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Searching for Cassandras
SEARCHING FOR CASSANDRAS....Brad DeLong says he was keenly aware of the housing bubble and fully expected it to burst. Me too! But he didn't expect any of the following:
(3) the discovery that banks and mortgage companies had made no provision for how the loans they made would be renegotiated or serviced in the event of a housing-price downturn.
(4) the discovery that the rating agencies had failed in their assessment of lower-tail risk to make the standard analytical judgment: that when things get really bad all correlations go to one.
(5) the fact that highly-leveraged banks working on the originate-and-distribute model of mortgage securitization had originated but had not distributed: that they had held on to much too much of the risks that they were supposed to find other people to handle.
(6) the panic flight from all risky assets — not just mortgages — upon the discovery of the problems in the mortgage market.
(7) the engagement in regulatory arbitrage which had left major banks even more highly leveraged than I had thought possible.
(8) the failure of highly-leveraged financial institutions to have backup plans for recapitalization in place in the case of a major financial crisis.
(9) the Bush administration's sticking to a private-sector solution for the crisis for months after it had become clear that such a solution was no longer viable.
So then: who did expect any/all of this stuff? Commenter macheath offers a few heroes:
Some people saw pieces of it, but were largely ignored or marginalized. Dean Baker was hammering on the house price bubble for years, and several people (including Gary Gensler at Treasury) called for stronger capitalization of Fannie and Freddie, saying their business model was not sustainable, and they were beaten up by Congress, Democrats and Republicans alike. Brooksley Born at the CFTC wanted to start investigating derivatives in the mid-1990s, and was slapped down by Greenspan, Rubin, and Summers, leading to legislation (backed by Summers) to prohibit the CFTC from regulating derivatives.
Is that it? Was anyone else warning us about Brad's seven points back in 2004? Or 2005?
It would take an extraordinary genius to see all seven points. They are in several different sub-domains of the econo-finance complex, and some key bits of supporting knowledge would have been available only to regulators.
But why so many Very Serious People? missed the housing bubble as a whole (or purposely refused to talk about it) until mid 2007 remains a very important question. It was obvious to a lot of people by 2005 that price trends were unsustainable (including me, and thus I sold my home - early! - in a bubblicious area). Heck, Shiller churned out a new version of Irrational Exuberance by May of 2006. That should have been a red flag for everyone.
It would take an extraordinary genius to see all seven points. They are in several different sub-domains of the econo-finance complex, and some key bits of supporting knowledge would have been available only to regulators.
But why so many Very Serious People? missed the housing bubble as a whole (or purposely refused to talk about it) until mid 2007 remains a very important question. It was obvious to a lot of people by 2005 that price trends were unsustainable (including me, and thus I sold my home - early! - in a bubblicious area). Heck, Shiller churned out a new version of Irrational Exuberance by May of 2006. That should have been a red flag for everyone.
Peter Schiff. Check out youtube for the sky-is-falling prophecy 2 years ago. Pretty amazing.
Exactly the same situation as the 10s of millions of Americans who protested against the Iraq war in 2003: by definition they were not "serious" and were given no press by either the traditional media or the oh-so-serious centrist bloggers. When entire points of view are excluded from the public square it is a little disingenuous of those who did the excluding (hint hint: those who like to say "the truth lies somewhere in between") to now demand proof of anyone having spoken up in that same public square.
For the record, there were a dozen people in deLong's comments section from 2003 to mid-2008 discussing exactly these topics. They were all shushed by deLong and his Super Smart Man(tm) theory of economic organization.
Cranky
Nouriel Roubini. Been predicting a major meltdown for quite a while.
And of course Krugman, but I don't know whether he ever got into the kind of specifics Brad's talking about.
Call we all agree that "all correlations go to one" is the official phrase of 2008?
"Call we all agree that "all correlations go to one" is the official phrase of 2008?"
If I'd had a kid born in the past two months, I'd have named him or her All Correlations Go To One Petey.
Nouriel Roubini.
Don't be afraid the the 'I' word Kevin, it's "incompetence" on the part of both Wall St. and government regulators (starting with Clinton's legendary latter-term SecTreas's, Rubin and Summers).
I'm not going to criticize DeLong because AFAIK his current day job is not as a regulator or financial analyst. Nevertheless there were many knowledgeable, respected people who knew a train wreck was coming. They didn't need to employ any controversial techniques either, just basic accounting and a knowledge of history that needn't be much beyond the high school level.
It would take an extraordinary genius to see all seven points. They are in several different sub-domains of the econo-finance complex, and some key bits of supporting knowledge would have been available only to regulators.
