"Emancipate yourself from mental slavery, none but ourselves can free our mind.” - Bob Marley

Friday, January 16, 2009

The Fallacy of the Fallacy: Post hoc ergo propter hoc

This comes up often in arguments with deregulationists. They say: just because we made these 5 or 6 major changes in the financial system and then went into the worst economic crisis since the Great Depression, it does not prove that those changes caused the crisis. The more erudite throw the latin phrase from the post title out. The more bombastic will sputter along the lines of:

You connect vaguely related associations (this happened, then later on, this happened!! See!! See!! Rivers cause beaver dams!!) ... and thus you think that "proves" *a* causes *b*.
Correlation is not causation.
But the phrase Post hoc ergo propter hoc is used for a specific reason: to combat a sometimes erroneous confusion of correlation and cause. Why? Because the mind typically looks for sequences of changes to a system and subsequent changes in the behaviour of that system to be linked - because that is the normal course of events.

There is a reason the mind does this. I am a geek. I work on networks of routers and switches and servers and PCs. These all have configurations that can be changed. And when something "goes wrong" - when a system that previously worked suddenly stops working - the very first question everyone asks (after checking for hardware failures and rebooting Windows machines) is: "What changes have been recently made to the system?". And guess what? In a remarkable number of cases it is a recent, intentional change - with unintended consequences - that caused the problem. Frequently it is the most recent change.

So, in the real world, recent changes to a previously working system are always the first suspect when that system breaks. And for very good reason.

That's how it naturally works in the real world, not in the fantasy worlds of deregulationists - in which fantasy world, you let slip the dogs of greed, by destroying the leashes or intentionally making shitty collars, and then disclaim responsibility when the economy gets mauled.

So we went 60 years from the end of the first Great Depression with no huge financial crises.

Then in 1999 deregulationists passed and signed Gramm-Leach-Bliley, which eliminated Depression-era barriers that separated parts of the financial system from each other. A driving force in the passing of this law was to legitimize the creation of CitiGroup - which is currently being dismantled due to the financial crisis and has been to the public trough twice for more than $45 Billion.

In 2000 deregulationists passed and signed another Phil Gramm abomination that enshrined the wholly unregulated status of Credit Default Swaps (CDS) - clearly a form of insurance that should have been regulated as such. Currently, we apparently cannot allow any large organization to fail, because CDS has turned the the financial system and big parts of the economy into a huge booby-trap of explosives massively interconnected by tripwires of unknown and unknowable CDS lines.

These moves were supported and aided by deregulationists in the Clinton administration, inluding Clinton himself. Billary have long been bought and paid for.

The Greenspan Fed lowered it's Fed Funds rate to historic lows and kept it there for a long time. Alan Greenspan was an arch deregulationist and did nothing to rein in abusive lending practices and other questionable activities. He has since pronounced himself "shocked, I tell you, shocked" at the crisis and conceded that his faith that financial entities would guard shareholder value was misplaced.

In 2001, GW Bush appointed rabidly deregulationist "regulators" throughout his administration. They did the following:

They pre-empted state attempts to regulate predatory lending, and did no regulation of their own. Predatoruy lending went on to new highs.

In 2004, the Bush SEC allowed the big 5 Investment Banks to "self-regulate".

In 2004, the Bush SEC allowed the big 5 Investment Banks to increase their leverage of loans to real equity from roughly 10:1 or 12:1 to as high as 40:1.

(Of those big 5 Investment Banks, none are in the same form they were in prior to the crash. FRB/Treasury had to guarantee $39 Billion of dodgy securities to get JPM to tyake over Bear Stearns and just today BAC came back for $20 Billion more from TARP and guarantees of $118 billion in loans and other assets to complete the takeover of Merrill Lynch.)

The Bush SEC did nothing while the 3 NRSROs (Fitch, Moody, S&P) took money from the issuers of toxic securities, and then rated those toxic securities AAA. These very same toxic securities, now much downgraded after the fact, are at the center of our financial crisis.

(The Bush SEC further proved it's deregulatory mettle by not discovering the Madoff ponzi scheme until Madoff confessed, in spite of multiple detailed warnings.)

Only the self-delusionary can claim that these were not hugely significant changes in a system that previously worked and is now self-destructing. Clearly the changes led to or aggravated the breakdown.

The deregulationists can spout all the latin they want. Commonsense shows that they were wrong and are wrong.


