Archive for September, 2017

The Mortgage Crisis

September 5, 2017

Last week, I came across another repetition of what passes for an explanation of the mortgage crisis. It claimed that the problem was the propensity of low-quality loans. Sorry, but no. I’m tired of hearing it.

A mortgage package combines loans of all qualities, of all risks. But, being an entity relying on stochastic processes, it must be random. Unfortunately, those mortgage packages were not random. This is the real failing of those mortgage packages. Mortgages happen over time and are temporally organized, as in not random.

The housing boom was great for bankers up to the point where they ran out of high-quality loans. At that point, the mortgage industry looked around for ways to make lower quality loans. Mortgage packages gave them the means. So fifty loans got sold in a given week, the lender packaged them into one package. Some of those loans were refinancing loans on high-quality borrowers. Rolling other debts into the instrument improved the borrower’s credit but didn’t do much for the mortgage package. Still, the averages worked out, otherwise, throw a few of the pre-mortgage packaging loans, high-quality loans, in there to improve the numbers. A few people had to make payments to their new mortgage holding company. Their problem.

But, the real risk was that all of the original fifty loans originated from the same week. They were temporally organized. That breached the definition of the underlying necessities of stochastic systems. That was the part of the iceberg that nobody could see. That;s the explanation that should be endlessly retweeted on Twitter.

Why? Well, we no longer living in a production economy. You can make money without production. You can make money from the volatility economy. You can make money off of puts and calls and packages of those. That allows you to make money off of your own failures to run a successful business. Just hedge. The volatility economy is a multitude of collections of volatility based on a stochastic system, the stock market.  And, with the wrong lessons having been learned about mortgage packages, the regulators want to regulate mortgage packages and other stochastic systems. Or, just make them flat our illegal because they didn’t know how to regulate them. I’m not against regulation. Constraints create wealth. I just see the need for stochastic systems.

Too many stories are wrong, yet, endlessly repeated on twitter. Kodack, …. 3M, …. There was only one writer that wrote about Kodak that understood the real story. With 3M, their innovation story was long past and still being told when the new CEO gutted the much-cited program.

From the product manager view, where do stochastic systems fit in? The bowling alley is a risk package akin to a mortgage package. But, if you are an “innovative” company much-cited in the innovation press these days, don’t worry, your innovation is continuous. The only innovations showing up in the bowling alley are discontinuous. Likewise, crossing the chasm, as originally defined by Moore, was for discontinuous innovations. Those other chasms are matters of scale, rather than the behavior of pragmatism slices.

But, back on point, we engage in stochastic systems even beyond the bowling alley. A UI control has a use frequency. When they have a bug, that use-frequency changes. Use itself is a finite entity unless you work at making your users stay in your functionality longer. All of that boiling down to probabilities. So we have a stochastic system on our hands. In some cases, we even have a volatility economy on our hands.