, there will be marks. But when I explain to them how the BSDs first have to lie to themselves about what the quants said, once I explain to them that the lies originate (in a twisted way) with quantitative analysts with some of the best mathematical and scientific minds in the country, the question then becomes how did people as smart as the quants ever give such bad advice to the BSDs? And then I tell them the story of one of the above three crashes, and what the quants actually said, and how the BSDs got it wrong.

The single most entertaining person I've ever told one of these stories to is phierma, a master-class costumer and genuinely talented artist whose day job is working on advanced medical imaging software. Like me, his degree isn't a completely worthless rag like a company's product certification, or a mostly worthless scrap of paper like a degree in "information technology," or even merely a degree in something vaguely skilled like "computer programming." No, Phierma has the same degree I do, even if I don't put mine to any use any more, in the much harder and rarer discipline of computer science. (That people who boast of those other three credentials are ever allowed to touch a compiler is why none of the software on your computer works right.) And I cherish the moment when I get to the point in the story where I explain where the breakdown occurred, because the look of horror (and, being Phierma, barely throttled rage) is priceless: it's something that computer scientists are taught, in their first freshman class at the age of 18, never to do.

You see, every computer program that does any calculation at all is, at its heart, a mathematical model of part of the world. And like any compact mathematical model of the world, it has what are called "boundary conditions." That is to say, we know that for a certain range of inputs, this set of calculations will produce honest and reasonably accurate and useful results. But we also know, if we understand the math at all, or understand the limits of the computer hardware we're running it on, that there are inputs that just should never be put into that model, because the results will be wrong. Maybe we know the math will create errors, like divide by zero errors. In today's world, more often it's that we know that the model was statistically derived, and we know the range of inputs in our statistical model, and we know that we haven't studied what happens when the numbers are outside that range. If your degree was in "information technology," this is probably the first time you've ever heard of this. If your degree was in "computer programming," this got hand-waved, or so they tell me, and you were told that it was enough to just put a note in the documentation with the code, to be put into the user manual by the tech writers, telling people to never input a value there that is out of bounds. Computer scientists, on the other hand, are told early in their training, by brutal instructors who will not brook disagreement or even argument on this subject on pain of flunking you out of any reputable program, that they have a moral obligation as computer scientists to test every input to their programs, and if a number gets entered that the program can not reliably produce a useful result from, to "error out" right there: to stop the program, and refuse to go any further, unless the user puts in a valid number. "Wait a minute!" he shrieks in that tone of outrage his friends all know so well, "Are you telling me that they lost all those billions of dollars on something as simple as an 'out of bounds' error?" Yes, Phierma (and the rest of you). That's what I'm telling you. Not only that, but they've done it three times in the last thirty years. The best minds on Wall Street have trashed the entire US economy three times in thirty years because of boundary errors.

1980s: A quantitative analyst named Ivan Boesky takes up, almost as a hobby, the job of calculating what the "risk premium" should be for every class of common investment on Wall Street. To a quantitative analyst, one of the fundamental laws of physics is that if you estimate what the inflation rate will be over the length of an investment, and you can estimate what the percentage chance of not getting your money back is, you can plug those two numbers into a simple equation and calculate what interest rate you have to charge to break even; the difference between the inflation rate and that number is called the "risk premium." So given the better database and spreadsheet tools we started putting on every desk in the early 1980s, he crunched the numbers to determine just what the default rate was on all kinds of investments and calculated actual risk premiums for each of them, and then compared them to the risk premiums that had been set on them the old fashioned pre-computer way, by trial and error, by glorified guesswork. And he discovered one really glaring error: junk bonds. They were a class of investment that was designed specifically for small, startup businesses, almost all of them family-owned, just starting to expand, who'd never had access to "commercial paper" loans before. Since they'd never borrowed that kind of money before, nobody knew how to tell if this particular business was going to pay back its loans, so the risk premium they got charged was plenty high. What Boesky found, when he went out and talked to some people to confirm the results from his spreadsheets, was that these loans mostly went to people who understood that not just their business, but their entire personal future right to ever borrow money ever again, depended on them making these payments, even if they had to sell their kids into sex slavery in Thailand to do it (figuratively speaking), that there was nothing they wouldn't do and no hours they wouldn't work and no effort they would spare to make those payments. And he happened to mention this at a conference to a bunch of sales guys, most famously Michael Milken, who just happened to be sitting on a bunch of junk bonds that (in order to make their numbers) they had to sell for way, way more than junk bonds had ever sold for. And if that had been where the story stopped, it would have been "how capitalism is supposed to work" in perfect form. But the problem is that they did make good money doing it, at a time when almost everybody was losing money, which created huge demand for junk bonds to resell. So the people writing junk bonds started floating junk bonds to the kind of people that weren't in Boesky's original statistical model, and the biggest demand was from "corporate raiders" who wanted to borrow the money to buy up a majority of a company's stock so they could run it (or more specifically loot it) however they wanted. Obviously those two groups are going to have dramatically different default rates. Didn't matter to the BSDs, though; all they heard, out of everything quants like Boesky said, was "junk bonds always make money and lots of it."

