cause for the financial crisis

[Free Trade is managed by the invisible hand.]

Just for the record if anyone is concerned about the Fed I would say that their record is more impressive from the 1960s onwards. Obviously the Fed has made a few mistakes,but economics was still in its infancy when the institution was created, and major modern advances in the field did not occur until the 1950s. Now obviously monetary policy has its limitations, for example policy lag for somethings are estimated to be around 6-12 months. On the other hand "open market operations" can effect things overnight, and this is important because effecting the market in an immediate manner can be the difference between a typical recession, and a Great Depression. Obviously the Federal Reserve is far from perfect but it has been rather successful in saving us from stagflation in the 70's, freed us from major inflation in the late 70's, early 80's, and helped to minimized the stock market crash of 87.

Some people have become rather critical of the Feds low interest rate policy and have suggested that the fed played a direct role in creating this crisis. Obviously "sub prime interest" was a bad idea, but changes in the short term interest rate may have had less of an effect than people may think. This is because many other nations had low interest rates as well,but have suffered less severally from the current financial crisis, or not at all(well obviously capital flows have been disrupted for everyone,but that really isn't a result of interest rate policy). It will be hard to come up with an exact number that can explain how much of a role the Fed played,but vector auto regression models suggest that interest rate policy did not have that great of impact on ARM's. Thus the Fed had some role in this current financial crisis, but econometric models suggest that the Fed had a relative minor role when compared to those who overemphasize the role of the Fed in causing this financial crisis.

During the 2000's interest rate policy was very low,but many lenders also gave out loans despite the fact that many mortgages were overvalued. This wasn't exactly their fault because credit rating agencies such as moody would often overestimate the credit worthiness of borrowers, but this wasn't anything the reserve could do about either. Thus the reoccurring theme of lenders overestimating the worth of an asset is what caused the bubble to pop, but this shouldn't be treated like common sense because very few people are aware of what enables a smart investor to trip up.

people like to claim that deregulation and a low interest rate policy is the main reason as why asset price inflation increased so dramatically. The model of vector auto regression and comparisons to other central bank policies whom had low interest rate policies show the Federal Reserve had less than a "Primary role". This is because if interest rate were high it does not mean that credit rating agencies wouldn't have overvalued loans. Thus the the impact of overvalued loans also lead to an increase in the money supply, and can be directly linked to things such as ARM's, and asset price inflation.

Financial bubbles are normally caused because of two things.
1) change in the money supply(low interest rate policy, credit agencies overvalued the capabilities of borrowers ).

2) Changes in technology(CDS, stated income loans, Financial practices.

you can add to the list if you wish!

[Bo]

The main causes are the repeal of the Glass-Steagall Act and the fact hat the Fed lowered interest rates too much and kept them too low for too long during the early 2000s.

[Free Trade is managed by the invisible hand.]

The main causes are the repeal of the Glass-Steagall Act and the fact hat the Fed lowered interest rates too much and kept them too low for too long during the early 2000s.

yah but stupid credit ratings also lead to increase in money supply!!!!!

[phk]

Where u, v in [0,1]  and Φ denotes the standard normal cumulative distribution function.

[opebo]

The cause was political.

[Free Trade is managed by the invisible hand.]

Where u, v in [0,1]  and Φ denotes the standard normal cumulative distribution function.

what does the impact of your statement imply?

[Free Trade is managed by the invisible hand.]

The cause was political.

Not really, because these conditions have occurred in many other bubbles as well. Thus the reason as to why this financial crisis may have been bigger than others may have had more to do with structural reasons.

[phk]

Where u, v in [0,1]  and Φ denotes the standard normal cumulative distribution function.

what does the impact of your statement imply?

The basic idea behind the Caussian Copula is one should consider two random variables X and Y, with continuous cumulative distribution functions FX and FY.  NormalPDF(x) = NormalCDF(x'). That means it is highest when the argument is zero and gets small (put positive) away from zero.

The probability integral transform  can be applied separately to the two random variables to define X’  = FX(X) and Y’ = FY(Y).

It follows that X’ and Y’ both have uniform distributions but are, in general, dependent if X and Y were already dependent (of course, if X and Y were independent, X’  and Y’ remain independent).

Since the transforms are invertible, specifying the dependence between X and Y is, in a way, the same as specifying dependence between X’ and Y’. With X’  and Y’ being uniform random variables, the problem reduces to specifying a bivariate distribution between two uniforms, that is a copula.

