Wednesday, February 25, 2009

Crisis Enablement

I wrote earlier about the financial crisis blame. Certain people allowed a natural credit bubble to grow to unnaturally monstrous proportions.

A related but very different issue is what enabled the problem to grow--what blinded everyone to what was happening? My wife just sent me a great article that explains how the liquidity crisis came about.

The culprit was a math formula.

More specifically, too many people used the Gaussian copula function in ways for which it was never intended.

Remember, formula's don't kill economies, people do.

UPDATE: More on how CDOs enabled a mortgage crisis to expand into a liquidity crisis. And an article about just how much deregulation was to blame.

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