Abstract philosophy survey results

So I put up an abstract political philosophy survey on Reddit yesterday, and got over 1300 replies to 9 questions.

I have decided to show them on a net percentage scale, i.e. if 80% choose blue and 20% choose yellow, the overall marker will be on 60% towards blue.

N.b. for ease of reading, the end points vary among 25, 50, 75 and 100.

You are walking down the street and a genie appears from behind a bush. It presents you with ten cardboard boxes, 9 of which contain £10,000,000 and one of which contains your instant, painless death. What do you do?


A genie (another) appears and offers you a choice. Either the genie will donate £1000 to starving children in a third world country, and £10,000 to a political group advocating that vaccinations cause autism, or neither group will get the money.

You are a judge. You are presented with 5 men, 4 of whom have each murdered one person, and 1 who is totally innocent. You have divine knowledge that the murderers will not murder again if they are freed, but you are also unaware of who the innocent man is, and there is no way to find out. The sentence for murder is 30 years in prison. What is your sentence?
Con jail


green jail


Lab minus









Lab N 

Lab plus jail


LD jail


UKIP jail.jpg




















You are standing on a bridge over a railway track. You see a runaway train coming down the track towards two people tied to it. You can reach a lever that would divert the train onto an off-flow track, with only one person tied to it. What do you do?

Unfortunately, the results were too tight to clearly display, so they are as follows:


You are a soldier dealing with a terrorist cell in a foreign country. You have captured a 12 year old who knows about a bomb that will be set of tomorrow and kill 2 people. The child has been brainwashed into keeping the secret of the bomb. You have divine knowledge that if you torture the child, you will get the knowledge and be able to stop the bomb on time. What do you do?

You have been made governor of the Bank of England and the chancellor asks you which of his two economic plans you recommend. The first will increase the average income of the poor by £300, and of the richest 5% by £10,000, which will not be taxable income. The second raises the wages of the poor by £100, and the rich will have no increase. Which budget do you suggest?

You are visiting a city and see an injured duck. Your train home only runs once every 4 hours. If you phone the animal rescue, you will miss your train in 10 minutes and you will have to wait at the station for the next one. If you leave the duck, it will die overnight.


You are at war. Deciphering an intercepted code, you learn two things about your enemy. A single spot in their defence will be at its weakest in ten days, and they will attack one of your cities in five days. What do you do?


You are the head of a campaign for a presidential candidate. You have been called into court to testify about your boss. You know she has been part of a scandal covering up child abuse , but also you divinely know that the country will be significantly better off if she wins. If you tell the truth she will lose; if you lie, it will be a closed case and justice will never be done. No one will ever know that you lied except your boss.
Truth or lie

Raw data can be found here.




Theresa May vs Jeremy Corbyn

In a survey on the UK politics subreddit, over 1100 respondents gave their opinion on whether Theresa May or Jeremy Corbyn would be better for the country on a selection of variables. The responses have been separated by party and depicted below.

1 = Much better under May, 2 = somewhat better under May, 3 = a little better under May, 4 = about the same, 5 = a little better under Corbyn, 6 = somewhat better under Corbyn, 7 = much better under Corbyn

In the party guide, Lab- = anti-Corbyn, LabN = Corbyn neutral, Lab+ = pro-Corbyn


Economic equality

Econ eq

Social equality

Soc eq

Economic growth

Econ growth

Education standards


The environment


Protection from terrorism


A strong Brexit deal




Average of the 8 factors

average of 8


If you would like to see the full results, click here.

Labour support for Corbynite policies

Yesterday, I published a short poll asking people on the Labour subreddit how they felt about a number of Jeremy Corbyn’s policies, to determine whether the claim that Corbyn was the problem more than his policies were true.

Below, I’ve changed my previous colour scheme for ease of reading, and we can imagine someone asking a four-year-old what they think of Corbyn and answering with trafic lights, i.e. the green is the pro-Corbyn group, yellow the neutrals, and red the anti-Corbyn group. So it definitely was not a subliminal attempt to paint the anti group as the ‘true Labour’, before I receive such an accusation.

