Posted by Joe, a resident of Another Palo Alto neighborhood, on Nov 2, 2012 at 9:46 am

> "It's good to build in some skepticism and criticism of modeling,"

> he said. "The 2008 financial crisis was built on faulty

> asset-pricing models ... so having young students

> criticize models makes me excited."

To some extent. The collapse was systemic, resulting from the ultimate consequences of banks being forced to issue loans (often called “liars loans) to far too many people who could not afford the properties they purchased. As these mortgage defaults began to accumulate, there was a ripple effect that washed through the whole system. Wall Street had “hedged” its position, relative to a 1%-2% failure rate of these so-called “sub-prime” mortgages, but the failure rate was closer to 8%, at one point. The modeling had not considered this possibility. However, that was not what caused the meltdown. Since all of these mortgages had been bought up and resold as “Mortgage Backed Securities” (MBS), these MBSs had been “insured” by Credit Default Swaps (CDSs) which were supposed to provide “insurance” in case of defaults of significant numbers of individual mortgage owners. As it turned out, thanks to people like Anna Eshoo, CDSs had been allowed to function outside the normal regulatory arm of the US government—and so these financial instruments that looked like “insurance” were actually nothing more than smoke-and-mirrors, since the sellers of these instruments were not required to maintain sufficient capital in reserve to pay off a abnormal situation, like the one that occurred in 2006. Ultimately, the main holders of these CDSs ended up going bankrupt, or seeing the massive bailout from the taxpayers.

Blaming modeling for the meltdown is not fair, or accurate. Yes, it played a part, but there this meltdown revealed massive fraud and corruption at every level of government, the housing industry up through Wall Street.

> Kauffman said computer modeling is a financially sustainable

> way to bring real-life science into classrooms across the country,

> not just the wealthy ones.

Absolutely! And with these sorts of education software packages being installed “on the cloud”, the costs become virtually free—given enough time.

Wonder if anyone at the PAUSD is paying attention to what is going on in the local private schools to address the ever-expanding costs of education?

Posted by John Galt, a resident of the Fairmeadow neighborhood, on Nov 2, 2012 at 11:57 am

You have probably conviently forgotten that Clinton in 1994 deregulated the mortgage busines so that "The disadvantaged and poor could realize the American dream of home ownership "without the nasty conservative roadblocks thrown in to discriminate against them". The result was a feeding frenzy of real estate "salespersons", loan brokers and lenders cashing in on the wonderful new cash flow provided by naive buyers. Real estate "salespersons" made their commission immediately, brokers collected their fees up front and lenders bundled the shaky loans into the infamous instruments called "derivatives" and sold them immediately at steep discounts to the greedy, getting their spoils up front also.

Perfect setup to provide a nasty domino effect at the first ripple in the economy.

Good work Castilleja!

Posted by AndyNash, a resident of Woodside, on Nov 2, 2012 at 1:36 pm
AndyNash is a member (registered user) of Palo Alto Online

In a very odd Stanford connection, so far as I've googled, one of the most constructive critiques of the 2008-09 collapse in terms of grievous errors in financial risk models... is actually written by a very eloquent Stanford aerospace engineer who is concerned with modeling a different kind of risk entirely.

Web Link

Of course, the failures in the practice of modeling alone did not topple the economy. Like most catastrophes, the financial crisis is complex, and we all can agree many parties behaved poorly.

Posted by Wondering?, a resident of Another Palo Alto neighborhood, on Nov 2, 2012 at 2:33 pm

"It's good to build in some skepticism and criticism of modeling," he

said. "The 2008 financial crisis was built on faulty asset-pricing

models ... so having young students criticize models makes me excited."

Wonder if this teacher is going to be able to focus on modeling errors in the software they are using .. rather than something that is too complex for most people to understand--such as the 2008 meltdown?

Posted by Ducatigirl, a resident of the Old Palo Alto neighborhood, on Nov 3, 2012 at 7:43 pm

[Post removed by Palo Alto Online staff.]