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Old 03-25-2009, 03:35 PM   #21
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Originally Posted by eridanus View Post
Unless the trader is hedging (i.e., is an oil producer or a farmer with oranges), it is indeed a zero-sum game.
Actually, it's the futures (or options) market as a whole that is the zero-sum game, not the actions of a particular trader or hedger. The value of these markets to society is that they provide a mechanism to trade risk.
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Old 03-25-2009, 06:19 PM   #22
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I have read in a number of places that the bulk of the people at currently at AIG FP are a clean-up crew that were not involved in the mess we are all so upset about. I was wondering when someone would hold a press conference to articulate their side of the story. I assume this guy is who he says he is and can back up his claims -- if not the press will be all over him. The populist bashing of these folks by the Hill, the press, Cuomo and everybody involved has been breathtaking. I haven't seen a single politician show an ounce of common sense or integrity on this one -- they are a pathetic bunch. I think I will have to switch my colors from Democratic to Libertarian.
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Old 03-25-2009, 08:11 PM   #23
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My question about the AIG employee is "Did he really 'create wealth' for anyone except himself and his employer?"
Well Adam Smith & Karl Marx agreed on one thing, finance supports wealth creation but doesn't create wealth on its own.

So I guess the answer to your question is probably "no".
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Old 03-25-2009, 08:16 PM   #24
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The black swan came along and they lost the bet (which does not mean it was a bad bet).
Funny. I had a conversation with a hedge fund client that went something like this:

Me: "Well, it really wasn't a bad bet because . . . "
Client: "Excuse me. We lost money. It was a bad bet."
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Old 03-25-2009, 08:45 PM   #25
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Funny. I had a conversation with a hedge fund client that went something like this:

Me: "Well, it really wasn't a bad bet because . . . "
Client: "Excuse me. We lost money. It was a bad bet."
You need to get some smarter clients. Or charge the dumb ones more so it is at least worth your trouble.
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Old 03-25-2009, 08:53 PM   #26
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"I started at this company in 1998 as an equity trader, became the head of equity and commodity trading and, a couple of years before A.I.G.ís meltdown last September,"

It was equity and commodity trading.

You need to do more research on commodity trading; your assumption is not correct.

Also, your assumption that "they'd be willing to do that if they earned $100k per year." does not reflect how labor compensation works in the USA.

The issue is not about his "big income".

I did spell Galt incorrectly in my post.
You are correct that I don't know a lot about commodity trading. I assume that that traders don't really have a use for the commodities, they are simply trying to predict which direction prices will move. One way to make money is to be a few minutes quicker than the other guy - you read and process the news on acres planted in soybeans in Brazil a little quicker than someone else and make the trade before they do. (I assume that usually it's putting together a number of factors that aren't that obvious.) So, what am I missing that's relevant?

I understand that, under current laws, investor preferences, and technology some people can command a lot more than $100k in these jobs. I was thinking about an alternate universe in which, possibly, there were a lot more people who could do the work. I probably distracted from my real point with this comment.

I think that other people draw a conclusion from the "big income" that I'm questioning. IIRC, the point of the novel was that "society" benefits tremendously from having these incredibly talented people among us. If we don't treat them respectfully enough, they may leave us and then we'd be in deep ____. I think that in some cases very high income people have "created wealth" for more than themselves and their employers, but I don't think it's clear that all highly paid people do, or that the highly paid people at AIG Financial did.
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Old 03-25-2009, 09:06 PM   #27
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Well, in the options-trading arm of AIG, it sounds like they did okay (if the guy's letter is to be believed).

If you mean AIG overall, it looks like it has worked out great. If the "game" had continued, they'd all be fabulously wealthy. The black swan came along and they lost the bet (which does not mean it was a bad bet). Yet still the government is riding in to cushion their fall. Crazy like a fox, they is.

The suckers are you and me and whoever pays taxes.
I agree with your last sentence. I'm thinking that the trader made a lot of money, and AIG made money on his work, but I'm not sure that anybody else did.

The way the "invisible hand" is supposed to work is that when everyone follows their own basic human self-interest, the efficient market makes everyone better off. In Adam Smith's "game", the rules work for everyone's benefit. If one individual makes $1 million a year, he/she must also be providing large (though unintended) benefits for everyone else. Is that really happening in this case? Or have we messed up the rules somehow?
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Old 03-25-2009, 10:34 PM   #28
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I think that other people draw a conclusion from the "big income" that I'm questioning. IIRC, the point of the novel was that "society" benefits tremendously from having these incredibly talented people among us. If we don't treat them respectfully enough, they may leave us and then we'd be in deep ____. I think that in some cases very high income people have "created wealth" for more than themselves and their employers, but I don't think it's clear that all highly paid people do, or that the highly paid people at AIG Financial did.
Thanks for the clarification.