As a reminder of the scale: 1 = very bad idea, 2 = bad idea, 3 = a little bit of a bad idea, 4 = neither good nor bad idea, 5 = a little bit of a good idea, 6 = a good idea, 7 = a very good idea


Railways should be nationalised

Rail nationalisation

HS2 should be scrapped


Diplomacy with Hamas and Hezbollah helps the peace process

Ham n hez.jpg

Trident should be scrapped

scrap tri.jpg

The UK should not bomb ISIS in Syria

no syria.jpg

The Falkland islands should have “some degree of joint administration”


We should impose an arms embargo on Israel


Nuclear power should be banned

nuclear power

The energy companies should be nationalised

nationalise energy.jpg

The coal mines should be reopened


A maximum wage should be introduced

max wage

Britain should be a republic


“We should be adult and grown up and decriminalise cannabis”


If you would like to see the graphs of the original data, you can do so here 



Political controversy

For the third time, I took to the political forums of Reddit to find out how much support a set of controversial political opinions might receive, and how it breaks down party by party. Over 700 people responded to 20 statements, and gave an answer between 1 and 7, where 1 meant a strong disagreement with the statement and 7 a strong agreement.

I have decided to display the 20 statements here not in the order they were presented, but rather in increasing range between the highest and lowest scores among the seven groups (UKIP, Con, Lib Dem, Green, Lab (pro-Corbyn), Lab (Corbyn neutral) and Lab (anti-Corbyn), i.e. from least controversial to most controversial.

Firstly, a brief look at the demographics of our respondents.




Party voting intention, if an election were held now:



A breakdown of Labour voters:



The first few of our statements were rather uncontroversial and had a range of under 1, so I have merely given these as averages to avoid a messy cluster on one part of the scale.

Reminder: the left of the chart means ‘strongly disagree’ and the right ‘strongly agree’.

“If parents choose to eschew modern medicine and bring a sick child to a faith healer, the state should permanently remove the child before damage can be done. ” [Range = 0.3]

Faith healer



“It is wrong to abort a baby for the sole reason of its gender.” [Range = 0.4]

Gender abortion.jpg


“If I knew I would not get caught, I would consider murder. ” [Range = 0.5]



“Nuclear power is no less safe than renewable energy sources. ” [Range = 0.9]

Nuclear power


“Democracy is overrated. ” [Range = 0.9]



An interesting point to note is that a “controversial opinion” works the opposite way for individuals compared to groups: as all 7 groups were more or less in agreement for the 5 above statements, you could argue that they are uncontroversial, yet that also means that any individual disagreeing with the average *is* controversial. Conversely, if the 7 groups are not at all in agreement, while that might mean it is a controversial issue, any individual with an opinion on an extreme end will not be without company.


And now to our more party-divisive issues.

[Note: in the charts below, L+ = Labour (pro-Corbyn), L- = Labour (anti-Corbyn) and LN = Labour (Corbyn neutral).]

“There is nothing wrong with euthanasia. ”



“People who take homeopathic remedies then die deserve no sympathy. ”



“Russia is an enemy of the West.”


This issue appears to be a lot more random than others in terms of party allegiance, as the Greens and Conservatives are in close agreement, with UKIP and the anti-Corbyn Labour faction taking the end positions.


“The Middle East would be a much better place if it weren’t for Western Intervention.”

Middle East.jpg


“The government should be able to read people’s emails, texts etc in order to fight terrorism.”


N.b. the “L-” on 2.2 should be a LN. Am I going to change it? Nope.


“A degree in English is intrinsically less worthwhile than a degree in engineering. ”



“Most poor people are in that situation through their own actions rather than from factors beyond their control. ”

Poor people.jpg


“The majority of black people do not face serious racism in the UK. ”



“Women’s rights have now more or less caught up in the UK, and feminists should focus their attention on more serious issues abroad. ”



“The death penalty should be re-introduced. ”

Death penalty.jpg


“Donald Trump would be a better president than George W Bush.”



“The beliefs of a majority of Muslims in the UK are incompatible with modern Britain.”


And now to our top three most controversial issues:


“Practicality aside, there is nothing unfair about a top tax band of 90%.”

Top tax.jpg



“It is preferable for children to have a parent of each gender than same-sex parents.”

Gay parents.jpg

And, with a range of 3.8, our most controversial statement:

“It is immoral to have nuclear weapons as they are fundamentally civilian-targeting weapons.”

Nuclear weapons.jpg


An interesting point that the final issue highlights is how frequently the pro-Corbyn faction of Labour overlaps with the Greens, and the same between the anti-Corbyn faction and the Lib Dems. That said, there are a number of issues where that is not the case, and a few cases where the anti-Corbyn faction took a ‘more left’ view than the pro-Corbyn faction, for example on sympathy for those who take homeopathic medicine or on Donald Trump.




What makes a good PM?

This week I posted a survey on what qualities people people want to see in a potential PM, and had around 450 responses. They were asked for each of the qualities whether they found the quality personally important, and whether that quality was important in winning an election. They were then asked to rate 8 politicians on those qualities . All of these were on a 1 – 5 scale, where 1 is the lowest and 5 the highest.

