On Wall Street it’s GIGO all over again
As I watched our financial system crumble away and saw giant investment firms collapse one after the other, I was deeply puzzled, not to say concerned, at how this could happen to so many supposed financial whizzes. I could see that the regulatory agencies, the SEC, the Federal Reserve, the rating agencies, and Congress were all culpable. I could also see that CEOs of financial firms were impelled by greed to push the envelope of risky investing.
But what happened to the so-called “quants” who had developed vaunted computer models that were supposed to manage risk and take the factor of human emotions like greed out of the picture? Why didn’t the computers tell their financial masters that they were leveraging too far? Saul Hansell gives the answer in a New York Times piece, How Wall Street Lied to Its Computers.
Ever since computing began, there has been the expression, “garbage in, garbage out”, or GIGO. And GIGO was at work in the financial world. The fact seems to be that Wall Streeters didn’t want to be told that they were on a precipice so they gave the computers bad models to work with.
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I am old enough to remember the S&L crisis (as well as the Dot.Com, Enron, and real estate). It all gets down to greed (and no accountability or risk of those who profit the most).
S&L: No responsibility in how funds are invested and spent. It is all backed by the FDIC
Dot Com: The new economy; profit does not matter.
Enron, et al: Anything to raise the stock price.
Sub prime Crisis: Real Estate will ALWAYS increase in value 20% to 50% per year. Adjustable rates when the Prime rate is 0.25%. Put someone who makes $50k a year in a $1.2 M house.