Thursday, September 27, 2007

Epicycles

"Rating agency Moody's is changing the way it rates complex debt products backed by US subprime mortgage bonds to reflect mounting losses in the stricken market", Financial Times, 25 September.

Throw the models out. They are useless. Changing the models after the fact shows it. Instead of admitting the obvious, Moody's is tweaking its equivalent of a pre-Copernican geocentric model of the solar system, i.e., the Sun circles the Earth. Eventually we threw that model out. Similarly, eventually even Moody's will see its models are a search for the philosopher's stone. They want to turn models into GOLD.

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