The qualities that were discussed were being patriotic, intelligent, tough, honest, good looking, compassionate and an ordinary person. The politicians in question were David Cameron, Jeremy Corbyn, Nigel Farage, Ed Milliband, Boris Johnson, Theresa May, George Osborne and Chuka Umunna.


Patriotism self

Here, the green dot represents the average response to the question “How important is it to you personally that a potential PM is patriotic?”; the purple is the average response to the question “How important do you think being patriotic is to electoral success?”.

Next, our politicians.

Patriotism politicians


Intelligent self

It is interesting to note that it is almost unanimous that being intelligent is a trait that is important for people in a PM, yet there is a shared perception that it isn’t overly important to winning an election.

Intelligent pol

With our politicians, we have a much smaller range than before: the difference for patriotism was 2.03 (Corbyn on 2.09 vs Farage on 4.39); the difference here is only 0.87 (May on 2.97 vs Millinand on 3.84).


Tough self

Tough pol


Honest self

I must admit I laughed at the cynicism of my respondents: although honesty was clearly important to them, it was deemed the least important of the seven traits when it comes to electoral success.

Honest pol

Good looking

GL self

In a reversal of cynicism of the honesty question, the majority of people say that they aren’t swayed by good looks, but seem to think that it will affect electoral success.

GL pol


Com self

Com pol

An ordinary person

Ord self

Ord pol



The party differences

An interesting thing that comes from this data is how people’s opinions vary according to what party they say they would vote for if an election were held today. Surprisingly, people are reasonably unpartisan when it comes to judging politicians: the Conservative voters still said that Corbyn was more honest than Cameron; the Labour voters still said that Cameron was tougher than Corbyn (although obviously, there were some shifts in favour of people’s preferred parties). What does change, however, is what values people find important and unimportant.

According to Jonathan Haidt, there are five areas that matter when discussing politics (later a sixth was added): fairness; care (for others); loyalty to the larger group; respect for authority and tradition; and purity (e.g. religiously pious). He suggests that right-leaning individuals tend to care a fair bit about all five categories, while left-leaning people care a great deal about the first two, but not very much about the latter three. As such, a combination of group loyalty and respect for tradition would mean that we would expect right-leaning people to value patriotism more highly than left-leaning people, and the results confirm this.

Here are the seven values, split into importance according to voting intention of Labour, Conservative, Liberal Democrat and UKIP (unfortunately the sample sizes were too small to create a meaningful representation of SNP or Green voters).


Patriotic parties

A key consequence of these kinds of difference is what party leaders use as targets. For example, Jeremy Corbyn is likely not overly concerned about appearing patriotic, and those around him probably agree. However, if Corbyn wishes to win over UKIP supporters who used to support Labour, he needs to understand that they do value patriotism, and without being patriotic, it will be much more difficult to win them over.


Int part

Seemingly, no party wants to be the party that doesn’t value intelligence.


tough parts


Honest parts

A man with less journalistic integrity would make a joke about that set of results.

Good looking

GL parts


com parts


Ord parts

Finally, is the breakdown of answers to the question “Which quality is most important for you personally?”

quality pie

I should note that although it shows up as 0%, there were actually 2 respondents who said that the most important quality was ‘good looking’.

If you would like to look at the results to my survey in further depth, they can be viewed here.


Policy opinion breakdown – what the nation thinks

Recently, I put a survey on the website Reddit, specifically inviting users from the subreddits of /r/ukpolitics, /r/unitedkingdom and /r/uklabour to answer.

I got 1194 responses, which allow me to paint a fairly decent broad-strokes picture of how the UK feels on certain issues, and how those issues compare among supporters of different parties.

First and foremost, a warning on how to read statistics

I am not a professional pollster, so my questions were often overly vague, and occasionally potentially misleading. Therefore, the first rule is to assume every finding here is potentially wrong. Secondly, in the main results form (linked below), the results are simply in their raw form. That is to say that the number of respondents who supported certain parties did not reflect the national spread, so on that results page, the results are only intended to reflect the users of the parts of Reddit that answered. In this article, I have made an attempt to weight some of the more interesting results to better reflect how they might be seen nationally. Thirdly, other demographic biases are present here. There is a very strong gender imbalance, where more than 90% of respondents are male, although generally this doesn’t have a massive impact on most issues (although that is not to say that there is no impact). More important to policy belief is age, and unsurprisingly an internet poll leads to a massive underrepresentation of older people. Unfortunately, the number of people in the groups 40 – 49, 50 – 59 and 60+ were so low that I cannot fairly weight responses to include an age weighting without a very large margin of error.

