the cause of the financial crisis..

unimpressed
how did a housing crisis become a financial crisis, ending up as an economic crisis?

how come highly trained professionals didn't see it coming?

a nice simple summary visualizing all the subprime mortgage, CDO, CDS, leverage, tranching, rating, AAA, default, frozen credit market stuff:


at the barebones level, wired magazine gives insight into the core mechanism in their article Recipe for Disaster: The Formula That Killed Wall Street.

the culprit:

the gaussian copula function

basically a quantity measuring the correlation (preciser: the dependence structure) of two random variables.

"the corporate CDO world relied almost exclusively on this copula-based correlation model."
"everyone was pinning their hopes on house prices continuing to rise."

the idea, published in 2000, quickly became a metric quants ubiquitously used to evaluate risk and a cornerstone of financial engineering allowing simple modeling of vastly complex risks. particularly default risks of CDO tranches. until august 2007...

the ideas:

• tame the nasty nature of real-world dynamical, complex and latent variables by substituting them with a clean and simple number summing up everything
• convey an image of what is happening: correlation is more like a constant than a fluctuating variable and all you need to know and compute
  
• let the method be adopted by investors, banks, rating agencies and regulators
  
• ignore any warning signs (for instance d. sornette in 2006: "this recurrent use [of gaussian copulas] has been ratified by the recommendations of the BIS concerning credit risk modelling. however, there are many indicators suggesting that this [...] approach may be grossly inadequate to account for large credit risks [...]." pg. 138)
  
• let everyone make a lot of money
• let quants forget about the concrete reality behind the math and crank up the models
• let managers, lacking formal math skills, execute transactions worth trillions of dollars based on the models
  
• forget about the underlying magic that makes it all work: a decade of soaring housing prices
• lend money to people without jobs and income
  
• be surprised when everything blows up in your face
  

cartoon from cagle.com

--
update 28th of june 2010:

who cares?

mood: more bewilderment and head-shaking
is the human brain big enough to save one of the most intelligent creatures? greenpeace asks cynically in an add, aiming at banning whaling amongst other ocean related concerns.

when i mention i'm vegetarian in restaurants, a frequent response is to point me in the direction of the fish...


greenpeace campaign

fact i: the ocean is humanities last frontier of ignorance

• 72% of earth's surface covered by sea
• 97% of the ocean is unexplored
• with one yearly NASA budget, the exploration program of NOAA (the National Oceanic and Atmospheric Administration) could be funded for 1600 years
• largest mountain range covering 23% of earth's surface area underwater (visited for the 1st time after the moon in 1973)
• coral reefs still unexplored between 60 and 150 meters
• there are better maps of mars than the 50% of total US territory which lies under the sea
• most of the southern hemisphere's underwater terrain is unexplored (more exploration ships in that region during captain cook's times than today)
• the seabed is harboring countless well preserved archaeological artifacts
• underwater hot springs are basically commercial grade heavy metals deposits
• underwater volcanoes are emitting methane

fact ii: the oceans are teeming with life

• although most of the ocean does not get exposed to photons from the sun, and hence there is no photosynthesis, it is completely erroneous to not expect life
• the antarctic sea is, unexpectedly and only recently discovered, teeming with marine life
• hydrothermal vent systems are islands of life
• bacteria replicating photosynthesis in the dark by chemosynthesis where accidental discovery as no one ever predicted their existence
• resilient bacteria living in ph 11 environments
• 7 new species found per hour of deep reef exploration
• 2000 to 2500 estimated new species in the indo-pacific ocean alone (vs. 5000-6000 known species)
  
• not only new species are still being discovered, but also new behavior and new ecology
• amazing variety of bioluminescent animals
  

fact iii: the seas are being destroyed at breakneck speed

• 90% of all big fish have disappeared in the last 100 years
• 50% of all coral reefs are destroyed
• for 1kg of fish ending up in a market, at least 10kg of bycatch was killed and thrown away
• 1.7% of the blue whale population is remaining
• 10% of the tuna fish population is remaining
• commercial trawlers are forced to access ever deeper seabed due to the depletion of fisheries; this completely destroys potential habitats which are totally unexplored and eradicates possibly unknown species
• throwaway plastic accumulating in the sea (half of the 100 billion pounds of plastic pellets a year are made into throwaway plastic produces of which a large fraction ends up in the sea)
• 100000 albatross chicks in remote habitats dying from stomachs filled with plastic trash
• some ocean water samples contain more plastic than plankton
• plastic debris concentrate pollutants and become "poison pills"
• these are been eaten by many fish at the bottom of the food chain
• gigantic garbage patches in the pacific and atlantic
  

