For an IQ group in the top 1%, one would think that - under pressure of incisive arguments - they'd be able to respond with aplomb and parry all thrusts. Not just punk out. Okay, it isn't the entire group, but an enclave of dedicated Libertarians whose views seem to get a constant airing in their local (regional Intertel) newsletter, Port-of-Call - run by the current Intertel President Kort Patterson.
In a recent reply sent in timely fashion to my published article ('The Real Cause of the Financial Crisis’ ), Patterson again made follow-up editorial remarks on the piece that don't hold up under scrutiny. Those who wish to read the article, plus Patterson's response, can access it at the link:
http://www.hevanet.com/kort/2009/stahl5.html
Since Patterson did not publish my subsequent takedown of his editorializing nonsense, I do so herewith:
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Response to Editor’s Note (‘Port-of-Call’ June-July, 2009)
This is in response to Kort Patterson’s recent editor’s note appended to my Port-of Call article ‘The Real Cause of the Financial Crisis’. Unfortunately, all Kort’s comment has achieved is adding more layers of irrelevant dross to what should be relatively simple (for the top 1% of intellects) to grasp. Especially, as I have laid out the basis for credit default swaps in meticulous detail in previous submissions and shown how there is a difference between a mild financial crisis incepted by a plethora of sub-prime mortgages circulating, and a systemic collapse arising from a device (credit derivative) that patches those sub-prime mortgages together with other benign financial instruments.
In his add-on, Kort insists I am “dismissing the simplistic real cause” which he also claims is “well-documented”(it isn’t, except by assorted fringe interests). I call him on this and assert he has no remote clue of what the REAL cause of the SYSTEMIC meltdown is, only an informal grasp (probably based on multiple googlings) of a peripheral or marginal cause: the enabling of too many high risk buyers of sub-prime mortgages.
But as I pointed out in earlier submissions, articles, even forty million such buyers would not pose a core systemic risk to the whole financial infrastructure. That had to arise from a proximate, immediate source which effectively “spider-webbed” the high risk sub-primes to millions of innocuous financial instruments, including municipal bonds, pension investments via “structured investment vehicles” or SIVs.
I regret this stuff may be a tad complex especially to novices, but merely because it is (again I am referring to the immediate cause of the systemic credit meltdown and bank credit seizures) doesn’t mean anyone is employing a “camouflage of complexity” as Kort paints it!
I submit we’re not going to get far in this exchange unless we put away the codswallop and agree that there are two aspects to what happened: 1) the enabling of too many high risk buyers with the ancillary availability of too many sub-prime mortgages and little assurance of paying off and 2) the invention of extreme risk credit derivatives (credit default swaps) which patched together widely disparate financial instruments, bonds etc. from around the world in a “daisy chain” of debt totaling more than $55 trillion (as pointed out by the FORTUNE article of Oct. 2008, already referenced but which I seriously doubt Kort has read)
Let me then agree that if (1) had not occurred, (2) would likely have been irrelevant. (It matters not HOW it occurred, but the “Community Reinvestment Act” was not a major component, only accounting for perhaps 25% of subprimes). In effect, (1) comprises what we refer to as a necessary condition for the meltdown. A necessary condition is one which – if it isn’t present- an event cannot transpire.
However, it is NOT the sufficient condition for the meltdown. Given the meltdown is defined by professionals in finance (see e.g. any of the extensive articles appearing in The Financial Times during December, 2008) as the SYSTEMIC collapse predicated on credit seizures and bank failures arising from over-leveraged debt from CDS, (1) is not factored in (we already accounted for the necessary condition). A sufficient condition, again, is:
One which – once it is present - the event must transpire. In this case the global financial meltdown based on tranching trillions of disparate assets to high risk liabilities – the sub-primes sold in the U.S.
Thus, while David X. Li’s (Gaussian copula) formula wasn’t the reason for concealing bad securities among good ones(and I remind readers I never claimed it was!) it DID provide the effective operational basis for the concatenation and intertwining of relatively innocuous securities (with high bond ratings) to toxic waste in the form of the sub-prime mortgage securities- via credit derivatives. (Again, for those who don’t know, derivatives were invented by physicists who had migrated to finance and based their creation on the concept of the mathematical derivative, e.g. dy/dx, such that a fractional incremental variation in one variable (dy) generates a corresponding change in another (dx).)
Thus, while Li’s formula wasn’t the reason for concealing bad securities in good ones, it did provide the facile enabling mechanism and basis to accomplish it with little oversight – because the obscure mathematics was generally not well understood by the investment banks (like Lehman’s) that offered the spuriously blended instruments. In other words, Li’s formula provided the effective underpinning to satisfy the sufficient condition (2).
Again, I reiterate, the most pernicious part of the financial crisis was the impending SYSTEMIC meltdown arising from seizure and freezing of all credit markets due to the liabilities in the form of $55 trillion in CDS generated on assorted banks’ books – engendered via the Gaussian copula formula of Li – admittedly misapplied by the investment bankers!