But why so many Very Serious People missed the housing bubble as a whole (or purposely refused to talk about it) until mid 2007 remains a very important question. It was obvious to a lot of people by 2005 that price trends were unsustainable (including me, and thus I sold my home - early! - in a bubblicious area). Heck, Shiller churned out a new version of Irrational Exuberance by May of 2006. That should have been a red flag for everyone.
Tanta at Calculated Risk.
Also, Mish at Global Economic Analysis.
The Housing Bubble Blog got a lot of it right too....
Yep, I agree with those above who say Roubini, and to a lesser extent Krugman and CR/Tanta
A certain Benjamin Wallace-Wells, editor of some socialist rag whose name escapes me, seems to have gotten point 3 (at least) in April 2004
'that they had held on to much too much of the risks that they were supposed to find other people to handle.'
Seems to me they did find suckers to handle it, even AFTER the roof fell in! Of course, no moral hazard is implied. Capitalists learned long ago that morals can be hazardous.
KD, maybe I read it wrong, but I interpreted Brad's post as saying 1 and 2 should have been obvious, even to non-specialists. That 3-9 would greatly compound the effects of 1,2 requires specialist knowledge. A lot of us have been predicting some sort of train-wreck for years, based upon some combination of unsustainable current account deficit, debt accumulation, and housing bubble induced stimulus. That (3) through (9) could greatly magnify the effects of the inevitable unwinding should have been the job of the economists.
...leading to legislation (backed by Summers) to prohibit the CFTC from regulating derivatives.
Is this not the very definition of what is wrong with the relationship between business and government in this country? Does it really get any more clear than this?
Early remarks from Paul Krugman on the housing bubble:
Here's my nightmare: America's recovery from its current slump, whenever it comes, is tentative and short-lived, because the business investment that drove our boom in the 1990's remains stagnant. Eventually the housing bubble bursts and we have another slump; then we have another weak recovery, this time driven by deficit spending, but that, too, fades out. Eventually we look around and realize that it's 2009, and the economy still hasn't fully recovered from the slowdown that began at the end of the previous decade. (September 30, 2001)
The basic point is that the recession of 2001 wasn't a typical postwar slump, brought on when an inflation-fighting Fed raises interest rates and easily ended by a snapback in housing and consumer spending when the Fed brings rates back down again. This was a prewar-style recession, a morning after brought on by irrational exuberance. To fight this recession the Fed needs more than a snapback; it needs soaring household spending to offset moribund business investment. And to do that, as Paul McCulley of Pimco put it, Alan Greenspan needs to create a housing bubble to replace the Nasdaq bubble. (August 2, 2002)
Or suppose that there's some kind of oil supply disruption - or that warnings about declining production from Saudi oil fields turn out to be right. Suppose that Asian central banks decide that they already have too many dollars. Suppose that the housing bubble bursts. Any of these events could easily turn our mild case of stagflation into something much more serious. (April 18, 2005)
Here's what I think will happen if and when China changes its currency policy, and those cheap loans are no longer available. U.S. interest rates will rise; the housing bubble will probably burst; construction employment and consumer spending will both fall; falling home prices may lead to a wave of bankruptcies. And we'll suddenly wonder why anyone thought financing the budget deficit was easy. (May 20, 2005)
Now the question is what can replace the housing bubble. (May 27, 2005)
Doug Noland at PrudentBear has been writing passionately about all of this for five years. Also, Brad Setser.
Elliot Spitzer pointed the finger in a editorial in the WSJ in february of this year, targeting among others AIG. The next day he got caught with a hooker and threatened with money laundering charges. Cause - Effect
http://oxdown.firedoglake.com/diary/543
As much as I never wanted to be in the "who could have foreseen this" camp, I really wonder who ever really thought that the bastions of American financial order would be gleeflullly and deceptively packaging borderline-to-bad debt into somehow attracive investmant vehicles worldwide.
I wish I had something more substantive here, but much as the mendacity and violence of the Bush administration staggered much of the world's opinion, the behavior of their thuggish and thieving co-conspirators in the financial world must also have dropped jaws worldwide at their blatant connivance and cooruption.
I mean, really!
Just like in the 80s when you didn't often see the word fascist in print, polite people rarely discuss class warfare.
The cash cow has been milked. The middle class herd has been thinned. Some new reality awaits us all.
"Watch out now, beware of greedy leaders" and just who are they that direct our nation?