I could tell you a similar story about the dot-com bubble of the 1990s, about the difference between actual e-commerce websites with plausible business models, even if only a few of them were going to make it, and (once the demand for e-commerce shares outstripped supply, because no other class of investment was offering the same returns or making the same cheery promises) the proverbial three guys who knew nothing about the business and had nothing to show but a 6-slide PowerPoint presentation and a logo some friend of theirs drew on the back of a napkin. But I don't have to go into as much detail, because most of you remember those days. Just remember this: as fuzzy as the models were, even the most optimistic of the venture capitalists who created the dot-com business model were explicit about the difference between "has a plan to actually make money doing this some day" and "doesn't." But the people selling shares in dot-com startups didn't want to hear that caveat, not if it stood in the way of making their numbers. So they just remembered the part about how some companies in some investment pools were going to make huge money down the road, enough to pay off the losses on the investments in the ones who didn't, and brainwashed themselves into forgetting the rest of the caveats so that they could make their numbers.

Now remember that ever since the first experiments in widespread home loans for first-time home buyers during the Great Depression, one thing that the industry has learned is that working class and middle class people, once they're in a home, will relentlessly work 120 hour work weeks, and if that isn't enough they will murder random strangers and feed their entrails to their children, rather than default on the mortgage, that people who've never taken out home loans before have long been charged risk premiums that are way out of line with their defaults. Remember that in the late 1990s and early 2000s after waves of Clinton and Bush administration deregulation, investment firms' quants came up with a way to spread the risk of the few (but big) defaults across so many people that they'd never notice it, so long as we didn't change our model of who was buying homes and why they were buying them. And then compare that to this paragraph, from Lewis' "The End:"
Eisman knew some of these people. One day, his housekeeper, a South American woman, told him that she was planning to buy a townhouse in Queens. “The price was absurd, and they were giving her a low-down-payment option-ARM,” says Eisman, who talked her into taking out a conventional fixed-rate mortgage. Next, the baby nurse he’d hired back in 1997 to take care of his newborn twin daughters phoned him. “She was this lovely woman from Jamaica,” he says. “One day she calls me and says she and her sister own five townhouses in Queens. I said, ‘How did that happen?’” It happened because after they bought the first one and its value rose, the lenders came and suggested they refinance and take out $250,000, which they used to buy another one. Then the price of that one rose too, and they repeated the experiment. “By the time they were done,” Eisman says, “they owned five of them, the market was falling, and they couldn’t make any of the payments.”
I guarantee you that in every firm involved in this market, somewhere in some windowless cubicle in the basement, there was at least one quantitative analyst screaming his head off in emails about this, about how the mathematical modeling that underlaid the calculations that determined pricing on collateralized debt obligations was based on statistical analysis of customers who were buying their primary home, not as an investment vehicle but to live in, and pricing those homes based on reasonable expectations of what someone in their social class could afford to live in and paying no more for them than three times their income. And no BSD in the entire industry wanted to hear that caveat. He didn't dare. He almost certainly paid people to intercept those emails and keep them from him. Because if he let himself get drawn into what must have seemed to him like an arcane and wrong-headed argument about what something is "actually worth," when there really is no such thing, when everybody knows that the only accurate way to value something is to put it in the hands of a talented salesman and see what he can sell it for? He wouldn't have made his numbers.