Kort’s aspersions cast on the Fed, based on the ruminations of a known crank – Thomas DiLorenzo (see e.g. the Southern Poverty Law Center’s Intelligence Report article:
http://www.splcenter.org/intel/intelreport/article.jsp?pid=844
doesn’t put his comment on any intellectual footing, but rather in line with the endless conspiracy babble of legions of anti-Fed conspiracy theorists.
As I recall, one of the most famous of those tinfoil hat “crimes” involved the supposed Fed role in JFK’s assassination because the Fed opposed his (June, 1963) creation of separate “U.S. Notes” ($4.2 billion of them) by the U.S. Treasury (outside the Fed’s control). Kort’s harangues play right into this Fed mythos. That most of them are quoted or cited from work by DiLorenzo (who had a sketchy rep even when I lived in Maryland) doesn’t add anything of value. According to the SPLC IR, we know this about DiLorenzo:
“DiLorenzo is a senior faculty member of the Ludwig von Mises Institute, a hard-right libertarian foundation in Alabama, and teaches at the League of the South Institute for the Study of Southern Culture and History, a South Carolina school established by the League of the South to teach its unusual views of history”
Though Kort imputes ignorance (or lies) to me, he continues to expose his own gross ignorance by repeating canards to do with the claim that inadequate regulation was not the problem and laissez faire wasn’t responsible for the financial meltdown”. His “list’ of Fed controls on page 6 is also laughable and merits a thorough catechresis which I’d deliver, if I had the time. For now I will refer him to three books[1] which put the kibosh on most of his claims, as well as howlers – such as failure to distinguish the Bank Holding Act of 1956 from the Bank Holding Act of 1984 passed during Reagan’s tenure, which paved the way for creation of the toxic waste known as “collateralized mortgage obligations” – the forerunner of CDS.
Then there was the repeal of the Glass-Steagall (1935) law which had previously kept investment banks’ practices apart and separate from commercial banks’ practices. Once that repeal was passed, in 1999, the way to deregulatory hell was paved – and only awaited an infernal mechanism like Li’s Gaussian Copula formula for its effective creation.
Let’s get it straight here the FED had nothing to do with it! The Fed did not approve or mandate the repeal of Glass-Steagall, it was done as a political mandate to deliberately loosen up securities markets for investment banks.
In his excellent article (which I suggest Kort read, outside of just googling terms) Sam Natapoff in The Financial Times (7/17/08) notes that the Fed’s creation was predicated on a political independence. Despite this, to this day well-meaning but uninformed people continue to think or believe the Fed is part of the Federal government when it is nothing of the sort.
The Fed, as Natapoff observes, is really there to provide a buffer between the forces of private capital and democracy. As he writes:
“In 1913 the Fed was created as a compromise between the needs of private finance and the demands of democratic government”.
Ironically, as Nataproff points out, it has been Republicans – “private finances’ traditional champions” who have sought to disturb the balance and give democracy short shrift.
No surprise then that the chief Fed culprit in the mix was none other than Allan Greenspan, appointed by Reagan. Greenspan is a high culprit in terms of having plumped for the ARM or adjustable rate mortgages for people he had to know couldn’t afford them. In one speech he gave in 2004 he aggressively promoted them.
But then it was also Greenspan, the erstwhile disciple of Libertarian guru Ayn Rand, who insisted that “good speculation will cut the top off the market peak” (Financial Times, August 11, 2008). Later, Greenspan came clean and apologized for his own role in the financial meltdown fiasco – since he created the original bubble by lowering interest rates to ridiculous, deflationary levels making money cheap as dirt.
Ironically, in all his ranting against the Fed, Kort has very little to say about Greenspan and his role, or the fact he’s always been one of the most outspoken Libertarians. Truth is sometimes inconvenient.
It is truly unfortunate that the Editor’s insistence on post-article-submission editorializing, interjections and sophistry continues to engender the real “camouflage” in inhibiting readers from grasping the actual dynamics in the financial meltdown. It seems he cannot simply stand back and allow a debate to naturally unfold – with other readers commenting or responding – rather than him reactively putting in his two cents.
Given that, it simply isn’t worth further elaboration on my part since Editor Kort will simply continue to apply his own camouflage and spin where and when he sees fit. Mostly using spurious or dubious sources, like Di Lorenzo. And, after all, this sticky wicket is his to control, since he as the Editor will always have the last word with his “Editor’s Note” – so there is no way I can prevail, even if I offered DVD seminars on credit default swaps to each Intertel member in this region, to accompany each rejoinder I might write.
So I will leave it at that. We will have to agree to differ. But I do hope that enough readers of Port-of-Call will at least be spurred to learn more about the Gaussian copula formula and the egregious ways it was put to use, to create a financially calamitous systemic risk to us all.
[1] The Origins of the Federal Reserve- by James Livingstone; Arrogant Capital, by Kevin Phillips; The End of Economic Man, by George P. Brockway.
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