Vilhelm_S
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Vilhelm_S has not written any posts yet.
"If you look at the rules for Conway's Game of Life (which is Turing-complete, so we can embed arbitrary computable physics in there), then the rules are really very simple. Cells with three living neighbors stay alive; cells with two neighbors stay the same, all other cells die. There isn't anything in there about only innocent people not being horribly tortured for indefinite periods."
While I of course I agree with the general sentiment of the post, I don't think this argument works. There is a relevant quote by John McCarthy:
"In the 1950s I thought that the smallest possible (symbol-state product) universal Turing machine would tell something about the nature of computation.... (read more)
If someone notices that morgage defaults are uncorrelated, and new instruments that exploit that lack of correlation are invented, investors will be more likely to buy securitized morgages, so the rates are bid down and they become cheaper for homeowners. But that in itself should not cause defaults to be more correlated.
In the event, the models for correlation were off, and defaults were more correlated from the start. But that's not a problem with public/private knowledge or anything; they were just bad models. If the prizing had been done correctly to start with, I see nothing paradoxical in assuming that introducing CDOs would lead to persistently lower morgage rates -- the lack of correlation doesn't stop being real just because people believe in it.