( 70 comments — Leave a comment )
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Nov. 12th, 2008 01:58 pm (UTC)
Fascinating post. I'm proud to have contributed to it. I was reminded of that great scene in Stand on Zanzibar where Chad Mulligan gets the computer Shalmaneser to accept the data it refuses to believe.
Nov. 12th, 2008 02:05 pm (UTC)
just......fuck. wow.
you are always interesting, brad, but this is something more. i'm not a math person and number-crunching always makes me vaguely anxious. but not only do i get this, but while reading it i realized i always have. this is why i've been so incoherently angry, back in the dot.com days and really really angry through the last decade of the housing bubble. i haven't been able to articulate it, but i've always felt viscerally that some huge flaw, like vortigern's dragons, lurked at the foundation of these cheery money-making miracles.
doesn't help, but it's nice to know that my gut is right even if my brain has trouble with the specifics.
but criminy, how furious it makes me that so many have been so badly bilked, and no one will ever, ever have to take responsibility for bilking them.
Nov. 12th, 2008 03:11 pm (UTC)
And one of the reasons I can never cure myself of "Little Professor Syndrome" is that when I have a forum where I can rant at as much length as I want, I get ego-boo like that. Thank you.

Yeah, it's extraordinarily hard to put a BSD in jail. Because when you put him on the stand, he can say with a level of sincerity that is impossible to fake that he really did think that the investment he sold was worth that much, and the jury can tell that he's not lying.
(no subject) - foomf - Nov. 13th, 2008 02:21 am (UTC) - Expand
(no subject) - en_ki - Nov. 13th, 2008 12:44 pm (UTC) - Expand
(no subject) - domesticmouse - Nov. 13th, 2008 08:33 am (UTC) - Expand
(no subject) - aquaeri - Nov. 14th, 2008 09:13 pm (UTC) - Expand
Nov. 12th, 2008 02:16 pm (UTC)
Oddly apropos: have you ever read the roleplaying game In Nomine? One entire class of demons in that game, the Balseraphs, have only one supernatural power all their own: the power to convince themselves of a falsehood so thoroughly that they can project that belief onto others. And they're pretty much the ultimate big shots in Hell.

Also re: my earlier comments that a lot of the problem with the subjective interview-based hiring model comes from evaluating every potential employee for sales ability (i.e., charisma) instead of ability at the actual job they're being hired for.
Nov. 12th, 2008 02:50 pm (UTC)
Reminds me of what another friend of mine says about the post office. They don't have subjective interviews there - they hire people on the basis of a test. They give the test relatively infrequently, and then when jobs open up they go to the higest scoring person currently available. The effect of this, is to get employees who do really well on such tests, but who *aren't* charismatic, because it takes so darn long to get the job, that anyone who can get a job elsewhere will have already done so by the time the postal service calls them. They cherry pick the most brilliant people from the pool of people who have such poor social skills that they can't get through those subjective interviews. So they hire a disproportionate number of people with mental illness, and terms like "going postal" enter the vernacular.
(no subject) - hick0ry - Nov. 12th, 2008 04:02 pm (UTC) - Expand
(no subject) - elizilla - Nov. 12th, 2008 04:42 pm (UTC) - Expand
(no subject) - mrteufel - Nov. 12th, 2008 11:50 pm (UTC) - Expand
(no subject) - supergee - Nov. 12th, 2008 04:21 pm (UTC) - Expand
(no subject) - (Anonymous) - Nov. 12th, 2008 05:17 pm (UTC) - Expand
(no subject) - bradhicks - Nov. 12th, 2008 07:25 pm (UTC) - Expand
(no subject) - kimchalister - Nov. 13th, 2008 05:47 am (UTC) - Expand
Nov. 12th, 2008 02:57 pm (UTC)
beautiful post
Liar's Poker remains one of my favorite books; I was fortunate enough to read it back in '04 or '05, before the shit really got bad.

Moneyball is similarly good.
Nov. 12th, 2008 03:22 pm (UTC)
Re: beautiful post
I was going to recommend Moneyball. It' superficially about baseball, but the essence is that you need to know what your statistics mean. There actually is a real world out there.
Re: beautiful post - supergee - Nov. 12th, 2008 04:24 pm (UTC) - Expand
Re: beautiful post - nancylebov - Nov. 12th, 2008 06:01 pm (UTC) - Expand
Re: beautiful post - supergee - Nov. 13th, 2008 10:54 am (UTC) - Expand
Nov. 12th, 2008 03:07 pm (UTC)
Ah ha! That answers the question I've had in the back of my mind through the last two bubbles - why in the heck people START investing in losing propositions like no-business-plan dot-coms or way-more-than-I-can-afford houses. I understood that once it gets to a critical mass, when "everybody's doing it", then many people feel they have to do it too - but what prompts the first people?

