Ronald Pires

Origins of the Economic Crisis in One Chart

Pretty reasonable for an admittedly simplified chart. I have some problems with the "Excessive Complexity" box however, as I see that as a far too convenient excuse (not on your part) to avoid addressing real problems.

First, predatory lending is not complex. It is simply loansharking dressed up with a storefront. As we have learned from (the now shunned) Eliot Spitzer, the states were quite well aware of these abuses, but were barred federally from acting. Embarassing, but hardly complex.

Second, CDOs are not complex. They are merely insurance policies written (like all others) on assets. The only difference is that they were (again federally) barred from the oversight routine to other insurance products. Because of this, several mistakes were made and went unaddressed:

1) Inadequate reserves were kept to pay for future claims. This was not due to complexity however, but rather to the fact that there was insufficient experience data available from which to properly develop this component of their rates. As we have learned from Eliot Smith (Bloomberg News), this was a known fact when these rates were developed, and conscious decisions were made at the highest levels to ignore this problem. Again, not complex. Merely embarassing.

2) Thrid party policies were not only allowed but were written with abandon. (A third party policy, an insurance no-no, occurs when the purchaser of insurance does not own the underlying insured asset. These are shunned by insurance companies because they involve anti-selection, an anathema to all serious underwriters.) There is nothing complex about this either; it was a lack of insurance knowledge coupled with simple greed.

Otherwise, a good chart which I will keep handy.