In a New York Times column titled, “School for Scoundrels,” Paul Krugman reviews a new book by James Fix titled, “Myth of the Rational Market.” The book describes the development of elaborate mathematical programs to determine values of various investments. The author contends that these programs and their masters led to the financial structure built on sand that collapsed in 2008 yielding the “Great Recession.”

There is a place for these programs. A good friend of mine is one of the top brains in the world involved in valuing “risk” of investments which employs such programs.

However, my contention over these many months is that it was not the valuations of investment alternatives that led to the economic mess. Rather it was the devaluation of a distinct class of investments, “securitized” or “collateralized” debt, based on the false premise that falling home prices would yield massive defaults on mortgages. As I have stated over and over again, the foreclosure rate on mortgages, in fact all debts, never exceeded 3% of the outstanding loans.

Properly valued the securitized debt should have been valued at the “maturity value,” i.e. the balance due, times interest rate, times years left to pay off, minus 3%. But the mathematiclal models and programs used by those valuing the securitized debt instruments devalued them as much as 90%. As I have also stated ad nauseum, what should have been an acceptable correction to the valuation of this mountain of debt, was elevated to economic hari kiri.

No, the scoundrels were not the 30 year old MBAs with a Blackberry who conjured up false valuations of various investments. The scoundrels were the 30 year old MBAs with a Blackberry who savagely devalued securitized debt instruments and in the process damn near destroyed the economy.