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November 19, 2008

Comments

Expecting any regulator to join the minority in anticipating a bear market is a bit much really. Not that Paulson and Greenspan for that matter shouldn't have been more prudent. Still the fact that the minority made huge amounts of money tells you what they did was hard.

Oh, I don't know. I expect my regulators to be more skeptical and discerning than the "majority" of investors/banks/regulated entities when it comes to bubbles, trends and the newest rage(s).

That's their purpose. If they are merely going to be indicators of popular opinion, then they aren't worth much.

In 2004, San Francisco was in an obscene bubble for housing, bidding wars for tiny little houses in my neighborhood, buyers bribing the sellers with vacations and other wierd stuff. Then, in the space of a month all that fell off and the selling prices started to edge down, and my gut said 'sell...NOW'. My husband wasn't happy (it meant a lot of work for him) but we got a good price just before things got sticky. If we'd waited even a year we would have $100k less. The bubble bursting was only a matter of time and it was very obvious in 2004 to me.
Either Paulson is very insulated to reality or very, very, very stupid.

The shorting anecdote doesn't help much. There were similar short sellers for every year for the 4 years before that who lost enormous amounts of money.

And the AFTERMATH of the bubble really was of an unexpected magnitude, which is all he is saying.

Just because it was predicted by a few savvy traders doesn't mean it was (or should have been) predicted by "any competent economist". If all competent economists easily saw this coming, why didn't they all make a killing when it happened? The relatively minor investors you speak of were a small minority.

You should read that article anon, the portfolio one, it was very interesting. And I think it makes it pretty clear that the issues is not your savviness, but your willingess not to accept complete bullshit.

Bull Market, Bullshit Market is more like it.

Just because it was predicted by a few savvy traders doesn't mean it was (or should have been) predicted by "any competent economist".

Context matters. "It" in this case was the housing bubble and I do think that any competent economist should have been able to recognize that a housing bubble was underway. For one thing, price to rent ratios shot up far above trend.

The relatively minor investors you speak of were a small minority.

I think comparisons between the Treasury Secretary and random investors miss the mark somewhat. The Treasury Secretary isn't supposed to see a worrying trend and make a big bet on it. His job is to watch for worrying trends, and investigate them to see if regulations or incentives need to be improved. The government has enormous power to extract information from industry when it wants to. Random investors do not. The publicly available information may not have been enough to prove, beyond a shadow of a doubt, that a huge market crash was coming, but it was certainly strong enough to compel a smart Treasury Secretary to investigate, and new policies resulting from such an investigation may very well have softened the blow when it finally came. The point about claiming that some investors figured out what was going on is not to show that Paulson had enough information to know with confidence what was going on: it is to show that Paulson had a sufficient basis to be very worried.

frank: Still the fact that the minority made huge amounts of money tells you what they did was hard.

anon: If all competent economists easily saw this coming, why didn't they all make a killing when it happened? The relatively minor investors you speak of were a small minority.

I think you're both confusing i) the ability to see the collapse coming (viz. Atrios and "Big Shitpile"), and ii) the ability to profit off the collapse (and possibly iii) the willingness to profit off the collapse). Plenty of people saw this coming; it was Eisman's "genius", if that's the right word, that allowed him to turn that insight into profit.

[Plus, though there is a No True Scotsman peril in this: I'm not sure one can call an economist "competent" if they didn't see the collapse coming...]

Not only was it entirely predictable, it was actually predicted well in advance!

Ah, but you miss that the people who were making the predictions weren't the right sort of people. Like the presidency, our courtier class in the press have built up the a cult of omniscent/omnipotent authority: The fed chief is never wrong, just look what a god they made out of Greenspan. And if the fed says it was totally unpredictable and sudden, well who can argue with that after all Roubini ain't the fed chief and hasn't been to any DC cocktail parties.

1. The market can stay irrational longer than you can stay liquid.

2. The very purpose of regulation is to pull away the punchbowl when everyone's getting hammered. Higher lows require lower highs.