Other biases do exist in the data of course, but as long as you have the three points above in mind, you should largely be able to read the data without being misled.

If you click here you can read the raw data responses, and once you have had a look there, you can come back to this article to see party-weighted results for a couple of the issues, then a more in-depth analysis of four issues: the legalisation of marijuana; opinions on the EU; state ownership of the NHS, the railways, the postal service and the utilities; and finally on voting systems.

Party weighted results

Party weighting is particularly tricky since to reflect the national opinion correctly, you would have to include all the minor parties, as well as the opinions of those who are undecided or non-voters. As such, I will simplify the following questions and then divide them by the vote share as of the last GE, and ignore non-voters and minor parties. This isn’t ideal, but it does somewhat combat the online biases. Secondly, the question asked in the poll was what party people would vote for today, so there is a small discrepancy with comparing today’s imaginary GE with the 2015 GE. Bearing that in mind, here are three issues to compare raw data and party-weighted data.


Firstly, opinions on trident. The initial poll asked for more detail to include military spending, but this is a simplified one just referencing trident.

raw                                                                 weighted by party

Trident raw  Trident weighted

As you can see, the weighting of the data here shows that in fact there is a rather large majority of the country that supports keeping trident (again, the assumption being that the average conservative voter in my poll, for example, is representative of the average conservative voter in the country).



Next, immigration:

Raw                                                                   Weighted by party


Again, the party weighting paints quite a different picture: in the raw data. a total of “too high” was 48%; in the weighted data, “too high” was 60%. If this data reflects the country accurately, it will be interesting to see how it might affect the EU referendum.


Finally, a ban on niqabs and burkas. Before even looking at the data, I should note that this was one of the questions that I later realised was misleading, as given by answers in the ‘other’ answer boxes – I assumed that people would know what niqabs and burkas were (both covering the face), whereas some responses suggested that people thought that one was a face covering and the other just a headscarf.

Raw                                                                    weighted by party


Here we see the ‘banning’ portion of the pie increase somewhat with weighting, although it is still in a minority by quite a large amount. It should be noted that the majority of ‘other’ votes were in favour of a ban, but under conditions, for example in schools.


Now, a breakdown of four issues

Legalisation of marijuana

Firstly, our overall data (raw) in response to the statement “Marijuana should be legalised for recreational purposes”

Mar All

As you can see, there is an overwhelming majority in favour of legalisation

Party by party:

Conservative                           Green                                            Labour


Lib Dem                                      SNP                                                UKIP

It is interesting to note that even amount UKIP supporters, as the least likely group to support legalisation, agree leads disagree by thirteen points. As such, unless this data does not accurately reflect the country, it would appear that this issue is one that is up for grabs for future political point-scoring.

Now interestingly, here is a break-down of the same data by age group:

Under 18                                        18 – 21                                        22 – 29


30 – 39                                  40 – 59

Mar 30 - 39 Mar 40 - 59

This indicates a somewhat counter-intuitive trend, where the young are less accepting of legalisation than the old. There are two possible explanations here: my view of the world may be wrong and the data reflects the truth; alternatively, the fact that this was an online poll on Reddit may have generated a user bias, that became especially prevalent in older groups. If the vast majority of people in their 40s and 50s do not casually use the internet for fun, the group that does may be rather unrepresentative of their age group as a whole, and so the data may not reflect the national picture.

Whatever way you look at this data, in every breakdown by age or party, there is very significant support for the legalisation of marijuana.


Concerns about leaving the EU

This section will show a party breakdown of what people thought Britain would be like out of the EU.

Overall (raw)

EU all


Party by party

Conservative                                                            Labour


Green                                                                         Lib Dem


SNP                                                                           UKIP


The key point of interest for me was that out of almost 200 votes, the Conservative pie was only one vote off being perfectly symmetrical. Now again, there could be a user bias, but either way among the Conservative voters that answered, the EU is certainly not as clear cut as believed.


State ownership

For the third breakdown, we are looking at which organisations have support to be run by the state. Firstly, the overall data (raw):

State all


Now party by party:





Voting systems

As our final breakdown, we will look at what system people would like to use to elect representatives. Firstly, the overall data (raw):


vote all


It should be noted that a very sizeable number of the 47 people who voted ‘other’ wrote “STV” (single transferable vote), evidently unaware that it is a form of PR, and thus really they should have chosen ‘PR (any)’.

Party by party:

Conservative                                       Green                                        Labour


Lib Dem                                             SNP                                              UKIP


With five of the six main parties having vast majorities in favour of replacing our FPTP system, it will be interesting to see how long it can hold on.


