Infiltrated by Jay W. Richards

Author:Jay W. Richards
Language: eng
Format: epub
Publisher: McGraw Hill LLC
Published: 2013-10-15T00:00:00+00:00

REDUCIBLE COMPLEXITY

Where else did the Inquiry Commission majority report point its finger? Another charge related to the one above, from the majority report and elsewhere, is that overly complex and opaque assets caused the financial crisis.

But the market for securitized mortgages is far less complicated than many other markets that work just fine. If you’re reasonably smart, have an aptitude for math, and study it fairly closely, you can learn just about every aspect of the mortgage and mortgage-backed securities market.

In contrast, consider any piece of modern technology, such as a smartphone. Before you can buy an iPhone at the Apple store, the work of millions of people, from miners to truck drivers to software programmers and silicon wafer fabricators, has to be coordinated. Everyone involved in this process is ignorant of the vast majority of these steps. In fact, most people involved in bringing an iPhone to fruition know only about their own step, and many may not even know that their work contributes to iPhones. The guy at the bauxite mine in Australia doesn’t know anything about how the aluminum he extracts from the earth will be molded to become part of an iPhone body. The assembler doesn’t know how to fabricate wafers for computer chips. The woman putting computers in boxes in China doesn’t know how to organize the transport of the boxes on a ship to the United States.

No one person on the planet could build an iPhone or even one of its components from scratch. And yet corporations such as Apple sell high-quality smartphones to hundreds of millions of customers. Somehow a complex network of information connects mines to manufacturers to retailers to customers, even though no one person knows more than a fraction of the details. A manual that fully described every step required to create an iPhone from scratch would fill many rows of shelves in a library. But no such manual exists, or needs to. For markets to work, participants simply need to have access to certain facts relevant to their part of the transaction, including especially price.37

The process that gives rise to an iPhone involves an information chain. And as with all information chains, every link doesn’t need to connect to every other link. It just needs to connect to the links on either side of it. If all the links are strong, the chain is strong.

The complexity of mortgage securities pales in comparison to high-tech markets for smartphones, so complexity per se wasn’t the problem.

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