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Sticks and Stones
Oct 1, 1998
Introduction – a study in comparative religion
In the beginning, we all agreed that the gods of credit play by chance. So philosophers in all camps have shared the view that for a set of comparable credits, the gods have a bottomless pit. Deep in the pit hangs a bucket which is almost, but not quite as wide as the pit itself. For each credit, there is a stone. To decide the credit's standing, the gods throw the stone in the pit, and then raise the bucket; if the stone is not in the bucket, the credit is doomed to default. For a large group of credits, the gods throw all of the corresponding stones at once, and with one look at the bucket, identify those credits unfortunate enough to have their stone slip into the abyss. The classical philosophers rightly deduced from this view that if the gods threw many stones each year, then roughly the same proportion should land in the bucket from one year to the next. And so it was, and anyone who dared disagree was branded a heretic.
In the age of Galileo, a new view arose that we should not merely take the words of the ancients, but actually observe these phenomena. At this time, it was observed that from year to year, the proportion of similarly rated credits which defaulted was not in fact constant. There were years with many defaults and years with relatively few. This contrasted sharply with the views of the ancients, and so the modern philosophers set out to explain their radical observations. It must be understood, however, that no one could part with the stones in the pit model, and so it was by revisions and enhancements that the philosophers proceeded.
The first explanation came written by followers of the Merton model, among them the philosophers of J.P. Morgan. The Morgan philosophers held that the gods did indeed cast stones into the pit, but that these stones did not fall independently as in the classical model. These philosophers posited an unseen "attractive force" which caused the stones to influence each other as they fell. The gods tossed these "attracting stones" into the pit, raised the bucket, recorded the lucky good credits, and damned those which had missed the bucket to an eternity of bankruptcy proceedings and recovery rate studies. Thus, there were years in which the stones mutually attracted each other toward the center of the bucket, and very few defaults occurred, and there were other years in which the stones moved as a group toward the edge of the pit, and a large number fell past the bucket into default. The constant in all of this, the area in which the Morgan philosophers could not break with the ancients was that the bucket never changed.
To challenge this view, a school of philosophers arose in London, inspired by the insurance models of antiquity, and calling themselves Credit Suisse Financial Products. The CSFP philosophers held that the "attractive force" was a construct of mortals unable to explain the workings of the gods. And, as a practical matter, how could mortals ever hope to measure the strength of this unseen force? The correct part of the ancient view, they asserted, was not the constancy of the bucket, then, but the inertness of the stones. But how to explain the observations? The answer came in the rejection of the view that the bucket never changed. Instead, the CSFP school maintained that the diameter of the bucket, though unobservable to mortals, changed randomly from year to year. Thus in some years, the gods cast the stones (with no attractive forces) toward a very small bucket, and many defaults occurred, while in other years the gods cast the stones toward a large bucket, and the mortals spoke of an upturn in the credit cycle. This school remained interestingly silent, however, on how to describe the severity of the changing diameter.
And so here we are, with radicals screaming "Lovers attract, stones fall!" or "Protect the sanctity of the bucket!" and the politically correct pleading that we must understand each other and accept the existence of different points of view.
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