{"id":1255,"date":"2009-01-15T20:17:00","date_gmt":"2009-01-16T01:17:00","guid":{"rendered":"http:\/\/www.boldulysses.com\/?p=1255"},"modified":"2009-01-15T20:17:00","modified_gmt":"2009-01-16T01:17:00","slug":"chaostan","status":"publish","type":"post","link":"https:\/\/www.boldulysses.com\/?p=1255","title":{"rendered":"chaostan"},"content":{"rendered":"

Interesting to think about the vast grid of connections that’s led to the recent economic downturn. It really is a prime example of the butterfly effect<\/a>.<\/p>\n

The downturn is global in scope and has affected the economies of whole countries, mainly through the cascading failure of central banks. The health of those central banks is tied to the health of investment firms with whom they partner. The investment firms themselves are interconnected, meaning a failure of investor confidence in one will affect them all to a degree. Most of the firms in question dealt in mortgage-backed securities<\/a> to some extent, but there was one whose downfall<\/a> had more of a ripple effect in the industry. The MBSs that firm dealt in are bundles of mortgages, primary risky mortgages, packaged together in an attempt to mask the risk associated with them. In any investment product like that, the overall health of the asset is calculated based on the average health of the securities that it comprises. The mortgages are risky, sure, but on average there are more good mortgages than ones in default, and this keeps the security’s average value from tanking. However, there definitely comes a point at which the number of bad mortgages in the security reaches a criticality, and the security becomes, in effect, worthless. For the security to reach that point, there had to have been one mortgage that tipped it “over the edge,” so speak. And most mortgages don’t go bad instantly–there’s a process by which the bank notifies the homeowner that he’s past due, months to respond and so forth. However, the bank has to pull the plug at some point, after the homeowner has been sufficiently down-and-out or irresponsible. Most homeowners don’t wake up one day and patently decide to be irresponsible with their money; it’s a long series of little decisions that get them where they are. It could be something as simple as, say, buying a beer at a local convenience store using the last money available to cover the mortgage payment.<\/p>\n

So, going the other direction, the global economic downturn, affecting billions of people, could have been caused by the decision to buy a beer–a beer that caused the homeowner to default on his mortgage, which caused the security to go bad, which caused the entire MBS to be worthless, which caused the investment firm’s product line to be viewed in an unfavorable light, which caused investors to pull their money out, which caused the firm to fail, which cascaded through the investment industry, causing other firms to fail, which caused smaller banks to fail, which caused larger banks to fail, which affects the whole range of industries in a given country, which countries are interconnected in our global financial world, causing the economic downturn we’re all experiencing.<\/p>\n

Little things matter. Food for thought.<\/p>\n","protected":false},"excerpt":{"rendered":"

Interesting to think about the vast grid of connections that’s led to the recent economic downturn. It really is a prime example of the butterfly effect. The downturn is global in scope and has affected the economies of whole countries, mainly through the cascading failure of central banks. The health of those central banks is […]<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":[],"categories":[1],"tags":[],"_links":{"self":[{"href":"https:\/\/www.boldulysses.com\/index.php?rest_route=\/wp\/v2\/posts\/1255"}],"collection":[{"href":"https:\/\/www.boldulysses.com\/index.php?rest_route=\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.boldulysses.com\/index.php?rest_route=\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.boldulysses.com\/index.php?rest_route=\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/www.boldulysses.com\/index.php?rest_route=%2Fwp%2Fv2%2Fcomments&post=1255"}],"version-history":[{"count":0,"href":"https:\/\/www.boldulysses.com\/index.php?rest_route=\/wp\/v2\/posts\/1255\/revisions"}],"wp:attachment":[{"href":"https:\/\/www.boldulysses.com\/index.php?rest_route=%2Fwp%2Fv2%2Fmedia&parent=1255"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.boldulysses.com\/index.php?rest_route=%2Fwp%2Fv2%2Fcategories&post=1255"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.boldulysses.com\/index.php?rest_route=%2Fwp%2Fv2%2Ftags&post=1255"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}