Informational Frictions

The Executive Summary of "informational frictions" from the Federal reserve reads like a catalogue of skeptical chasms from Sextus Empiricus.  In fact, the term "informational frictions" seems to be a somewhat casual appropriation from the lexicon of information theory, deployed as a euphemism for the global collapse of inductive certainty along the entire chain of the mortgage lending and securitization process.  Clearly, there is no longer any effective analytic apparatus for assessing either credit-worthiness of borrowers, or the overall risks of investments in general.  (This raises the interesting skeptical question of whether there ever was.) The fact that there are no clear winners in this situation should at least prompt some of the analysts and managers, who have so much to lose by misunderstanding these things, to at least try to conceptualize where all the "lost" money has run off to.  I'm not just talking about lost value in terms of stock prices, but of lost money lent out to subprime borrowers who had purchased homes in a vastly inflated housing market.  First of all, it did not go to the folks who bought the house and took out the mortgage.  It went, by and large, to the people from whom they bought these properties.  These homeowners had, in recent years, seen the value of their property driven up to the skies by this very same process of excessive and reckless lending.  So, if you're interested in a more phenomenalogical reading of the subprime crisis (which you should be even if your interest is profit-driven), then it is important to investigate the event outside the framework of pure loss - keeping in mind that real money did change hands, and was spent, reinvested, etc.  This kind of research has the potential to generate new and more sophisticated understandings of concepts like gentrification, foreclosure, and insolvency, which could easily appear as subtle (if unconscious) proletarian mass-strategies.  Strangely, this process isn't being discussed as being part of the lineage of Kafkaesque "mystical bureaucracy".