For those who think that crowd-sourcing is the way to find the best solutions to problems...

[jducoeur]

... I offer up the observation that we are currently in the middle of a really *excellent* counter-example. I mean, much though everyone would like to blame the Nasty Evil Bankers, the reality is that the meltdown is happening mostly because we, as a herd, allowed ourselves to believe that the situation couldn't possibly be *that* bad. (Yes, a few very smart economists saw the credit crunch coming, but by and large that observation did *not* float to the top.)

So while crowd-sourcing may be a fine way to find good answers on matters of opinion, I think we've got a fine example here that it can truly suck on matters of fact, especially in complicated situations. And yes -- this does imply a need for some well-designed regulation over markets, at least to tame the feedback loops...

Comments

[meiczyslaw.livejournal.com]

The things that surprise me about "this mess":

1. The financial artifact that caused some (most?) of this mess (bundled loans) was so self-evidently bad that I couldn't imagine a bank ever buying such a thing.

2. That, anecdotally, its use became wide-spread because the investment firms saw people making a lot of (fake) money that way, and they needed to get in on the feeding frenzy.

The chained incompetence amazes me.

(There is an argument that #1 was fueled partially by Clinton administration policies that pressured loaners to loan to low-income minorities and illegal aliens. I haven't found evidence of the second, but have seen claims that Clinton changed the rules so that welfare checks were considered valid income -- that should be easy enough to fact-check.)

[corwyn-ap.livejournal.com]

Everyone of my personal market gurus knew it was coming. They also predicted further problems which have not yet hit.

[hudebnik.livejournal.com]

the meltdown is happening mostly because we, as a herd, allowed ourselves to believe that the situation couldn't possibly be *that* bad.

And further stages in the meltdown (e.g. the collapse of Bear-Sterns, then Lehmann, then AIG, share prices) because we, as a herd, suddenly overnight believed the situation really *was* that bad -- even worse than it really is. It seems that a lot of the "toxic" debt securities floating around were actually pretty sound (albeit made less so by falling home prices), but they've lost their book value (defined as "what you can sell them for") because nobody is buying debt securities at all.

Anyway, I basically agree with your point: crowd-sourcing may work well where the individuals in the crowd can reasonably be thought of as independent random variables, but not when they have strong positive-feedback causative links to one another as in a stock market crash, a bank run, the "irrational exuberance" of 1998, etc.

[jducoeur]

Yep. In general, this is a problem that the market fundamentalists too often overlook: people are *very* prone to herd mentality (in all directions), and that is an enormous hindrance to a well-run market, because it sets up irrational feedback loops. The regulatory element that is currently missing is mostly the loop-breakers. (Which is why I heap so much blame on Moody's and S&P -- if they'd been doing their job right, and rated the securities more sensibly, it probably would have prevented the key feedback loops from forming.)

It's worth noting that this is one reason why I'm not as pissed-off about the bailout as many people. My guess is that we're likely to eventually recoup most of that insane amount of money, once everyone stops tossing the word "toxic" around and starts treating the loans sensibly. Mostly, it's likely to be a horrible cashflow mess for a few years, *provided* things don't truly melt down in the next couple of months...