"Ezra Klein argues that people -- with their fancypants synthetic CDOs -- are making the financial crisis too complicated."

Publius on Obsidian Mirror takes a look at an Ezra Klein post:

"Ezra Klein argues that people -- with their fancypants synthetic CDOs -- are making the financial crisis too complicated. At heart, the basic problem is still the housing market:

[A]t the heart of all this was a fairly simple dynamic. The subprime market -- which is to say, the market of loans sold to high-risk individuals -- exploded. The banks invested in those loans. Other people bet on their safety. And the loans collapsed. The mistakes, in retrospect, seem quite simple, and quite stupid.

Well, yes and no. In theory, the larger meltdown shouldn't have happened strictly because the loans were more risky. In a functioning market, risky loans would simply have been priced more appropriately -- investors would have paid required more for the increased risk, and so on."

In general, I agree with Ezra Klein, as far as his point goes. The subprime aspect of this crisis is just low or fraudulent standards and poor loans. There's no reason to make this more complicated than that, except you might want to try and explain why it happened.

Publius, however, also makes a good point, which is that the horrifying uncertainty of how much money was wagered out there was a result of these more complex financial products, and that terrifying uncertainty was a major part of this crisis.

"The problem, then, was the lack of information. Banks, investors, credit agencies -- no one seemed able (or willing) to value these things appropriately. And that blindness, it seems, stemmed in very large part from the sheer complexity and Enronness of the instruments constructed on top of the housing market."

Yes, well, at some point, you could argue that, once the government got involved, they were no longer willing to value their products. The basic problem was that, at least as far as CDOs go, no one could price them, so that it wasn't possible for anyone to buy or sell them. This takes a bit more examination, but let's leave it for now.

"The housing market, admittedly, was the sandy foundation upon which everything was built. And it was an important cause in that respect. But the complex infrastructure built on top of the sand obscured the fact that it was in fact sand -- rather than magic money-spewing concrete -- below the surface. And so more infrastructure got added on top of the shaky foundation, furthering blinding everyone."

It's very true that you didn't need to actually have anything to do with the house or mortgage, say, to have a CDS, but I don't agree that this was a matter of reality being obscured by complexity. I don't agree with Publius about that.

"As for which one of these causes was the "proximate" one, who knows. But it seems like it required more than stupid housing loans. It required something that blinded people to the value/risk of those loans."

I don't accept that any blindness was involved. Sorry.

"The reason all this matters is that preventing the next crisis requires understanding what exactly went wrong this time."

Based on our learning curve after the S & L Debacle, I'd expect another rupture in the finance/government continuum in about five years. But, what the hell, let's pretend we can actually learn something and prevent futures crises. For all I know, it might well work this time.

Anyway, I don't agree with Publius in one very important matter. I'm studying these products precisely to prove that an aboveboard, decent, honest, mildly intelligent, investor or realtor or whatever, could have explained these products quite simply to anybody, at least as far as to their risk. I can understand quite a bit about the risks of driving without being an automotive engineer. I don't buy the complexity, obscurity, etc., line of explanation, which I believe has an exculpatory angle to it. So, if you want to learn what went wrong, then don't accept these protestations of befuddlement at face value.

As to Klein's point, it has the ring of indifference or annoyance to it, as if some daft professor had assigned him Swinburne and Mallarme in order to understand Ogden Nash. He doesn't know enough, it sounds like, to pronounce what the crisis all boils or reduces down to. I know he likes to cook, but this is one area where he's not a chef.

"As far as I understand the situation, at the heart of all this was a fairly simple dynamic. The subprime market -- which is to say, the market of loans sold to high-risk individuals -- exploded. The banks invested in those loans. Other people bet on their safety. And the loans collapsed. The mistakes, in retrospect, seem quite simple, and quite stupid. That's not to say that the instruments involved weren't very complicated, but the complicated nature of the instruments seems to have been a key player in obscuring the fundamentally hollow nature of the loans. It keeps coming back to the subprime loans. To the fundamentals of the housing market. In 2003, John Talbott wrote a book called The Coming Housing Crash. Talbott was a former Goldman Sachs banker, which is to say, he worked for Rubin. He was seeing something. He wrote the book "after hearing that a friend—a teacher in San Diego who earned $45,000 a year—had just refinanced his condominium and borrowed $255,000 against its rising value." These loans weren't secret.

In 2004, Dean Baker sold his house. "Houses have something similar to a stock's price-to-earnings ratio: their rental value. In a sane housing market, Baker says, a home's annual rent is roughly one-14th of the home's value...The annual rent he pays on his condo is roughly one-17th of its value -- and that's not taking into account high property taxes. Add those to the equation, plus condo association fees, and the ratio is closer to one-20th."

Baker didn't have insider knowledge. He just had a contrarian personality and an abiding faith in the fundamentals. Rubin did not. Somewhere in the gap between the two of them lies Rubin's mistake. This stuff is complicated. But this effort to suggest that no one could have been more prescient is really weird."

Again, I don't disagree with his points, as far as they go, but he seems indifferent or uninterested in fraud, negligence, fiduciary mismanagement, and collusion, as well as to the system of backups that many of the highest members of our financial establishment were assuming. This story is basic to understanding the way our system really functions, and what the beliefs and expectations are that people base their decisions on in our actual system. Believe me, they're not Cato Fellows, and they have an abiding love and faith in government largess. They wouldn't have lowered capital requirements without making assumptions of how things would go for them if this all went sideways.

So Klein is terribly wrong. The only way to uncover what actually caused this crisis is to understand all of these investment decisions well enough to judge truth and real misunderstanding from BS and CYA and IDWTGTJ. I Don't Want To Go To Jail.

I'm not saying I can, but I don't see any point in not giving it the old college try. Go Bears!