OBloodyHell said...
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OBloodyHell said...
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bobn said...

you check first those things which have changed recently as likely causes.

Y'know what?

It isn't always them!!!

My laptop mouse just started acting hinky last month. This happened almost EXACTLY coincidental with a raft of new updates pushed down by Microsoft....In the end, it was the mouse connector.

1) You failed to adequately check for hardware failures, which I noted is done before or at the same time as looking for recent changes. With intermittent problems, this often happens, so don't feel too bad about it. ;-)

It's a *fallacy*, bob.

No "ifs", no "ands", and no "buts".

Again, you miss the point. More often than not, commonsense rules: the changes made to a system are what caused the problem. The fancy latin phrase is used to point out only that this is not *always* the case. Invoking it proves nothing.

You in fact are far more guilty than I:

1) You insist that CRA caused this, in the face of far more contradictory evidence than you have produced to support this theory. Even Carl has given up on this one.

2) You insist that GSEs have caused this. But during the crucial years of the runup (2004-2006) of sub-prime *and* Alt-A *and* Option ARM, the GSE share of the mortgage market *dropped* to 25% - because of the concept of "comforming loans" which I keep referring to and which you and Carl conveniently ingnore. And yes, the amount of garbage on the GSE balance sheets did grow thereafter, especially in 2007 and 2008 but this was not so much creating the problem as desperately moving it around - in this case, I agree that the GSE actions put more of the garbage explicitly on the government's hands, and this is attributable to government action, most of it executive branch (see here) but also Congress, under the untterly completely f'd up advice of Bernanke to increase the conforming limits.

The bulk of the damage was done by private Ibanks and other securitzers, who encouraged the bad loan practices by paying "yield spread premium" - that is that the higher the ultimate interest rate on the loan - which is to say the more ruinous the loan to the borrower - the higher the YSP paid to the originator. This is your precious free market in operation.

Because of the continuous invocation of "Post hoc ergo propter hoc" by you and Carl, my post showed major deregulative changes made by both parties and linked them to the current crisis. You are arguing the fallacy without arguing the base points.

> "Currently, we apparently cannot allow any large organization to fail".

I'm sorry, were you under the impression that I really supported anything like that?

This was specifically in the section on CDS - which has tied the whole system into a huge booby trap - and which is nothing but insurance with NO regulation at all, thanks to deregulationists like Summers, Rubin, Gramm and Clinton.

OBloodyHell said...
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OBloodyHell said...
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bobn said...

bob, you constantly focus on the 2004-06 as thought the entire 10 years in general, and the five years in particular that preceded it, did not exist or have any relevancy.

The GSEs were *not* taking crap loans before 2004 either - they were taking conforming loans. (That phrase may sound familiar, BTW.) Whatever their accounting practices, they weren't fueling the bullshit loan practices that started after the Fed started raising rates from the ridiculously low rates that they'd previously lowered them to and the private market moved int to keep the boom going.

The sub-prime and Alt-A and Option-ARM crapola *exploded* in 2004 ("coinicidently" the year that SEC allowed the I-banks 40:1 leverage and "self-regulation") and the damage was done, with a crisis baked in, by 2006.

So, yes, I disregard the entire "CRA and/or GSEs caused this" meme as pure bullshit - as shown by facts and numbers.

Glad you finally conceded that OFHEO - executive branch, controlled by Bushco - had some responsibility over the GSEs. If, as you say, the GSEs had been responsible, OFHEO could have reined them in - except Bush was way too heavily invested in the "ownership society" crap for that to ever happen. We know this because even now the GSEs are buying $40 billion per month of garbage MBS and garbage mortgages - on orders from FHFA, the Bushco-created successor (with the very same boss) to OFHEO.

bobn said...

As far as the GSEs failing first and GAAP, here's a new phrase for your googling: "Level 3 Assets".

The I-Banks and other big players (Wamu, Wachovia, Citi, Countywide, etc.) have all been insolvent since late '06 or early '07 - except by "mark to fantasy" methods.

About Me

I'm a 57 year old geek. I voted Democratic for 20 years, because I disliked the Republicans more. But now, nobody really speaks for me. I'm for Guns, for more correct government regulation of the financial world, against illegal immigration and amnesty. (in 2008 I ended up voting Republican - too many questions about Obama, and voting against anybody who voted for TARP 1.) In 2010 I voted a stright republican ticket because the Democrats have completely lost their minds.