I think the discussion about pay scales at this time is a distraction from the real issues. People get paid what their employer perceives as their value is to the company and market conditions for that position. Society does not come into the equation on the high end - except for taxes. It does play a factor in the low end - minimum wage laws.

The interesting aspect about this person quitting is that he was in an area not related to CDS, in a profitable area, was working for $1/year, may have his bonus taxed at 90% and was quitting. In other words, a good person who had the option to leave and took it because of how he was treated.

The way congress is treating those companies that take TARP funds will backfire as other companies/banks that don't take them don't have to live by the restrictions placed upon them by congress. Those that don't take TARP funds will be able to hire and pay employees as they wish - getting the best talent money can buy.

Atlas Shrugged - Wikipedia, the free encyclopedia
The strikers believe that they are crucial to a society that exploits them, denying them freedom or failing to acknowledge their right to self-interest, and the gradual collapse of civilization is triggered by their strike. This is not to say that they believed that giving the creators their due would cost civilization. Rather, the strikers believe that the current irrational altruist/collectivist culture impeded them and therefore the rest of society as well. Thus it would serve no one's interest to continue to allow himself to be exploited, although the strike is not primarily motivated by the harm the current state of society does to others as well.
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Old 03-26-2009, 12:24 AM   #29
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Thanks so much for your post Dex.... very eloquently stated. That man is a hero. It amazes me that people still cling to the notion that they "know" what is a fair salary and what is not. Equally amazing is asking the same people (that were outraged) if this was happening to them... and of course they would be outraged in the other direction! Unfortunately, most peoples attitudes seem to be "as long as I get something for nothing I am OK with it". Most do not really know or care where that money is coming from, as long as they do not have to do anything in return for it.

If these execs are so useless... so overpaid... so stupid....then why should anyone be upset if they all decide to get out and quit? I would think this would make most folks happy. But no.... that is not really the motivation of such peoples hatred. Deep down most people KNOW that they cannot do what these people do. I would love AIG to do what the masses are screaming for. Put one of those low level guys in the company in the CEO spot. See how well he does after a week. If all those execs are so incompetant that anyone should be able to do their job... then go ahead... they should have at it....
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Old 03-26-2009, 09:13 AM   #30
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Thanks for the clarification.

I think the discussion about pay scales at this time is a distraction from the real issues. People get paid what their employer perceives as their value is to the company and market conditions for that position. Society does not come into the equation on the high end - except for taxes. It does play a factor in the low end - minimum wage laws.

The interesting aspect about this person quitting is that he was in an area not related to CDS, in a profitable area, was working for $1/year, may have his bonus taxed at 90% and was quitting. In other words, a good person who had the option to leave and took it because of how he was treated.

The way congress is treating those companies that take TARP funds will backfire as other companies/banks that don't take them don't have to live by the restrictions placed upon them by congress. Those that don't take TARP funds will be able to hire and pay employees as they wish - getting the best talent money can buy.

Atlas Shrugged - Wikipedia, the free encyclopedia
The strikers believe that they are crucial to a society that exploits them, denying them freedom or failing to acknowledge their right to self-interest, and the gradual collapse of civilization is triggered by their strike. This is not to say that they believed that giving the creators their due would cost civilization. Rather, the strikers believe that the current irrational altruist/collectivist culture impeded them and therefore the rest of society as well. Thus it would serve no one's interest to continue to allow himself to be exploited, although the strike is not primarily motivated by the harm the current state of society does to others as well.
I think we're closing the gap here. I'd be concerned if an admin assistant agreed to work for a $1 salary and a $100k retention bonus, than the gov't came in and tried to confiscate the bonus as punishment for working for AIG. That's "wrong" morally, and shortsighted economically to me. I'm equally concerned about the guy who has a $1 plus $1 million deal (assuming he had nothing to do with the disaster and just happened to work in the same division), but I'm not more concerned about him. All workers deserve to get the wages they earned.

My recollection of the Ayn Rand position is that some people are uniquely productive and we need to be especially concerned about their welfare. Your Wikipedia entry says that in the novel a strike by a very small percent of the total workforce (maybe 1 in a million? It's been a long time since I read it.) leads to the "gradual collapse of civilization". That's the part that I doubt.

Furthermore (this may not be Rand, but I think it's a common thought today) we can find these people by looking at compensation - the job market assures us that there will be an excellent correlation between income and positive externalities.