And finally – the best of the rest!

One of the fun things about having over a thousand people reply to the survey was that occasionally they took the chance to write something in the ‘other’ box that gave me a laugh. As such, I thought I’d share a few of them here.

In third place was that we should “nationalise /u/Duke0fWellington’s cocaine reserves” in order to fund universities.

In second place was someone saying that taking marijuana should be ‘compulsory’ for all citizens.

In first place was a bizarre historical reference in the volcano question, where one respondent suggested Enrico Dendolo (sic), a 12th century Doge of Venice.


Understanding 2008 – Part 4: How everything came together

This is the fourth of four posts explaining how the economic crisis of 2008 came about. Make sure to read Part 1 on housing bubbles, Part 2 on financial derivatives and deregulation, and Part 3 on financial players, subprime mortgages and leverage if you haven’t already done so. 


In 2001, following various issues (like the dot.com bust), the chairman of the Federal Reserve, Alan Greenspan, lowered interest rates down to 1% in an attempt to boost the economy. Big investors traditionally liked buying government bonds, as they were seen as a very safe return on investment, but 1% was such a low return rate that they started looking elsewhere. At the same time, 1% was very little to repay, so many banks borrowed more money, assuming they could make a higher return than 1% and so turn a profit.

As the housing market was booming, the banks and investors decided that this would be a good place for them to get involved and make a lot of money. For a while, many families were given easy access to credit to buy their own homes, and the mortgage brokers sold their mortgages on to investors, and they were lumped together by their thousands into Collateralised Debt Obligations (see Part 2), and a lot of people got very rich.

After a while, the market of financially prudent people looking for mortgages dried up, as they had all been given one. In order to keep making money, the mortgage lenders started looking more into the subprime market (see Part 3). Although they knew that occasionally some people wouldn’t pay back their mortgage, it wasn’t seen as overly problematic, as it just meant the investor would get their home instead, and homes were good to have since property values were rising so much.

The problem was that houses and their prices do not exist in isolation, but in relation to other ones.

Let’s imagine America street, with 20 houses. When the first house on the street goes up for sale, it’s no big deal, and no one else is affected. However, if three months later it isn’t sold, and two more houses on the street also default and go on sale, this starts to have two effects. Firstly, the simple rules of supply and demand mean that if two families are wanting to move to the street, and one house is available, the price might go up and the richer family gets it. However, if those two families are competing for three houses, then there will be no price rise, and potentially even a price drop to try and sell the house. Secondly, if a few months later there are five empty houses, not only do the occupied houses lose value from an abundance of supply, but the street starts to look empty and unappealing for new families, and demand drops too. The Smiths at 1 America Street were paying a mortgage for when their house was worth $400,000, but now their house is valued at only $100,000. It is now financially better for them to simply abandon their house and move on.

This problem started happening all over America. Banks and investors once had a collection of mortgages that paid in money, but now just own homes. Not only was their revenue stream cut off, but also the homes they now own in their thousands are constantly losing value. Various financial players try to sell off these useless assets, but everyone knows there is no more money to be made so no one is buying.

This would not have been such a huge problem if everyone had been investing their own money, as they simply would have owned a useless selection of properties, but nothing that actually harmed them. But they weren’t investing their own money. Remember the principle of leverage (see Part 3), which meant that to make these investments, the banks had borrowed huge sums of money, at an average of 33 times more than they actually had in reserve. So when it came to paying back their money, not only did they bankrupt themselves, but lost money for any institutions they were borrowing from. The whole sector was so connected that the collapse of one led to everyone losing money.

So why did the problem not just affect banks? When bank X lost all their money, it also meant that they had to tell every ordinary working person who had kept their money in that bank that their savings were gone. Moreover, the interconnectedness of the banks was not kept in America, but was spread throughout the world. For example, when Lehman Brothers collapsed on Monday 15th September, 2008, the effects meant that by Friday factories had permanently closed in China.

Understanding 2008 – Part 3: Financial players, subprime mortgages and leverage

This is the third of four posts explaining how the economic crisis of 2008 came about. Make sure to read Part 1 on housing bubbles and Part 2 on financial derivatives and deregulation if you haven’t already done so. 

A key problem in discussing financial issues is that too often the institutions and individuals are simply labelled ‘banks’ and ‘bankers’, which mixes up several very distinct groups. Here is a short list of a couple of the most important financial players, each with a simple definition of what they are. As usual, these definitions are for people not familiar with financial markets, and lack nuance, but allow for the broader picture to be understood.

