Comments on: The housing bubble vs. the financial crisis

By: Henry Canaday

Henry Canaday — Tue, 31 May 2011 23:46:28 +0000

The consensus was not completely ignorant, just wrong. From 2006 onward, macroeconomists were building into their forecasts the assumption that housing prices would tumble and this would cut demand and growth due to the perceived reduction in wealth. Many were also assuming large write-downs in bank assets. What they did not pick up was how close the banking system was to insolvency or at least illiquidity. The bankers did not know that themselves. They knew they had overvalued assets, had tried to cover them and thought (wished) they had. They came close, as indicated by the payback of most of the bailout money given to the investment bank. But close was not enough.

By: Justin Loe

Justin Loe — Mon, 30 May 2011 03:18:28 +0000

@TGGP: I think Eichengreen’s papers are among the best: http://www.voxeu.org/index.php?q=node/3421

By: TGGP

TGGP — Mon, 30 May 2011 01:43:57 +0000

Eric Falkenstein thinks Shiller hedged his claims too much to be credited with calling the crash. I think I've linked to it before, but these folks claim the Great Moderation and its reduced volatility is still ongoing.

By: gcochran

gcochran — Sun, 29 May 2011 21:43:25 +0000

Speaking of hierarchy, wouldn’t it be nice if the people running the show knew that the hell they were doing? I can think of cases in the past in which they kinda-sorta did, but the world didn’t change as fast then.

Of course their interests and mine are not the same, so I wouldn’t like a lot of their actions even if they were competent – but it’s hard having to knuckle your forehead to a proven fool.

By: dirk

dirk — Sun, 29 May 2011 21:27:47 +0000

Equally as amazing is how people in power insist that the solution is to do whatever it takes to keep home prices as high as possible.

By: Justin Loe

Justin Loe — Sun, 29 May 2011 19:35:54 +0000

Taleb got it right. He’s now a collaborator of Prof. Daniel Kahneman, Nobel Laureate at Princeton (http://en.wikipedia.org/wiki/Daniel_Kahneman). It’s true that Taleb isn’t “formally” considered an economist, but his work has become more influential. Likewise, Prof Robert Shiller, ranked in the top 100 economists, predicted the housing bubble. http://en.wikipedia.org/wiki/Robert_J._Shiller

Admittedly, these accurate predictions were few and far between. Most quants on Wall Street also got these predictions completely wrong, so incompetence was widely distributed within top PhDs of physics and math programs who populate Wall Street firms.

By: John Emerson

John Emerson — Sun, 29 May 2011 17:02:13 +0000

It wasn’t just stupid people who poo-pooed the idea of recessions. That was the dominant economic theory — “The Great Moderation”.

There were economists and others who saw trouble coming, but they were a minority, and the economists who did see trouble weren’t at the top of the profession. (They still aren’t. There’s been no real shakeup. Economists are ranked on the basis of sophisticated work, regardless of whether or not the work applies to reality. The people who helped screw things up so badly still feel that they’re right about everything).

Many people started getting antsy 2 or 3 years before the crash, but they didn’t talk too loud because they didn’t want to be the one to pop the bubble. Once there’s a bubble there’s no painless way out, and it’s almost impossible to make money by timing when a bubble’s going to pop: “The market can stay irrational longer than you can stay solvent”. If you bet against a bubble too early, you lose big time.

By: Kay W.

Kay W. — Sun, 29 May 2011 13:56:45 +0000

When I moved from the Deep South to the DC metro 6 years ago, I was astounded at what I perceived as a mania in housing. People talked with pride about the value of their homes. I refused to buy because I knew something was grossly wrong. Average wage earners were living in what I believed were dumps that they had financed at .5M or more. A local economis guru at a major university fueled the delusion with predictions that the average DC area home would be valued at $5M within 4 years. It took everything for me not to burst out laughing in front of educated people who salivated this garbage. No way could this be perpetuated. It was so obvious and yet I could find few people who could see it.

Luckily I rented and still do. My estimation of people’s ability to see the implications of a highly flawed process was lowered to negative numbers. Sad. It will happen again. There are more chumps out there than anyone can imagine.

By: Shecky R.

Shecky R. — Sun, 29 May 2011 11:34:33 +0000

yeah, it aggravates me when I hear some folks say “no one could see this financial crisis coming” when in fact several economists and financial gurus talked about it in advance repeatedly… but they were a minority saying things people didn’t want to hear (even though their logic was pretty impeccable). Anytime you hear prognosticators
(salespeople?) saying that ‘times have changed,’ the old metrics or standards no longer apply, and a new booming economy will just keep rolling along forever and evuh… sell your stocks and hunker down!