I'm questioning both claims. Yes, some people are more talented and contribute more to society than others. But I'm skeptical of any claims that a small number is somehow irreplaceable. Furthermore, I think there is a complex and inexact connection between salary and positive contributions to the rest of us. Suppose this AIG employee has saved much of the $10 million (I'm guessing) he made over 10 years with AIG, and is so frustrated with the system that he ER's. Will the rest of us lose by this? Randians seem to say "of course, and the loss will be large", I'm not so sure.

(I have to be clear about the "rest of us". You may be saying that in this unusual situation where the taxpayers own AIG, we need to keep the employees who contribute to AIG's bottom line. I'd agree with that. I'm thinking about Rand's general situation where the taxpayers don't own the employer, but "the rest of us" benefit to the extent that these unique individuals' actions create so much wealth that some of it spills out of their firms onto us.)
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Old 03-26-2009, 09:36 AM   #31
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My recollection of the Ayn Rand position is that some people are uniquely productive and we need to be especially concerned about their welfare. Your Wikipedia entry says that in the novel a strike by a very small percent of the total workforce (maybe 1 in a million? It's been a long time since I read it.) leads to the "gradual collapse of civilization". That's the part that I doubt.

Furthermore (this may not be Rand, but I think it's a common thought today) we can find these people by looking at compensation - the job market assures us that there will be an excellent correlation between income and positive externalities.
I guess my question to you, is do you believe that salaries were arrived upon in some arbitrary fashion? Why do you think a brain surgeon makes more than a school teacher? Not everyone has the mental prowess (or fine motor controll) that it takes to go through the training needed to be a sugeon. That is why their salaries are higher, because these folks are more rare. Not that they are better or worse than anyone else, just have a skill set that everyone else does not have.

Of course you can find examples of incompetance in people performnig their work, but you can pretty much find that in any job field, low skilled or not. By and large those with larger salaries either have rarer skills, or more responsibility that most. A great example of the latter are phamacists. The may not DO very much during a day, but they are paid the large salaries they make for their responsibility. If someone were to get the wrong drug at their store their career could very well be over. Would you really want a career where even a small mistake on your part might cost you your career? There are lots of high paying fields out there that are exactly like that.

And just one more thought.... all of the innovations that are made in science, technology, medicine are certainly not made by people that have very low intellignece. And their accomplishments help everyone, and improve everyones quality of life.
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Old 03-26-2009, 09:52 AM   #32
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My recollection of the Ayn Rand position is that some people are uniquely productive and we need to be especially concerned about their welfare. Your Wikipedia entry says that in the novel a strike by a very small percent of the total workforce (maybe 1 in a million? It's been a long time since I read it.) leads to the "gradual collapse of civilization". That's the part that I doubt.
I recall Ms. Rand's position differently. I don't think she espoused any particular concern for a certain protected class of superproductive individuals. I think she has a general concern for protecting the individual property rights of all people.

The logical outcome, according to Rand's position, of disrespecting the rights of the highly productive is obviously much more detrimental on a societal level than is disrespecting the rights of the marginally productive.
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Old 03-26-2009, 09:54 AM   #33
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I guess my question to you, is do you believe that salaries were arrived upon in some arbitrary fashion? Why do you think a brain surgeon makes more than a school teacher? Not everyone has the mental prowess (or fine motor controll) that it takes to go through the training needed to be a sugeon. That is why their salaries are higher, because these folks are more rare. Not that they are better or worse than anyone else, just have a skill set that everyone else does not have.
Also because many people want to be teachers because they enjoy working with children or they feel some "calling" to it which gives them a sense of purpose or fulfillment. When people find a certain type of work enjoyable and/or personally fulfilling, the number of people willing to do that kind of job is high, and thus the "supply" of willing workers is high -- which depresses wages in that industry.

So when people say teachers are underpaid, I'd say "bollocks" to that in many areas. As long as there is a sufficient supply of qualified applicants willing to do that job at the current salary levels, they aren't underpaid -- the market is working. If there was a terrible shortage of qualified applicants, the teacher salaries would start getting a lot higher (as has happened for nurses).
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Old 03-26-2009, 10:42 AM   #34
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My recollection of the Ayn Rand position is that some people are uniquely productive and we need to be especially concerned about their welfare. Your Wikipedia entry says that in the novel a strike by a very small percent of the total workforce (maybe 1 in a million? It's been a long time since I read it.) leads to the "gradual collapse of civilization". That's the part that I doubt.
Let's remember it is a novel so the extremes might be used to make a point. The concept are that all individuals make a contribution and they have a right to the fruits of their labors and the option to decide how they work - self interest. Also, there are individuals who have skills or knowledge or risk takers that advance society but do to the collective restrictions they are held back and thereby hurt all of society if their contribution is not allowed to be implemented.

