Financial Engineering vs. Stupidity

October 12, 2009

Mark Cuban, on his Blog Maverick web log, argues that fancy financial engineering caused the recent bust and proposed a laundry list of solutions.  I respectfully disagree.

The bust was caused by plain, garden variety stupidity on a grand scale. What else can one say about bankers who lend money to people who have no hope of ever being aboe to repay secured by assets that have no chance of ever being worth nearly enough to cover even a respectable portion of the loan. Stupid, stupid, stupid, stupid!

What about securitization, derivatives, etc. Didn’t that play a role? In a cosmetic sense, yes.  That stuff caused the bust to look the way it did. But it didn’t cause the bust. When enough loans go sour, we’ll have a financial crisis with or without financial engineering. The presence or absence of the latter only impact the details of how the bust looks, but a bust will occur with or without it.

The good news is that it’s easy to articulate a solution: Ban stupidity!

The bad news is implementation. Humanity has been struggling with this since the first caveman stuck his hand into a flame in an effort to take it with him.