Financial Engineering applies here, however let's look firstly from the viewpoint of those who need money (borrowers) and those who have money to lend (investors).
Note how the second group is categorized; we had an earlier look at investors. There we were dealing with equity markets which is where Ben wants people to go now. That is, people need to run after risky ploys in order to find some type of illusive gain.
Ben has made it difficult for the simple saver (of course, many have no alternative but to let him slap them silly and say "thank you, Ben").
The thrust of the Fed has been to keep borrowing costs low. For what reason? Why is it that he would expect someone to tie themselves into being a long-term loaner, at a low cost?
Aside: Of course, it's relative. People bought long-term government bonds at rates that were not stellar. No, risk-free wants only a little reward. But, sacking savers at less than 1% (that's outrageous and has been from the beginning). Why is there no outcry? Because the idiots running the game think that they are on the mark with their thinking.
|CDO in the mortgage context|
On the Wiki page, there is another image that shows how tranches are overlaid on a pool (see early remarks about tranche and trash). Please note how there are levels of ratings from AAA down. Notice, too, the range of returns that are expected (by what type of thinking? ).
So, investors? Yes, those who are to buy securities based upon this type of scheme. You know what's silly? Some of these toxic things were sold as cash equivalent. And, the SEC has been trying to bring the idiots selling these things (and similar things) to some reckoning. But, you know, it's not illegal to be stupid. Okay?
As we look at the history, we will note the advance of this type of thing with computational improvements. So, it's like the argument that goes: because they can. That is, without some type of oversight (and, idiots are doing this, to boot) or, gasp, some notion of ethics (forget anything related to conscience, for now) things unfold as described by Minsky (note the timestamp; this and related posts will be updated).
So, we see changes over the past decades. One large one was post WWII. You see, we had to provide rewards to the veterans. The VA house policy (and similar) needed money. How do you get money out of the air? Securitization. There have been all sorts of problems over the years.
The one constant is that with each tick of the clock, technology came more into vogue. Along with it came exploitation (Made-off is only one little glimmer, folks).
Fannie and Freddie are rolling the dough, now. How much of that is real (to be discussed)? Obama knows how these two went astray (along with Sallie); but, going entirely private ought to cause an adult to shudder (so many things to discuss here).
Aside: The only way to go private is to have things run by those who take a vow of poverty similar to what we see with the enlisted in the military (yes, Officers rake it in; not so the lower classes). We have people putting their lives and limbs at risk for a system that favors the fat cats. Things could take a step in the right direction if there were a national service. That is, all would share in the burden implied by common weal.
08/23/2013 -- Another example. Jon has it right: high-frequency to blame. Of course, there are several reasons for the market being out of control.
08/16/2013 -- 30-year mortgage needs taxpayer assistance (or guarantee).
08/15/2013 -- Nice viewpoint. Farce, indeed (chimera).