Your explanation of the quants and the BSD brings it all into focus for me. I'm a computer scientist, so I'm the type who sees the same general picture as the quants do. Same reason I'm currently urging my parents and in-laws NOT to pull all their retirement money out of the stock market.
Nov. 12th, 2008 03:17 pm (UTC)
*sigh* Yeah. What reputable investment advisers have been required by law to tell people since I don't know when is that if they needed that money in the next five years, it shouldn't have been in the stock market at all, and if they disregarded that advice, they're screwed now and nothing they do can help. And if they can wait five years before taking it out, there isn't anywhere else that they can put it that offers them a better chance, statistically, of getting their money back. If they take the money out now to put it somewhere "safe" (and therefore paying little or no interest relative to inflation), they "lock in" their losses; if they leave it where it is, some of it may come back if companies return to profitability.
(no subject) - nancylebov - Nov. 12th, 2008 03:27 pm (UTC) - Expand
(no subject) - bradhicks - Nov. 12th, 2008 07:07 pm (UTC) - Expand
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(no subject) - mecurtin - Nov. 12th, 2008 08:59 pm (UTC) - Expand
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My investment adviser lost it in this meltdown... - (Anonymous) - Nov. 12th, 2008 05:19 pm (UTC) - Expand
(no subject) - dd_b - Nov. 12th, 2008 07:58 pm (UTC) - Expand
(no subject) - mari_who - Nov. 13th, 2008 11:37 am (UTC) - Expand
Nov. 12th, 2008 03:08 pm (UTC)
What you described was a big part of the reason why we've had three Roaring Twenties in a row. The irony is that it required an obsession with numbers by people who understand people all too well, but who don't understand numbers at all.

BTW, let me introduce you to the character in the icon. His name is Greed.
Nov. 12th, 2008 05:20 pm (UTC)
What you described was a big part of the reason why we've had three Roaring Twenties in a row.
To be followed by three Great Depressions in a row?
Nov. 12th, 2008 03:49 pm (UTC)
Makes a lot of depressing sense.

Anyhow, another well put together article of yours I'll save and send to a few other people when they need a concise explanation of 'what went wrong'.

Reminds me a bit of "Self Made Man" as well, when (s)he worked in sales with the swallows. Also your previous commentary about the Man of Concrete, and how much art is worth.

I did not like my art instructor's answer "It's worth what you can get for it." It seemed wrong somehow, that there must be an intrinsic value to the time and material at least.

And the BSDs explain why "we're fucked" so often.
Nov. 12th, 2008 04:09 pm (UTC)
I dunno, that's the exact case that I'm sure Heinlein got right -- an unskilled cook can turn good apples, flower, shortening, and so forth, valuable in themselves, into an inedible mess. And they spend time doing it, too.

Also, I'm pretty sure the value of art is much less intrinsic and much more consensus than most things, and it was an art teacher that was giving you that answer.
Nov. 12th, 2008 03:53 pm (UTC)
Yet another brilliant essay! I love it when you explain things like this.
Nov. 12th, 2008 04:12 pm (UTC)
My degree is actually in math, but I've been programming professionally since I was 15, well before I went to college. So, yeah, limits and boundaries; very important things. Both solid ones (software will divide by zero) and the much harder to convince people of case you talked about with statistical models -- limits of validity that have nothing to do with hard limits in the software or the equations.

Currently working at a hedge fund, too. We have generally good opinions of quantitative modelers here; we don't have salesmen hardly at all, though, which probably helps.
Nov. 12th, 2008 07:30 pm (UTC)
I should have explicitly given the caveat that it's also possible that Michael Lewis' perceptions of the social pecking order on Wall Street were obsolete, since he left the industry altogether in 1987. It's clear from this new article that he doesn't think so, but then, how would he know? After all, in 1987 quantitative analysis was still an infant science, both the models and the computers to analyze them have improved substantially in 20 years.

