The Financial Crisis Pt. 1

Different people have different takes on the financial crisis in America. Here’s an article that describes risk management, which a federal requirement, and how analysts learned to manipulate the data to produce results they wanted—risky or not. The risk engines would have warned that the decisions being made were imprudent, and traders would have averted the crisis. I’m not sure that bypassing risk predictions was the root cause, but I’m sure it did not help our current situation.

So what do we do now? Some readers believe that the analysts should be supervised by ethics advisors or receive greater ethics training. The problem is not ethics. You cannot solve this by teaching ethics. The managers and traders knew what they were doing was worng and all the ethics in the world won’t overwhelm greed. Ethics don’t make money unless they’re legislated, and the last thing we need is government intervention. Instead, we should be teaching finance students that the blind pursuit of gains led them to much larger losses. “You gain more when you play it safer” would appeal more to analysts than “you gain more when you’re ethical.”

There’s another take on the financial crisis that I find interesting. The author points out five problems and the nation’s ridiculous solutions. The sarcasm ends with a plain, simple description of our problem:

There is only one thing necessary to understanding what is happening and it is this: no one at US banks, no one at the Federal Reserve and no one in politics can accept the reality that real estate assets in this country remain oversupplied, overpriced and overleveraged.”

The description makes sense to me, at least at face value. A lot of people got rich off of real estate, but speculation and data manipulation lead to a skewed understanding of home values.  Let me explain with some numbers:

If everyone over the age of 18 lived in a house, there would need to be 200 million homes. If everyone over the age of 18 was married, there would need to be 100 million homes. Realistically the number of people who could live in a home is somewhere in between—say 170 million. Now take out people in apartments, nursing homes, their parents’ basement, etc and account for roommates. On the other end of the spectrum from cohabitating hippies, some people will own more than one house. For example, McCain has at least four houses, although he’s a little shaky on the exact number. I’m not convinced that enough people own multiple homes to make up for the glut of housing.

I found a blog that uses similar data and a little math to determine that in 2006 there was an excess of 1.7 million homes. Since then new home starts continued trotting along at a nice pace while the number of foreclosures skyrocketed, so the excess must be much larger now. It seems that, indeed, America has a serious glut of housing!