So, the financial questions keep coming. I’m avoiding a lot of them, because
(A) they bore me, and (B) I’m really not the right person to ask. I try to stay
out of this stuff unless I have some clue of what I’m talking about. Rest assured, I’m not spending all of my blogging time on this; I’ve got a post on cryptographic modes of operation in progress, which I hope to have time to finish after work this evening.

But there’s one question that keeps coming in, involving the nature of things
like so-called “Credit Default Swaps”, which I thought I’d explained, but
apparently my explanation wasn’t particularly clear. So I thought I should fill
in that gap, and strengthen the main weakness in my earlier explanations.

The basic question is: “What’s a credit default swap?”; I think what people
really want to know is both what, specifically, a credit default swap is, and how
the system surrounding credit default swaps and related monstrosities work.

Credit default swaps are interesting – in the same way that a Rube Goldberg
device is interesting. They are in a fundamental sense very simple, but the
structure that’s built up around them is so bizarre, so ridiculous on the face of
it, that when you look at it in retrospect, it’s hard to believe that anyone
actually thought that it was a good idea, or that it could ever work.

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This is just a short gripe at the NYT, and a feature
that they included in today’s Op-Ed section.

It purports to compare how the economy does under democratic versus
republican administrations. They claim that they’re computing the returns
on a 10,000 dollar stock investment under 40 years of republican
administrations and 40 years of democratic administrations, in the 80 years
since 1929.

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Ok, another batch of questions have come in, all variants on
the same theme.

The question is, if mortgages are at the root of the current economic disaster, how can it possibly result in close to a trillion dollars worth of losses?

It definitely seems strange, on two different levels. On an absolute scale, it’s hard to see how mortgage losses could add up to a trillion dollars. And on a relative scale, it’s hard to see how the foreclosures could really overwhelm the lenders when even an extremely high foreclosure rate represents a fairly modest loss considered as a percentage.

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There is at least a little bit of interesting bath math
to learn from in the whole financial mess going on now. A couple
of commenters beat me to it, but I’ll go ahead and write about
it anyway.

One of the big questions that comes up again and again is: how did they get away with this? How could they find any way of
taking things that were worthless, and turn them into something that could be represented as safe?

The answer is that they cheated in the math.

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With the insanity that’s been going on in the financial world
lately, a bunch of people have asked me to post a followup to my
earlier posts on the whole mortgage disaster, to try to explain
what’s going on lately.

As I keep saying when people ask me things like this, I’m not an economist. I don’t know much about economics, and what little I do know, I tend to find terribly boring. And in this case, the discussion inevitably gets political, so I’m expecting lots of nasty email.

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