But I'm still inclined to side with his analysis of the industry, because the psychology of sales that he describes is one that we've all seen if we've ever been around highly successful salesmen, as several other people have already commented.
(no subject) - dd_b - Nov. 12th, 2008 07:49 pm (UTC) - Expand
(no subject) - dnwq - Nov. 12th, 2008 08:44 pm (UTC) - Expand
(no subject) - nancylebov - Nov. 13th, 2008 06:30 pm (UTC) - Expand
(no subject) - daveon - Nov. 13th, 2008 01:39 am (UTC) - Expand
(no subject) - mari_who - Nov. 15th, 2008 12:25 pm (UTC) - Expand
Nov. 12th, 2008 05:14 pm (UTC)
And that means that as long as there are con men, there will be marks.
"I go chop you dollah,
I make you money DISAPPEAR...
Four-one-nine just a game;
You be de Mugu,
I be de Mastah!"
-- Some Nigerian Music Video
Nov. 12th, 2008 05:22 pm (UTC)
Actually, the key principles behind these economic crashes are even simpler than that:

1. What goes up, must come down.

2. Natural processes are cyclical, not linear.

3. Therefore, an economy based upon ever-increasing profits and consumption rates violates the basic laws of physics.

It continues to amaze and appall me that something so simple continues to elude so many folks who are allegedly so smart.
Nov. 13th, 2008 06:38 am (UTC)
Cyclical? I'm picturing it more like an upsidedown pyramid. No, you're right, a pyramid is much too static.... But the whole thing Brad described is a lot like a pyramid scheme in that it works for the first few people who try it, but the farther on you get the less it works until it is a complete disaster.
I've been thinking about the dynamic of our economy being like this: it starts out conservative,balanced. then someone goes out on a limb a little bit. Nothing bad happens, so they go a bit farther out on a limb. Nothing bad happens, and the view is great, so they go a little farther out on the limb. Etc. That goes on until the limb breaks and everyone is really surprised and says no one could have foreseen the limb breaking....
(no subject) - koogrr - Nov. 13th, 2008 04:29 pm (UTC) - Expand
Nov. 12th, 2008 05:29 pm (UTC)
As I noted in Goblin Markets: The Glitter Trade:

Throughout most of the human world, we define our selves in terms of money and possessions. To prosper, we share bits of those “selves” with one another through commerce. That commerce determines our value as people in our world. You know how rotten you feel when there’s no money in your bank account? That account, abstract as it is, defines your value in human society. A prosperous man feels “worthy” because society agrees that he is; a homeless one becomes “worthless” because he owns nothing that society considers valuable. It’s an illusion, really, but a compelling one. Sure, societies prize values like hard work and honesty, but try paying your phone bill with honesty alone. Without money’s social stamp of approval, you’re “worth-less.”

Faeries may be masters of illusion, but history’s greatest illusion comes from mortals: money. Money takes an abstract reflection of work or goods and turns it into a portable expression of value. The more money you supposedly have, the more valuable you supposedly become. What a great illusion! It has the whole world fooled.

On its own, money means nothing. A burning stack of hundred-dollar bills generates as much heat as a burning stack of toilet paper. Even in human society, money means as much or as little as the people nearby say it’s worth. Just take a dollar bill to China, Germany, and the heart of the Amazonian rainforest and see for yourself. Money’s value is a social illusion. There’s no lasting substance behind it.

Nov. 12th, 2008 07:23 pm (UTC)
As the late Robert Anton Wilson documented, something truly strange happens to your head when you realize that banks are allowed to loan out more money than they have in assets, that if you are a bank that has one million in customer deposits, that means you have fifteen million dollars to lend. Where did the other fourteen million dollars come from? A wizard did it.
(no subject) - dnwq - Nov. 12th, 2008 08:23 pm (UTC) - Expand
Nov. 12th, 2008 05:37 pm (UTC)
Value, much like quality, means nothing until it is defined. Because of this, the value changes depending on who is assigning it. To the salesmen, the only value of importance is what the sale nets him. To the consumer, the only value is what he perceives he can sell the item for later.

The value of art is much more difficult due to the emotions that art is supposed to evoke.

I do have an issue with your 3x rule. It does not take into account the down payment. If you have never had a home equity loan, and consistantly paid the mortgage, and moved every seven years. There is a pretty good chance that you are going to wind up in a better house each time and that your house may wind up having more than your 3x salary value.

Nov. 12th, 2008 05:37 pm (UTC)
Although I never finished the degree, I studied CompSci in grad school, and yes, certain of the professors practically beat the students over the heads about the importance of boundary conditions. I don't know if those classes had anything to do with my unease over the dot com and housing bubbles, but I didn't want anything to do with them, and I was really suspicious of the whole concept of "flipping."
Nov. 12th, 2008 06:21 pm (UTC)
Good analysis of part of the process. The cover given to this process by politicians and bureaucrats is another major factor. When corporations know that FedGov is going to bail them out, they have no reason to refrain from irresponsible behavior.
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