Stock broker – This is somebody who buys and sells stocks and shares on the stock market. Shares are a portion of a publicly owned company, and may pay dividends and give voting rights, depending on the type.

Commodities trader – While seeming like a stock broker, a stock broker buys into companies, whereas a commodities trader buys raw materials themselves, looking for fluctuations in their prices to make returns on their money. They largely work around future derivatives. The four main commodity markets are agriculture, metals, meat and livestock, and energy.

Mortgage broker – A mortgage broker finds potential homebuyers and connects them to a mortgage lender and receives a commission.

Mortgage lender – a mortgage lender in a institution that lends money for people to buy real estate.

Investors – An investor is anybody putting up money with the hope of making a return on investment. A low risk investor might buy government bonds, which rarely fail, but have a low percentage return. An investor can be an individual or an organisation, including pension funds or even charities.

Ratings agency – The previous article described how tranches of a CDO might be labelled as safe or risky. However, all sorts of financial players may themselves be given a risk rating, even governments. The safest level given to anything is a AAA (said as ‘triple A’). The ratings agencies are the people who decide how risky a given investment might be. There are three main ratings agencies: Moody’s, Standard and Poor’s, and Fitch.

Insurers – An insurer is simply an organisation that provides insurance. The key role of the insurers in the 2008 crash was providing credit default swap insurances between banks. The main insurance giant in the crash was AIG.

Subprime mortgages

In very broad strokes, a prime mortgage is a ‘good’ mortgage, and a subprime mortgage is a ‘bad’ one.

In the same way that a government bond gets a rating, individuals also get rated on Consumer Credit Ratings, but rather than given a letter code, they are rated on a score of 0-1000, depending on how good they have been at paying back debts etc.

When someone goes to take out a mortgage, there a few things that may factor into what conditions they get. If, for example, Amy goes to get a mortgage on her house and her credit score is 600 or more (i.e. she has been good at paying back loans on time in the past), then she is likely to be able to get a good mortgage with a low interest rate, and will be expected to also provide a downpayment, of say $20,000.

A key problem in the crash was that mortgage brokers approached people like Bob, who had a credit score of 450, and couldn’t afford the downpayment. Since his conditions made it more likely that he would fail to make his repayments, he will have a higher interest rate, say 6%. This is an example of a subprime mortgage.

One type of mortgage is an ARM – an adjustable rate mortgage – where the first few years are paid at one rate, then there is a reassessment and the rate changes, usually to a higher rate. If someone could pay the low rate, but not the higher one, they may default on their loan, and the mortgage dealer would take ownership of the property.

The final piece of the puzzle is leverage, which thankfully is easy to understand. Simply put, leverage is borrowing money to make more. For example, if a bank had £100, and could buy Christmas trees at £80, and sell at £120, rather than buying one at a time, and making £40 per Christmas tree season, it could borrow £900 to have £1000, buy 12 trees for £960 (with £40 left over) and sell them for £1,440, repay the £900 + £100 of interest, and have a total of £480 at the end of the day. If our bank started with £100 and borrowed £900, it would be said that it has a leverage ratio of 9:1. Provided the borrowing is followed by the selling, the leverage ratio doesn’t matter. However, if someone borrows money at a high ratio to buy something, then can’t sell it on, it becomes extremely problematic, as not only will it itself go bankrupt, but the lender could potentially lose extraordinary levels of money too.

In 2004 the Securities and Exchange Commission passed a change regarding leverage. This led to the average leverage ratio growing from 12:1 in 2004 to 33:1 just before the crash. The larger the ratio, the more of an effect that one bankruptcy has on other institutions.

At this point, you should now understand what a housing bubble is, what a financial derivative is, who the different financial players are, what leverage is, and what the subprime mortgage market is. Part 4 will explain how all these came together to cause the crash.

Understanding 2008 – Part 2: Financial derivatives and deregulation

This is the second of four posts explaining how the economic crisis of 2008 came about. Make sure to read Part 1 on housing bubbles if you haven’t already done so. 

A very significant part of the financial world today revolves around the use of products called financial derivatives. This post will examine what they are, the two most important ones for the crash (CDOs and credit default swaps), and a brief history of their deregulation.

Firstly, what is a derivative? Essentially, it is a type of contract that itself is not worth anything, but derives its value from something else, like an asset or an index. An easy-to-understand example is one called a future. In a future, farmer Andrew and seller Bethany agree in September that come April, Andrew will sell Bethany 100 cows. Now, cows currently cost £100 each, but Andrew is concerned about the crop blight. Maybe it will kill off his neighbour’s crops, and his cows will be fatter and worth much more. At the same time, maybe his cows will be underfed and worth much less than £100. Bethany and Andrew’s future agreement means that Bethany will pay £100 per cow no matter which way the price goes. By doing this, both Bethany and Andrew can lower the risk that they will lose a lot of money over the agreement.

