I’m only half way through it, but so far this is the best account I’ve read yet of the roots of the credit crunch: The End of Wall Street’s Boom, by Michael Lewis.
One sentence captures the mixture of insanity and gross negligence – to put it at its most charitable – that led to dodgy BBB-rated loans being repackaged into AAA-rated bonds (“turning … garbage into gold”, as Steve Eisman, one of the few on Wall Street to have bet on the collapse long before it happened, puts it):
[Eisman] called Standard & Poor’s and asked what would happen to default rates if real estate prices fell. The man at S&P couldnt say; its model for home prices had no ability to accept a negative number.
So there you go. A huge financial bubble was created – and then the entire financial system brought to the brink of utter ruin – using models that “had no ability to accept a negative number”.
There is a point at which stupidity tips over into insanity. And there is another point at which insanity tips over into a demonic frenzy.