All the staff at Prudent Bear and The Daily Reckoning; Stephen Roache, who was chief economist at Morgan Stanley until his pronouncements were deemed too negative; David Roche at Independent Strategy in London; Jim Walker of CLSA in Hong Kong; Marc Faber in Hong Kong; Hugh Hendry of Eclectica in London; Philip Manduca, Titanium Capital in London. There are literally hundreds of them.
Brad Setser - although he focused more on the unsustainability of the trade deficit than the housing bubble - was the clearest warning bell. I said to myself - "I'm reading this stuff on the website of the Council of Foreign Relations?" And he and Nouriel Rubini are former high treasury officials.
It's been a long time since I read it, but didn't Robert Schiller's "Irrational Exuberance" compare the spike in housing prices to the NASDAQ spike in the late 90s?
I think that book was written in 2001.
Michael Hudson
Eric Janszen
http://www.itulip.com/forums/showthread.php?t=966
Oh, yeah, and Doug Henwood
glad folks are mention roubini, but i wasn't aware (but still not surprised) that mish @ global economic analysis also was so prescient.
Keith at www.housingpanic.com, now found at sootandashes.com. He has been tracking the cycle from unfounded exuberance to denial and panic for years.
oddly enough, Byron Dorgan, the Senator from North Dakota, was prescient about all of this. When voting against Phil Gramms bill that forbid regulation of CDOs, he said
"
a 'financial swamp' would result from "the casino-like prospect of merging banking with the speculative activity of real estate and securities, and that the bill will raise the likelihood of future massive taxpayer bailouts."
Kevin -- if you'd been a regular reader of the CATO Institute, the Heritage Foundation, the Mises Insitute, Mish's blog, Grant's Interest Rate Observe, and Calculated Risk, you would have been up to speed on a half dozen of the most important building blocks of the current crisis, including the most important of these, Fed policy and the Fannie Mae / subprime regulatory disaster.
Add Peter Schiff to the list.
Dean Baker has been pretty on the money about the housing bubble. The rest I'm not so sure about.
I'm curious Greg Ransom, why do you think Fannie Mae is one of the most important building blocks of the financial crisis?
Peter Schiff, Marc Faber, Jimmy Rogers, in addition to Nouriel Roubini and many other analysts, predicted the collapse of the housing bubble and the financial system two years ago. All of them publish well-read financial newsletters. It's inconceivable that the likes of Robert Rubin didn't know about these predictions and the reasons why they were made.
Here's the link to a clip of Peter Schiff appearing on various Fox financial programs, making his predictions and being ridiculed for it:
http://www.youtube.com/watch?v=B8r-nDBx5Jg
Excuse the stress points.
Effing Kevin. I've posted here twice at least, maybe three or four now, to try to grow you from the ignorance in which you sit. Don't you read your own threads?
You ask the questions but don't read the answers. Shit on you.
I edit-searched this page for "CDS" and "default" and got a zero result each time.
Brad deLong is right as far as he goes, but misses the main point.
Brookesley Born was totally right. Having unregulated derivatives and no clearing house was precisely where the weakened hinge that broke the back of the market came from.
We still don't know precisely where the CDS marked peaked at, or where it was at market break down. Best guesses are $62 trillion and $52 trillion respectively. 5 times our GDP. That is pure gambling. Every company's debt became a dice to be rolled. The undelying mortgages, let alone sub-prime mortgages were a small fraction of that number and only a factor in that banks, who normally regulate risk, had not; so the threat spread from their mortgages to debt. And where were the accountants protecting shareholders?
Hence no bank or marginally financial company knew what losses they themselves or any counterparty might be sitting on. And no one could or would tell. Hence sitting on your money and not lending; keep hold of what you've got.
Kevin, whenever you get into this subject you get into something you don't know about and refuse to learn about. It's really not that hard. But your subcutaneous republican self refuses to learn.
Get a grip.
"several people (including Gary Gensler at Treasury) called for stronger capitalization of Fannie and Freddie"
Fannie and Freddie weren't the problem. All statistics show that their market share seriously declined into the single digits during the bubble inflating years. Gensler and co were focussing on the wrong target, when the problem was created by unregulated private enterprises like Countrywide.
In 1999 (!), Senator Byron Dorgan (D - North Dakota) made a courageous stand AGAINST the repeal of the Glass-Steagal act. Watch the video of his arguments in that debate here, with the sharper eyesight we have now it's prophetic:
http://www.bergenjerseyforeclosures.com/blog/info/entry/repeal_of_glass_...