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Furthermore (this may not be Rand, but I think it's a common thought today) we can find these people by looking at compensation - the job market assures us that there will be an excellent correlation between income and positive externalities.

I'm questioning both claims. Yes, some people are more talented and contribute more to society than others. But I'm skeptical of any claims that a small number is somehow irreplaceable. Furthermore, I think there is a complex and inexact connection between salary and positive contributions to the rest of us. Suppose this AIG employee has saved much of the $10 million (I'm guessing) he made over 10 years with AIG, and is so frustrated with the system that he ER's. Will the rest of us lose by this? Randians seem to say "of course, and the loss will be large", I'm not so sure.

(I have to be clear about the "rest of us". You may be saying that in this unusual situation where the taxpayers own AIG, we need to keep the employees who contribute to AIG's bottom line. I'd agree with that. I'm thinking about Rand's general situation where the taxpayers don't own the employer, but "the rest of us" benefit to the extent that these unique individuals' actions create so much wealth that some of it spills out of their firms onto us.)
The positive externalities are determined by the company not society or the benefit to society.

The rest of us only benefit if we buy the company's product or service - we see a value in it.

The correlation of a person's salary and society in this discussion is only when taken as a whole - the cost of the product or service and the marketplace - too high and no one buys it - too low and the company does not survive.

Some of the rational you are using is the rational used by John Galt's opposition - i.e. his work must conform to society's dictates. He might reply that the only things that dictate the restrictions on his work is his self interest and the marketplace.
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Old 03-26-2009, 12:26 PM   #35
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I guess my question to you, is do you believe that salaries were arrived upon in some arbitrary fashion? Why do you think a brain surgeon makes more than a school teacher? Not everyone has the mental prowess (or fine motor controll) that it takes to go through the training needed to be a sugeon. That is why their salaries are higher, because these folks are more rare. Not that they are better or worse than anyone else, just have a skill set that everyone else does not have.

Of course you can find examples of incompetance in people performnig their work, but you can pretty much find that in any job field, low skilled or not. By and large those with larger salaries either have rarer skills, or more responsibility that most. A great example of the latter are phamacists. The may not DO very much during a day, but they are paid the large salaries they make for their responsibility. If someone were to get the wrong drug at their store their career could very well be over. Would you really want a career where even a small mistake on your part might cost you your career? There are lots of high paying fields out there that are exactly like that.

And just one more thought.... all of the innovations that are made in science, technology, medicine are certainly not made by people that have very low intellignece. And their accomplishments help everyone, and improve everyones quality of life.
No, I don't think that salaries are arbitrary. In a perfect market world, employers estimate how much value a person with a specific set of skills and duties would add to the firm. Then they look at the market price of those skills/duties. If the market price is less than the value added, they try to hire someone, if it's higher, they don't. You've got some good examples of why market prices vary.

The key point is "value added to the firm". No private business is expected to be concerned about value to society. If all the value of a specific person working in a specific firm is captured by that person and firm, then the rest of us really don't care whether that person works or quits. We only care if some of the value "leaks out" to the rest of us.

Yes, many innovations in science, technology, and medicine do end up benefitting all of us. That's a fortunate side effect that the invisible hand usually provides. It's not a universal rule. It seems to me that innovative ways of slicing mortgage pools into new securities, or "insuring" them, didn't really add any net value to "most of us". It made a few people wealthy, but it turned out to be a negative sum game.

The fact that people are earning lots of money in private firms does not guarantee that the rest of us are enjoying lots of improved quality of life.
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Old 03-26-2009, 12:35 PM   #36
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Yes, many innovations in science, technology, and medicine do end up benefitting all of us. That's a fortunate side effect that the invisible hand usually provides. It's not a universal rule. It seems to me that innovative ways of slicing mortgage pools into new securities, or "insuring" them, didn't really add any net value to "most of us". It made a few people wealthy, but it turned out to be a negative sum game.
Sure it benefited us. Dirt cheap easy credit. How else can individuals get financing cheaper than A rated corporations?

We can argue about the outcome of easy credit. But highly liquid mortgage securities markets helped and continue to help many consumers get cheap financing. I would say that adds value.