Now the two most important derivatives to the 2008 crash: CDOs and credit default swaps. Bear in mind that these are much more complicated contracts than I can hope to describe accurately, indeed it had been suggested that they were deliberately created to be needlessly complicated so that law makers would be unable to understand them and thus unable to ban otherwise dodgy practices. If you have never heard an explanation of these before, I personally would recommend reading their explanations several times, until you are confident enough that you could explain it to a friend; when I first learnt about them, I only half understood and had to repeatedly go back and check again.

CDOs – Collateralised Debt Obligations

To start, it should be noted that a CDO by itself is not a derivative, but more a specialised form of corporate bond. However, it becomes a derivative when combined with the CDSs below, and is then known as a ‘synthetic CDO’. Whether it is a derivative or not is irrelevant to understanding the crash, but is worth noting for those more interested in the fine details of corporate finance. So on with the definition.

A CDO is when organisation A brings together a large number of loans and pools together to create one big CDO. The CDO now sliced into ‘tranches’, lets call them safe, medium and risky. Other financial players may now invest in these three tranches, as they are sold on the bond market alongside conventional bonds. The three tranches can be imagined as three rock pools, where the highest one flows into the middle and the middle flows into the bottom one. When organisation A collects money from the various sources that make up the CDO, they first pay off money into the top rock pool, and assuming everyone pays, then then fill up the medium pool, and then the ‘risky’ bottom pool. However, if the stream of money lessens, for example when a risky loan is not paid back, the stream may fill up the top and middle pools, but only a little bit of the bottom pool. To compensate for the likelihood of failure to get the money back, each of the three pools gets a different return on investment. Investors in the safe pool may only get back 4% of their investment, whereas the medium investors may get back 6% and risky investors 8%. An important feature of the CDO is that although the loans are still passing through the bank, their ownership technically passes on to the investor in that tranche. Therefore, the bank no longer has those ‘risky’ loans on their books, and allows their business to appear more stable than it really is, were the bank to be audited.

Essentially, provided there aren’t too many failures of people to repay their loans to organisation A, things will go smoothly. Unsurprisingly, prior to 2008, there were too many unpaid loans. As you can see below, prior to the crash, the amount of money involved in these products grew staggeringly high:


Credit default swaps

The CDS, although technically complicated, can simply be thought of as a type of insurance on loan repayments. If bank A is receiving loan repayments from housing developer B, it would lose its money were B to default on that loan. As a result, it takes out a CDS from bank C, and just like any other type of insurance, they pay regular small fees, with the potential of a large payout should B default. By doing this, A lowers the amount of risk they are taking by giving B a loan.

Now, the big change from normal insurance occurs in that fact that the CDS is so complicated that it was not regulated, and so it allowed people to take CDSs out on things they weren’t involved in. For example, in our situation above, bank D could also take the CDS out from C, getting money if B doesn’t repay A. To explain why this is bad, imagine Fred takes out fire insurance on his house. He can only receive money if he loses his house, so his interests are balanced out. However, it is illegal for George to take out the same insurance on Fred’s house, because he has no balanced interest: he doesn’t live in Fred’s house, so he can only win from the house burning down, and obviously we don’t want a situation where people have financial incentives to burn down each others’ house. Moreover, the banks got wise to the fact that they could give a bad loan to homeowner X, take out a CDS, then benefit from the homeowner defaulting, which prior to 2008 became commonplace. Like the CDO market, this became ridiculously lucrative – by 2007, the outstanding CDS amount was estimated to be around $62 trillion.

Financial deregulation – a brief history

Financial deregulation is when the government loosens the restrictions on what financial institutions can do. There is a huge amount to say here, but for brevity, a few examples will be given so readers can get a general picture of how the situation has developed.

One early shift, and perhaps the birth of the modern finance sector was the changes for investment banks after the second world war. Initially, investment groups were collections of, say, a dozen wealthy businessmen, who pooled their own money and worked out where they thought the markets were growing. The rules were lifted and allowed banks to invest their clients’ money, and unsurprisingly, people are more willing to risk other people’s money than their own.

The real period of financial deregulation began in the ’80s under Thatcher and Reagan, but continued right up until 2008. One problem was that in the US, former bankers of huge institutions were repeatedly appointed to positions like chairman of the federal reserve or secretary to the treasury. Men like Donald Regan (not Ronald), Alan Greenspan, Larry Summers, Henry Paulson, Robert Rubin and others exacted undue influence on presidents who didn’t understand the complexities of the issues involved.