There may have been few people who saw the whole spectrum, but I recall an episode of PBS' NOW with David Brancaccio that highlighted some mortgage assistance organizations in Ohio that were aware of some of it around 2002, and tried to get the Ohio state legislature's attention but were dismissed by the controlling Republicans.
Bill Ackman had been shorting ABK for years. And of course Ron Paul had been warning about this since 2000.
Well, if you're gonna list Dorgen, you might as well list Molly Ivins for her frequent warnings about the repeal of Glass-Steagall and about the enormity of the derivatives risk, and likely outcome of that.
Identifying the asset bubbles of the 90's and this decade was easy if you read the news, and the same with the risks associated with derivatives if you remember the 90's.
Most of the the things on Brad's list are kinda inside baseball, but really you have to laugh when you read some of them. He's shocked!shocked! that capitalists were ignoring major risks in order to rake in the short term gains. He's shocked!shocked! that over a quarter century of deregulation had made a joke of accounting standards and oversight. Well Duh!
This economist, Joseph Stiglitz talks about Bush's stupid responses too.
It's an interesting read.
http://blogs.iht.com/tribtalk/business/globalization/?p=853
Jim Kunstler has been on all of this like white on rice. Also: Herman Daly, Wendell Berry, Bill McKibben, Thomas Frank...but they were all drowned out by the conventional wisdon (sic).
Position me with DeLong, and I'm not so sure that all of the names quoted above, even Krugman, got the bulk of what he missed. I figured housing was going to bust, and I figured it'd depress spending no end, given how far overextended that left many homeowners. I figured the depressed spending would further drive a recession, a bit like in the quote from Krugman in one comment. I just never understood the new financial instruments that financial institutions were engaging in, a severe crisis all their own. I also didn't note that the fallout of an auto industry wedded to gas guzzlers would come, too, precipitated by a spike in gas prices, just as I suspect many missed how that spike would doom Carter while he faced the aftermath of the Nixon financial policies like war spending and wage/price controls.
Oh, for those who think that conservatives ever learn, do check out the OpEd in the Times today from Kennedy of Stanford. For him, FDR's big foreign policy error? He missed a European conference on (you ready) a return to the gold standard. That'll teach those New Dealers.
FT columnist Martin Wolf lists a number of economists/analysts who got parts of this right:
http://blogs.ft.com/wolfforum/2008/11/a-time-for-humility/
"In my gallery of heroes are Avinash Persaud, who told us early and often that the risk-management models on which regulators foolishly relied were absurd individually and lethal collectively, a point also made by John Eatwell; Kenneth Rogoff, who warned of the US external deficit; Wynne Godley, who warned no less powerfully of the domestic financial imbalances associated with those external imbalances; Charles Dumas and Brian Reading of Lombard Street Research, who warned of the global imbalances; Roger Bootle of Capital Economics, who pointed out the fantasy of believing that we could become rich by selling second-hand houses to one another at ever more exorbitant prices; Raghuram Rajan of Chicago Business School, who identified the frailty of the new financial capitalism; Bernard Connolly of AIG, who warned of the ongoing "Ponzi game" and George Magnus of UBS, who foretold the consequent "Minsky moment"; Stephen King of HSBC, who argued that US growth was built on sand; Andrew Smithers of Smithers and Co and Martin Weale of the National Institute, who told us that UK fiscal policy was far too loose; Bill White of the Bank for International Settlements who insisted again and again that monetary policy should not ignore asset prices and associated credit explosions; and Nouriel Roubini, of course, who was Dr Doom before almost anybody else."
I am with Brad Delong on this one, and I think most comments above miss his point - yes, there were lots of people who predicted some kind of crisis, but almost nobody who predicted the crisis we actually got.
Most of the people listed above recognized that there was some form of housing bubble (at least in some markets), but most of them (imho ex-ante correctly) focused on the U.S.' external balance (i.e., current account deficit) as the main problem. Hence the crisis most economists predicted was a rapid depreciation of the dollar, associated with a massive and pain-full shift of employment from the non-tradeable sectors (i.e., housing) to the tradeable ones.
Bottom line: I have not yet found anyone who predicted that a house price decline would lead to a complete loss of confidence in the financial sector and a massive credit crunch taking down institutions all over the world with essentially no (direct) exposure to the US housing market. And as much as I love Roubini, perpetually predicting the end of the world for ever changing reasons just isn't that useful.
Kevin Phillips generally got it correct.
Housing bubble isn't the problem...it's declining middle class income and 'financialization' that's the problem. Too much debt and giving money to the upper one percent
George Mullin: