The backlash and analysis is beginning.
I should join in since the first of my September statements just arrived showing a 10% drop in a diverse basket of international growth, domestic plodders and domestic technology funds. I have a feeling that is just a pinprick compared with next month...
How could this have happened?
One line of toxic reasoning is that Fannie Mae/Freddie Mac were forced to take-on subprime mortgages by Congress desiring to spread homeownership. But that appears to have been only a small slice of the entire pie since FM/FM only held 40% of the subprime mortgages (and many of those bundles were acquired late in the game in an effort to shore up the broader market).
There is also the moral/economic analytic dimension based on moral hazard theory that the S&L bailouts of the late 80s combined with the hedge fund debacles of recent years gave a sense of cushion on the downside. But I don't tend to think that fund managers look much at worst case downside; upside is where the profit is and moral hazard reasoning is meaningless when golden parachutes will automatically deploy in contractual severance packages.
Instead, the best available analysis (thanks, Ted) divides across two arguments: (1) risk was hidden (information loss/information assymetry) due to the complexity of the security instruments, lack of regulation and restraint, and short-term profit objectives; (2) quants and algorithms screwed up resulting in (1).
The latter argument is summed up in the NY Times: "Beware of geeks bearing formulas" begins the article with a quote from Warren Buffet. This is the same bugbear that attacked in the 80s with automatic trading; deploying technology results in unexpected outcomes.
Perhaps. And perhaps the current election is unduly influenced by the flattening of information resources in the internet-driven world.
But there are inevitable corrections to extremes that result in people losing money or power, and the technology will continue to be pervasive while the users of the technology will get smarter about its impact. On the political front, factcheck.org demonstrates how there is already an evolution from pre-internet rumor-driven political feelings to partisan exploitation of technology channels, and then on to sensible corrections to those partisan swings.
Perhaps. I just hope my son's 529 plan recovers enough in the next 8 years to make it better than just a wash.