Unless we prefer to go back to the old days of 10 year non-amortized loans (equal principal payments).
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Old 03-26-2009, 12:41 PM   #37
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Let's remember it is a novel so the extremes might be used to make a point. The concept are that all individuals make a contribution and they have a right to the fruits of their labors and the option to decide how they work - self interest. Also, there are individuals who have skills or knowledge or risk takers that advance society but do to the collective restrictions they are held back and thereby hurt all of society if their contribution is not allowed to be implemented.



The positive externalities are determined by the company not society or the benefit to society.

The rest of us only benefit if we buy the company's product or service - we see a value in it.

The correlation of a person's salary and society in this discussion is only when taken as a whole - the cost of the product or service and the marketplace - too high and no one buys it - too low and the company does not survive.

Some of the rational you are using is the rational used by John Galt's opposition - i.e. his work must conform to society's dictates. He might reply that the only things that dictate the restrictions on his work is his self interest and the marketplace.
I have no problem with people having a right to the fruits of their own labor. I'm not sure who is being "held back" due to collective restrictions. I expect if we looked at enough examples, I'd say that sometimes we're too restrictive and others not restrictive enough.

We may have a definition problem. I use "positive externalities" and "benefit to society" as synonyms, you seem to be giving them different meanings. So I'm not sure what that sentence means.

I don't recall the book well enough to remember all the arguments. However, if Galt says the only restriction on his work should be his self interest and the market, then I'd disagree. There are standard examples which seem clear to me (air pollution) where neither self interest nor the market gives the "best" result, because the natural market doesn't reflect all the costs.
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Old 03-26-2009, 01:07 PM   #38
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We may have a definition problem. I use "positive externalities" and "benefit to society" as synonyms, you seem to be giving them different meanings. So I'm not sure what that sentence means.
How are you defining "positive externalities"?

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I don't recall the book well enough to remember all the arguments. However, if Galt says the only restriction on his work should be his self interest and the market, then I'd disagree. There are standard examples which seem clear to me (air pollution) where neither self interest nor the market gives the "best" result, because the natural market doesn't reflect all the costs.
That is a poor argument in this and most general discussions. No poster should have to add all the possible caveats to the concepts they are putting forth. For example, if a poster says "Do unto others as you would have them do unto you." They do not have to add, for example, "unless you are a masochist and the others are not." or some such wording.
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Old 03-26-2009, 01:38 PM   #39
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Sure it benefited us. Dirt cheap easy credit. How else can individuals get financing cheaper than A rated corporations?

We can argue about the outcome of easy credit. But highly liquid mortgage securities markets helped and continue to help many consumers get cheap financing. I would say that adds value.

Unless we prefer to go back to the old days of 10 year non-amortized loans (equal principal payments).
I'll agree that an efficient credit market is a Good Thing. But, did this activity add enough efficiency to offset the damage it did when it went overboard? And, for that matter, did it really add efficiency or did it simply muddy the water enough to appear to be something it wasn't?

The first sliced mortgage deals were done in the 1980s, and they really took off after 2000. We had an active mortgage market before then, complete with a variety of loans including 30 year amortizing and ARMS. Did the huge growth in securitization do enough good to pay for the bubble damage?
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Old 03-26-2009, 02:44 PM   #40
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I'll agree that an efficient credit market is a Good Thing. But, did this activity add enough efficiency to offset the damage it did when it went overboard? And, for that matter, did it really add efficiency or did it simply muddy the water enough to appear to be something it wasn't?

The first sliced mortgage deals were done in the 1980s, and they really took off after 2000. We had an active mortgage market before then, complete with a variety of loans including 30 year amortizing and ARMS. Did the huge growth in securitization do enough good to pay for the bubble damage?
The larger societal questions are "above my paygrade". But in the 39 years since the first mortgage backed security was sold, I think the American Dream has been realized by a fair number of people that may never have achieved home ownership otherwise. Whether the mess we are in was worth it, I don't really know. I guess we'll see how it plays out.

I'm no mortgage historian, but I am under the impression that lending pre-1970 and pre-MBS was less liquid. You had portfolio lenders that often times found themselves with illiquid 30 year mortgages on their books and much more demand than supply and no quick way to sell these assets (mortgages) to get money to lend again.

I guess I'm trying to suggest that the good old days may not have been as good as they seemed. And that mortgage securitization adds value to society through efficient market pricing of mortgage rates and products, and easier access to credit for most.

With so many different issues, it is hard to really define and analyze what is "value" and place dollar amounts on it.

Is a feminist theory professor at a major university receiving $150,000 a year "worth" it? Do they bring $150,000 in value to society in exchange for their services? How does one even begin to unravel what that would mean?
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