3. The SEC could have refused to allow the public issuance of the securities of the internet bubble companies. The Treasury could have done much more, along with an alphabet salad of other federal and state agencies, to oversee the formation of the various trusts which issued the mortgage-backed securities. They chose not to.

Elections have consequences. Over-regulation is probably here for a generation.

What Turbo said.

Also I'd add that HP doesn't even undstand what the problem is still. From his statements he seems to believe that there are a bunch of people with good credit and secure incomes who have to go begging for auto or other consumer loans/credit. He really hasn't shown any awareness of the huge increase and accellerating increase in household debt in the last 10 years, except to advocate for bankruptcy reform back in 2005.

He thinks that if he can just give the banks enough free money, they'll quickly get it out to all those non-existent well-heeled people looking to borrow, borrow, borrow buy, buy, buy. He just doesn't get that the game is over and gone forever.

Fledermaus, Paulson is a Wall St guy. For my money, that means that he's looking out for the interests of Wall St first and foremost; everybody else can go hang. And, of course, since he's G-S, G-S first among Wall St guys (and Paulson is first among G-S; he seems to have gotten more money and power at his hands than anybody since JP Morgan was a person, not a company).

(The Original) Francis: "Elections have consequences. Over-regulation is probably here for a generation."

'Over-regulation'? If there's a decent case to be made by the end of (g-d willing) Obama's second term that there's even adequate regulation, I'd be pleasantly surprised. We're seeing the results of a 30-year deregulation crusade; to fix it would require, among other things, purging the econo-br*thels of a whole generation of Chicago-influenced group; the sort of group which, for the 99% part, couldn't call this a bubble until after most Americans had figured it out the hard way. Not to mention purging the law schools of law&econ guys whose only goal in law is to redistribute wealth upwards.

It looks like hindsight to say that since some people made a lot of money on the crash it was easy to foresee. Speculators make all kinds of bets. Sometimes they win.

I do think it's absolutely fair to criticize Paulson for not having a better plan in place. After all, he didn't have to bet one way or the other. It was a likely enough event that he should have done some serious contingency planning in case it happened. If not, then no big deal.

It's not just hindsight that BY.

There were obvious indicators that something was amiss, and it was Paulson's job to be on the lookout for just such eventualities.

This one wasn't exactly well hidden. I mean, the only way to ignore the looming crisis was to believe that housing prices would simply keep going up indefinitely, and unperturbed by downswings.

Is it really only hindsight that reveals this position as delusional?

Eric,

Certainly there were a lot of people who thought housing prices were out of line. Just looking at ratios of prices to incomes, for example, gave you a pretty good clue. In fact, I suspect that was a widely held opinion. It was certainly mine. What I didn't understand was the devastating effect of a downturn. I didn't know about the whole web of CDO's and CDS and whatnot that threatened to bring down the economy. And I say that as someone who has, by both training and experience, a pretty reasonable understanding of financial matters.

I'm just saying that finding a group of traders who made a killing by betting on X doesn't mean that X was obvious.

Of course I agree, as I said in my comment, that Paulson should have been aware of the dangers. Not only does he, presumably, have a much better grasp of all this than you or I, he only needed to know that there was a risk of disaster in order to put plans in place. If the disaster didn't happen, he could just file the plans away.


Certainly there were a lot of people who thought housing prices were out of line. Just looking at ratios of prices to incomes, for example, gave you a pretty good clue. In fact, I suspect that was a widely held opinion. It was certainly mine. What I didn't understand was the devastating effect of a downturn. I didn't know about the whole web of CDO's and CDS and whatnot that threatened to bring down the economy. And I say that as someone who has, by both training and experience, a pretty reasonable understanding of financial matters.

But there were a veritable chorus of voices, speaking from multiple viewpoints who pointed out not only that we had a huge bubble, but just how devastating the collapse of that bubble would be. Warren Buffett and Kevin Phillips to name just two establishment figures, and numerous econ bloggers amongst the small fry - all called this event well in advance. Anyone who has been paying attention to the likes of Nick Taleb, or browsing current literature in behavioral economics, or who just has a strong sense of historical rhythms (1873, 1929, ????) was well aware that something wicked this way was a'coming.

