Meaningful Returns

Noah Smith had a piece at Bloomberg yesterday about a paper by some economists that delved into the role of complexity in the performance of mortgage-backed securities issued between 1999 and 2007. These were the securities that found themselves at the center of the financial crisis in 2008.

The paper basically found that the more complex the mortgage-backed security package, the worse the performance of that security. Which is unfortunate. But not terribly surprising (for a number of reasons).

What’s most unfortunate is that the inverse relationship between complexity and usefulness is not confined to mortgage-backed securities. In fact, at any given time at your local Starbucks or Panera you are likely in the company of people peddling financial complexity to innocent bystanders who are just trying to retire or pay for their kids’ college or surf more or buy a 1968 Camaro. Neither the sellers nor the victims can explain the product effectively, and the products themselves are terribly expensive and ineffective, and yet the products sell like hotcakes. Because complexity sells.

But you know what complexity doesn’t do? It doesn’t solve problems.