In 1982, the Garn – St Germain Act allowed savings banks to give out credit cards and issue non-residential real estate loans, which previously only commercial banks were allowed to do.

In the UK, in 1986, Thatcher passed a number of laws allowing more freedom for the financial services. For example, the barrier between stockbrokers and stockerjobbers was removed, allowing the creation of integrated investment banks, and foreign companies were now allowed to buy City of London firms.

A key instance of deregulation in the US is the Gramm- Leach- Bliley Act of 1999, repealing the Glass- Steagall Act from the 1930s. The latter banned the merging of retail and investment banks. When Citigroup and Travelers merged in 1998, they were given an exemption until the GLB Act passed the next year.

The following year, the Commodities Futures Moderization Act (passed under Clinton, with support from both parties) banned the Commodities Future Tradings Commission from giving any regulation for a number of derivatives, including credit default swaps.

In 2004,  the final major deregulatory act before the crisis passed, where the Securities and Exchange Commission allowed various financial institutions to increase the leverage ratio (explained in the next post), essentially allowing them to use many times more money than they held in reserves, with ratios up to 50:1 in cases like Fannie Mae and Freddie Mac.

Altogether, readers should not be surprised to see why the 2008 crash was so damaging – it was the culmination of almost 30 years of removing rules that discouraged risky trading.

Part 3 deals with the differences between the different types of financial institution, leverage and sub-prime mortgages.

Understanding 2008 – Part 1: What is a housing bubble?

I originally planned to write a single post on what caused the economic crash, but as there were so many aspects that have to be understood before seeing how they combine, I have decided to split it into four shorter articles. This first article will deal with what constitutes an economic bubble, and how it might happen in the housing market. 

Although we often hear the term ‘housing bubble’ in the news, it is normally given out of context, with no explanation as to what a ‘bubble’ actually is. Thus, it is important that we have the definition of an economic bubble before examining its causes: although the term dates from the early 1700s and has no one exact definition, it is roughly defined as when the price of a certain asset deviates greatly from its intrinsic value. What we mean by this is that if a house in country X cost $100 in 2000, and correcting for inflation, cost $200 in 2010, in the perfect world, its intrinsic value would have doubled. There are many factors that determine its intrinsic value: if the price of the bricks doubled, or if the price of labour doubled, or the house were twice as big, then we could say it is fair that the house cost twice as much. While it is impossible to work out the exact intrinsic value of any particular asset, if the house built in 2010 for twice the price is identical to the house built in 2000, we can assume its price has risen beyond its intrinsic value (although other factors beyond the house itself can increase its intrinsic value, for example house location). One pair of factors that might drive the price up without intrinsically increasing the houses value is the twins of supply and demand.

Adam Smith posed the question of the paradox of water and diamonds. Why is water, something utterly necessary for us to live and therefore in high demand, so much cheaper than diamonds, something that we don’t need at all? The answer, of course, is that that water is in great supply, while diamonds are in short supply.

Consider how this applies to housing. If the housing association builds three houses, and charges £20,000, and Anna, Bob and Claire can all afford that, then the price ought to rise only with inflation. However, if only 2 houses are built, and Anna and Bob can offer more than 20,000, but Claire can’t, and all three ask for the house, it is only natural for the housing association to raise the price to £21,000 and increase their profits. This situation of under-housing is exactly what is happening in the UK today, as can be seen in the following graph:

cbi housing shortage

When you add in the migration patterns of internal migration (away from the north of England, and towards London) to the housing shortage, it is easy to see why the following rates of inflation (2014) are so high:


In a historical perspective, the average house in 1979 was around £20,000, which in todays money is about £102,000. As it is, the average house today costs £195,000, just shy of twice the growth of inflation.

For interest, it is also worth noting that a housing shortage also drives up rents, and has lead to the UK having by far the highest average rent in Europe:

RentSource: http://www.numbeo.com/cost-of-living/rankings_by_country.jsp

Now it is important to be aware that a shortage of supply is not the only thing that can cause a bubble, and the US housing bubble prior to the crash was actually caused by a variety of other factors, such as ease of attaining mortgages (if it’s easy for people to get $120,000 in a mortgage, why only charge $110,000?). However, in understanding what caused the crash, it is only necessary to understand what a bubble is, and to know that there was a very large housing bubble, as can be seen here:


With the housing bubble (hopefully) clear, Part 2 explores financial derivatives and financial deregulation.