So the idea is to simplify the problem by removing consideration of many different marginal distributions by transforming the marginal variates to uniforms, and then specifying dependence as a multivariate distribution on the uniforms.

With the idea out there, the Gaussian Copula is not so bad on its own. But its shortcomings should have been addressed much quicker with respect to pricing of toxic CDO's.

Here is an image for you. Since I love graphs so much.

[Free Trade is managed by the invisible hand.]

Where u, v in [0,1]  and Φ denotes the standard normal cumulative distribution function.

what does the impact of your statement imply?

The basic idea behind the Caussian Copula is one should consider two random variables X and Y, with continuous cumulative distribution functions FX and FY.  NormalPDF(x) = NormalCDF(x'). That means it is highest when the argument is zero and gets small (put positive) away from zero.

The probability integral transform  can be applied separately to the two random variables to define X’  = FX(X) and Y’ = FY(Y).

It follows that X’ and Y’ both have uniform distributions but are, in general, dependent if X and Y were already dependent (of course, if X and Y were independent, X’  and Y’ remain independent).

Since the transforms are invertible, specifying the dependence between X and Y is, in a way, the same as specifying dependence between X’ and Y’. With X’  and Y’ being uniform random variables, the problem reduces to specifying a bivariate distribution between two uniforms, that is a copula.

So the idea is to simplify the problem by removing consideration of many different marginal distributions by transforming the marginal variates to uniforms, and then specifying dependence as a multivariate distribution on the uniforms.

With the idea out there, the Gaussian Copula is not so bad on its own. But its shortcomings should have been addressed much quicker with respect to pricing of toxic CDO's.

Here is an image for you. Since I love graphs so much.

ok,but this just shows that regulators took a backseat to companies who used their own finance equations.

[opebo]

The cause was political.

Not really, because these conditions have occurred in many other bubbles as well. Thus the reason as to why this financial crisis may have been bigger than others may have had more to do with structural reasons.

No, bubbles are political creations - they are created by the State.

[Free Trade is managed by the invisible hand.]

The cause was political.

Not really, because these conditions have occurred in many other bubbles as well. Thus the reason as to why this financial crisis may have been bigger than others may have had more to do with structural reasons.

No, bubbles are political creations - they are created by the State.

.....r u trolling?
The Comic book,Tulip,south sea, and a host load of other bubbles were not created by the state.Bubbles are created because of changes in the money supply and technology(in this case accounting equations).

[phk]

The cause was political.

Not really, because these conditions have occurred in many other bubbles as well. Thus the reason as to why this financial crisis may have been bigger than others may have had more to do with structural reasons.

No, bubbles are political creations - they are created by the State.

.....r u trolling?
The Comic book,Tulip,south sea, and a host load of other bubbles were not created by the state.Bubbles are created because of changes in the money supply and technology(in this case accounting equations).

More like misuse of financial equations.

Much of the math is still good math and a do a good job of modeling, though they do not work in individual circumstances.

I imagine the guy who invented the Gaussian Copula would have won the Nobel Prize just like Black-Scholes if things hadn't soured so much since 2008.

[Free Trade is managed by the invisible hand.]

The cause was political.

Not really, because these conditions have occurred in many other bubbles as well. Thus the reason as to why this financial crisis may have been bigger than others may have had more to do with structural reasons.

No, bubbles are political creations - they are created by the State.

.....r u trolling?
The Comic book,Tulip,south sea, and a host load of other bubbles were not created by the state.Bubbles are created because of changes in the money supply and technology(in this case accounting equations).

More like misuse of financial equations.

Much of the math is still good math and a do a good job of modeling, though they do not work in individual circumstances.

I imagine the guy who invented the Gaussian Copula would have won the Nobel Prize just like Black-Scholes if things hadn't soured so much since 2008.

what do you mean "individual cases"? give me an example of when such things would work.

[memphis]

Greed

[opebo]

The cause was political.

Not really, because these conditions have occurred in many other bubbles as well. Thus the reason as to why this financial crisis may have been bigger than others may have had more to do with structural reasons.

No, bubbles are political creations - they are created by the State.

.....r u trolling?
The Comic book,Tulip,south sea, and a host load of other bubbles were not created by the state.Bubbles are created because of changes in the money supply and technology(in this case accounting equations).

Accounting equations caused a bubble?  My good Hoffman, I'm not trolling - the State controls the entire pretense of a 'game' or 'market' that you fellows strive to examine so closely and sometimes seem to believe to be a natural phenomenon.