Heck I personally knew that something very much like the current downturn was going to happen over 2 and half years ago (I spent a good deal of 2005/2006 talking to friends about the highly unstable nature of our financial system and passing on folk memories of the 1930s inherited from my parents), just from paying attention to people like that.

If I could figure something like that out, on a part time basis as a sort of intellectual hobby, then the gosh-darn Secretary of the Treasury most certainly should have seen it coming, if he had not been subject to a profound intellectual blindness imposed by his ideology. Even if he could not have been certain that this would happen, it should have been high enough up on the list of possible outcomes to rate some serious contingency planning.

This downturn is the macro-econ equivalent of Katrina, and the Bush administration's response has been just as feckless and incompetent. This storm was visible long before it hit, and the almost certain failure of our financial levee system was evident for almost anyone to see who was willing to take a good long hard look without flinching at what was there.

TTLIA,

OK. I was dumb.

Serve a paper and sue me.

Bernard,

Sorry, I didn't mean to slam you. My point was, IMHO there is a higher standard to judge by for those in public office who are personally and professionally responsible for these things. They should have been ahead of the curve compared with those of us who despite being amateurs were lucky enough to have stumbled upon the right pieces of the puzzle - with no disrespect implied for those who didn't do so, such as yourself.

Last time I checked, you weren't the Secretary of the Treasury, unless there is something you aren't telling us...

:->

TTLIA,

No, I'm not Secretary of the Treasury. And I don't disagree that Paulson erred.

I've only tried to say two things:

1. Hindsight is easy. The disastrous consequences of the housing bubble were not so easy to foresee, even if one thought there was a housing bubble. Remember that the collapse of the tech bubble, while unpleasant, did not threaten nearly as severe a downturn as we now seem to be facing.

2. Regardless of #1, it was clearly Paulson's responsibility to have a contingency plan for dealing with what actually happened. I think criticizing him for not having such a plan is much more sensible than criticizing him for not knowing exactly what was going to happen. It has the advantage of eliminating arguments about who should have known what when. Planning for plausible contingencies is ordinary common sense. As a bridge player I know that sometimes the trumps split badly.

Bernard,

On further reflection, I apologise for not doing a better job of curbing my blowhard tendancies. I didn't intend to get in your face like that in my previous comment, and it came out wrong. Sorry about that, I'll try harder in the future to be more reflective and less aggressive. Thanks for the gentle wake up call.

Thanks for the link to the "made a killing" article Eric. It's a great read.

Anybody born before 1975 has now witnessed, as an adult, two mosterous financial bubbles. How did we rate this?

Why didn't the economists see this coming? Well, why didn't Wall Street see it coming? Certainly they know what they were doing was a house of cards. I'd wager economists are subject to similar pressures.

We are a herd animal. What this says for libertarianism I leave to the reader.

TTLIA,

OK. No problem.

I actually enjoy your "blowhard tendencies" much of the time, so don't curb them too much.

The thing that kills me about Paulson is not so much his response (or lack thereof) to the housing bubble, as it is his response (or lack thereof) to the credit crunch. In March, he takes extraordinary steps to prevent the collapse of Bear Stearns because it happened so suddenly. By that time, it was clear that Lehman was on the ropes. And it seemed pretty clear even at the time that things _could_ get a lot worse.

However, when everything came to a head in August, it turns out that Paulson and the entire Treasury department were twiddling their thumbs for 5 months!! There was no contingency planning in case things turned out worse than Bear and Lehman. When it came time to present a plan, Paulson had NOTHING! What exactly was he doing to earn his gov't paycheck all that time?

If all competent economists easily saw this coming, why didn't they all make a killing when it happened? The relatively minor investors you speak of were a small minority.

"Seeing this coming" can mean two different things. Identifying the fact that we're in an asset bubble is one thing. Predicting when the bubble is going to burst is another.

The difference is that, to make policy decisions, you have to be able to do the first, which is much easier. To get rich by selling short you have to be able to do the second.

To get rich by selling short you have to be able to do the second.

And, as noted in the Portfolio article, it wasn't even legal until comparatively recently.

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