Sylvia Earle's moving (and prizewinning) TED talk:


Robert Ballard: Exploring the ocean's hidden worlds


Captain Charles Moore on the seas of plastic


Richard Pyle: Exploring the reef's Twilight Zone


David Gallo fascinating TED talk:


update 20.04.2010:
Edith Widder: Glowing life in an underwater world


update 05.05.2010:


update 02.06.2010:
Brian Skerry reveals ocean's glory -- and horror


update june 30th 2010:


update july 12 2010:


update july 27 2010:

messages from banksy

mood: respectful
"people who get up early in the morning cause war, death and famine"

"sometimes i feel so sick at the state of the world i can't even finish my second apple pie"

"the greatest crimes in the world are not committed by people breaking the rules but by people following the rules.
it's people who follow orders who drop bombs and massacre villages.
as a precaution to ever committing major acts of evil it is our solemn duty never to do what we're told. this is the only way we can be sure"

"it takes a lot of guts to stand up anonymously in a western democracy and call for things no-one else believes in - like peace and justice and freedom"

"we can't do anything to change the world until capitalism crumbles; in the meantime we should all go shopping to console ourselves"

"people who enjoy waving flags don't deserve to have one"

"a lot of people never use their initiative because no-one told them to"


banksy is a british graffiti artist. he has reached international fame notably for stunts like:

• hanging a picture he painted (depicting mona lisa with a yellow smiley face) in the louvre
• or painting images on the israeli west bank wall showing, for instance, a girl being blown away by holding on to flying balloons
• or spraying "this is not a photo opportunity" on certain well-known photograph spots around the world
  
• or painting official looking signs on white walls reading "this wall is a designated graffiti area" and documenting the progress of tags and graffitis being created there by other street artists.

hollywood celebrities have purchased his art and one piece was auctioned for over half a million usd in 2007. he responded to a sotheby’s sale of his work by posting a painting on his website featuring people bidding for a picture, with the caption "i can't believe you morons actually buy this shit."

his view of life is anti-authoritarian, anti-war, anti-consumerist and anti-establishment, using very strong imagery for his pictures. his messages are often ironic, cynical, very to the point and critical comments on the current zeitgeist.

his true identity is unknown...

sources: webpage, wikipedia, wall and piece.

quotes of the day...

mood: bewilderment
sometimes, psychology (wishful thinking, denial, cognitive bias, blind spots, ideology, ...) is stronger than intelligence.

alan greenspan's comments on the financial/economic crisis:

I found a flaw in the model that I perceived is the critical functioning structure that defines how the world works, so to speak.

That's precisely the reason I was shocked because I was going for forty years or more with very considerable evidence that it was working exceptionally well.

those of us who have looked to the self-interest of lending institutions to protect shareholders equity, myself especially, are in a state of shocked disbelief.

source oversight.house.gov.

the worst of two worlds

mood: disgusted
reading the daily news can at times be quite a depressing experience. psychological protective mechanisms maintaining the mind's sanity can vary from cynicism over callousness to denial, etc. and so most news events don't cause any lasting effects...

apart from "normal" global tragedies as war, genocide, poverty, famine, opression, species extinction, catastrophic climate change events, etc. and the current ludicrous financial and economic crisis, in the last years the cannibalistic activities of Armin Meiwes and the horrific ordeals of Natascha Kampusch and Elisabeth Fritzl have been particularly shocking.

today the list can be extended by another unfathomable abomination. the titles of the articles read:

• Link between child porn and Muslim terrorists discovered in police raids
• Dangerous and depraved: paedophiles unite with terrorists online
  

From the content:

A link between terrorism plots and hardcore child pornography is becoming clear after a string of police raids in Britain and across the Continent.

During a crackdown on the mosque, police were astonished to discover pornography on computer hard drives. But what was not reported then was that the haul included images of children being sexually abused that were encoded with messages as a clandestine method of communication.

on the one hand, there is (in my opinion) the worst acts of destruction sentient beings can perform: systematically abuse the most fragile members of the society for pleasure. contaminate the cradle of future generations. personally i don't understand why there has been no global uproar, as the victims of child abuse become younger and younger and the atrocities worse and worse (some statistics), calling for a coordinated international effort to stop such and related activities (like female genital mutilation, child labour, ...).

and on the other hand, people driven by ideology to kill certain other people with different ideologies are using these unspeakable crimes as a vehicle for their own means of spreading death, destruction and suffering...

deep insights into the abyss of the human soul...

