Re: "Counting securitized and sliced up holdings as far safer than direct holdings, drove the over-securitization in the market."
DIVERSIFICATION of Risk is the key principle underlying Modern Portfolio Theory (an insight of sufficient magnitude that the Nobel Prize in Economics was granted for it...), and the basic principle remains COMPLETELY VALID.
Nor would I say that "over-securitization of the markets" (whatever that actually is...) has ever happened.
Don't believe it has.
What HAS HAPPENED is that the mathematical models, the computer algorithms for calculating the amount that "risk" is REDUCED by diversification were FLAWED.
Faulty.
Inaccurate.
99% of the time they worked with great accuracy but these models had one CRITICAL FLAW: they SERIOUSLY *underestimated* the probability of "long-tailed events" (events way out on the tails of probability distribution curves) happening.
Of "Black Swans" landing.
These economic risk models ASSUMED 'normal' Bell Curve distributions in the data but, (as often enough happens when dealing with the real world, not just some academic model simulating the real world) normal bell curve distributions were just WRONG.
Data from the real world more often charts out to resemble squatter, shorter, more compressed bell curves... with fatter "tails" out to either side of the central mean representing a greater natural incidence for events that stray further from the mean.
In short... in the REAL WORLD what was thought to be "low odds events" actually happen a whole heck of a lot MORE OFTEN then these financial models (that Wall Street grew to love so much!) predicted!
THAT is what blew-up the world's financial systems: GEEKS on Wall Street and in London with a bad grasp on reality in their financial risk models.... (and *not* that the 'government pioneered mortgage securitization' by early on --- we are talking 'seventies --- providing standardization for Ginnie Maes, etc., which then developed into private markets....)
That... and the fact that (acting like some great herd of lemmings) they, utilizing truly MASSIVE AMOUNTS of financial leverage, massive amounts of borrowed money, far more then Glass Steagel had ever previously allowed, placed TENS OF TRILLIONS or dollars (& Euro, and Yen, etc.) at risk by betting according to what their financial models predicted.
And, their truly massive size and interconnectedness brought the world to the brink when their homogeneous bets all went south at the same time.... |