Bubbles are an integral part of highly unequal hierarchies with a great deal of State-provided powers in the hands of a small owning class.  In a social democracy with effective redistribution - an 'assurational society' - there would be, basically, no bubbles.

[phk]

The cause was political.

Not really, because these conditions have occurred in many other bubbles as well. Thus the reason as to why this financial crisis may have been bigger than others may have had more to do with structural reasons.

No, bubbles are political creations - they are created by the State.

.....r u trolling?
The Comic book,Tulip,south sea, and a host load of other bubbles were not created by the state.Bubbles are created because of changes in the money supply and technology(in this case accounting equations).

Accounting equations caused a bubble?  My good Hoffman, I'm not trolling - the State controls the entire pretense of a 'game' or 'market' that you fellows strive to examine so closely and sometimes seem to believe to be a natural phenomenon.

Bubbles are an integral part of highly unequal hierarchies with a great deal of State-provided powers in the hands of a small owning class.  In a social democracy with effective redistribution - an 'assurational society' - there would be, basically, no bubbles.

There's a lot of psychology behind it too.

[opebo]

There's a lot of psychology behind it too.

Absolutely, but that, too, is created by politics.

For example, people are enormously more rational and stable when they are part of an assurational society in contrast to a penal one like the United States.  I see it every day - when you meet an american they're about 10 times more likely to be insane than any Continental you meet.

[○∙◄☻¥tπ[╪AV┼cVê└]

Where u, v in [0,1]  and Φ denotes the standard normal cumulative distribution function.

what does the impact of your statement imply?

I think he's saying that people made incorrect assumptions about the correlations of bad things happening.

[opebo]

Where u, v in [0,1]  and Φ denotes the standard normal cumulative distribution function.

what does the impact of your statement imply?

I think he's saying that people made incorrect assumptions about the correlations of bad things happening.

No, he's showing off.

[Free Trade is managed by the invisible hand.]

There's a lot of psychology behind it too.

Absolutely, but that, too, is created by politics.

For example, people are enormously more rational and stable when they are part of an assurational society in contrast to a penal one like the United States.  I see it every day - when you meet an american they're about 10 times more likely to be insane than any Continental you meet.

//I see it every day - when you meet an american they're about 10 times more likely to be insane than any Continental you meet.//
lol

[Free Trade is managed by the invisible hand.]

The cause was political.

Not really, because these conditions have occurred in many other bubbles as well. Thus the reason as to why this financial crisis may have been bigger than others may have had more to do with structural reasons.

No, bubbles are political creations - they are created by the State.

.....r u trolling?
The Comic book,Tulip,south sea, and a host load of other bubbles were not created by the state.Bubbles are created because of changes in the money supply and technology(in this case accounting equations).

Accounting equations caused a bubble?  My good Hoffman, I'm not trolling - the State controls the entire pretense of a 'game' or 'market' that you fellows strive to examine so closely and sometimes seem to believe to be a natural phenomenon.

Bubbles are an integral part of highly unequal hierarchies with a great deal of State-provided powers in the hands of a small owning class.  In a social democracy with effective redistribution - an 'assurational society' - there would be, basically, no bubbles.

Accounting equations that were used in a poor manner would often overestimate the value of stocks and bonds. For example the multivariant copula would allow individuals to find out how risky was one set of bonds compared to another set of bonds, while also explaining what would happen if those bonds defaulted. Value at Risk(VaR) was another model that was used for risk management, but despite all of its upsides it had one major downside, and that was it could not account for a financial crisis. Thus companies would continue to buy up debt thinking that they would continue to receive a good return, but as it turns out sometimes these models would overvalue their worth. The models themselves may seem pretty accurate,but interpretation of their accuracy was also important as well. For example Goldman sach's was able to use Var's more effectively than some other companies.

The other problem that I highlighted in this thread were credit rating agencies such as moody's whom would continually overvalue the worth of a bond.

[Free Trade is managed by the invisible hand.]

Note that there is a difference in the cause of the financial bubble and the cause of the "popping" of the bubble (and thus the subsequent crisis).  Derivative and subprime lunacy could have continued on indefinitely had not rising oil prices (and other costs of living) caused the house of cards to collapse.

how to rising oil prices accomplish this?

[Ghyl Tarvoke]

Reality.

[opebo]

Reality.

If you believe that you're a dupe.  These things are created by political choices.  The idea that it is natural for most people to be poor and miserable is the lynch-pin of the deception of ruling class.

[dialectical fetishist]

Low interest rates.