:-(

activism, anarchy and fun

mood: party on

from the 4th to the 6th of july 2008, hundreds of activists from the zurich squatter and left alternative scene occupied the old football stadium hardturm, to celebrate a weekend of fun, partying and anarchy.

after an initial clash with the police on friday evening, the security forces said they would tolerate the event, as long as the stadium is cleared by sunday.

offering such a platform in zurich, being known for it's active party culture, attracted a few thousand party goers by saturday, as the message of the event spread like wildfire...

this has been the third major event of the organizers in the last years, where for a couple of days all effective rules and regulations were suspended, and an alternative subculture asserted itself for a couple of days.

the event was lively reported on by all the swiss mainstream media.

view photos in the brotäktschen set on my flicker account.

visit the "official" website of the organizers: raumpflege.org

More info: indymedia, nzz, tagesanzeiger.

some little things life has taught me...

mood: inspired depending what your personal goals are in life, some strategies work better than others...

you are not the center of the universe

• be critical towards your cultural and religious imprintings: they could be far from ideal, and simply represent idiosyncratic artifacts from the past
  
• don't take yourself too seriously: a little distance to ones own ego can work wonders (and besides, the universe existed for roughly 14 billion years before your birth, and the last discernible structure in it will probably cease to exist after 10 to the power of 23 years after your death)
• don't expect your perception of reality to be too representative of reality itself (psychopathology, cognitive biases, psychedelic drugs)
  
• don't expect your knowledge and understanding of things to give you more than a glimpse of reality: you cannot possibly know and understand everything
• reality is perhaps more bizarre than anyone ever guessed (non-locality, quantization, measurement, duality, uncertainty, entanglement, time dilation, arrow of time, dark matter and energy, self-organization, emergence, life, death, consciousness, etc. without even mentioning multiverses and possibilities of higher dimensional space and/or time)
  
• allow for the possibility, that all your opinions and points of views could be wrong
• dogmas have never and will never work
• the best way to appreciate the arbitrariness of your socio-religious background and respect other takes is by traveling

you are the center of your universe

• take responsibility: don't expect others to think for you
• learn to accept and respect yourself
  
• your mind creates your experience of reality: you have total freedom in your mind
  
• you can always choose your inner reactions to impulses from the outer world
• appreciate the enigma of existence: every day you wake up in a structured and self-organizing reality, and rediscover yourself, a thinking, sentient entity full of memories from the past
  
• appreciate the improbability of existence: changing the values of fundamental physical constants just a little would most probably result in unstructured mess
  
• everything in the universe expresses the universe

getting into the right state of mind

• get a sense of humor
  
• once in a while, stop and think about how you are living your life, and if it's what you really want
• happiness is a state of being/mind: your only chance of finding it is within yourself
• modesty, honesty, sincerity can get you a long way
• let go: you can't control everything anyway
• be aware of your own mortality: relax and accept the only thing you can know for sure
  
• open your mind to change: conservatism and paranoia about new things doesn't get you far in a universe where everything is constantly changing
• good/bad or right/wrong are very relative attributes and often in the eye of the beholder
• there is no absolute evil
• assume that all people act to the best of their possibilities (even if the outcome of their decisions are disastrous), and that you would be the same, given their biography and neurochemistry
• relax, kick back and chill out once in a while
• dream of a better future
• be the change you want to see in the world
• don't be ignorant

interacting

• respect other opinions
• don't take stuff personal
  
• it is very easy and rewarding to be nice/helpful/compassionate to other people
• listen more, talk less
• respect every aspect of life: from plants, to insects to animals, to human beings of other faith/race/...
• the strong should protect the weak
• value friendship
• don't worry about what others think about you
• violence is really the very last resort; and mostly, just your inner commitment to defend yourself to the very end, prevents you from having to actually do this

lifestyle

• have fun
  
• resist the temptation to blindly follow the masses: many people doing stupid things isn't a justification for anything
• limit addictions
• you don't have to be evil to make money, or be a bastard to get ahead in life
• a more or less healthy lifestyle helps: a little movement, a somewhat balanced diet, and a (pragmatic) optimistic mindset can work wonders
  
• materialism is a bad strategy if you're looking for happiness
• as already mentioned, go travel
• the more you spend time getting educated, the better you can approximate the big picture
  
• did you know, lifestyles don't necessarily come pre-tailored: you can choose and combine elements from any pop- or subculture you like
• ever think about ecology and sustainability, i.e., your footprint?
• ever consider vegetarianism? (update over 7 years later: how about considering veganism? you know, from a sustainability, ethical, and health perspective?)