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December 30, 2008

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The only reason I saw this one coming was that I read people who know a lot more than I do: people like Paul Krugman, Dean Baker, Tanta at Calculated Risk, Stephen Roach at Morgan Stanley, and Nouriel Roubini. They all challenged one or another of the myths Samuelson lists, and they did so years ago.

In addition, Edward Tufte's book, The Visual Display of Quantitative Information, needs to be updated to include the graph made from Robert Shiller's data in the 2005 edition of Irrational Exuberance.

The vast majority of arguments claiming there was not a bubble in housing prices were easily debunked from this one chart. It was completely clear at the time what was going on.

Oh, and we told you so.

That the crash came and "we" did not see it coming is almost a tautology. You can't have a crash unless you have a bubble first, and "we" could not have had a bubble unless "we" thought it was not a bubble at all. That was easy enough to think, for "we" believe in our bones that The Market "creates wealth".

People like you, on the other hand, must be commie pinko subversives. Badmouthing The Market while it's "creating wealth"?! For shame!

And anyway, what did you do about the bubble you warned of? Did you short the S&P 500 like Warren Buffett did? Did you sell your house, at least? "We" did not do those things because "we" did not see this coming. What's your excuse?

Seriously, Hilzoy: "we" is almost all of us, whether we take up space in the Op-Ed page or not. It is because almost all of us believe that The Market creates wealth that almost none of us made bets against it. Had more of us done so, one of two things would have happened: either no bubble, or a crash with about as many winners as losers.

--TP

"we" could not have had a bubble unless "we" thought it was not a bubble at all.

Simply not true. Plenty of people thought that it was a bubble, but that they would be able to get out before it popped. They knew they were doing something foolish, but they thought they would find a greater fool to whom to sell. That's pretty much a requirement for a bubble.

There were very smart people who did predict this. Their writings were not arcane or hard to find -- I mean, I found them, and this is not my area of expertise. Nor was their basic point that hard to grasp. If I could grasp it, then anyone remotely worthy of having an economics column in the Washington Post should have.

This is very similar to what Greenwald was talking about earlier with David Gregory, a purposeful attempt not to ask the right questions, because if he did, his bosses probably wouldn't be too pleased...perhaps its not Samuelson's role to point out wrong doing....he's just a reporter presenting both sides, if say in 2006, Krugman is saying one thing about the housing bubble, and greenspan is saying another...how do you know who's right?

I, however, got in late to the party, as we were busy trying (and ultimately failing) to adopt children. I started reading Schneier for work, which led to some legal blogs such as Balkinization, and then branched out from there. I didn't find the economic blogs until late last year, when we were already in the throes of a foreclosure.

Sucks, but now at least I know what happened. I even have my wife shaking her head when they're wrong again at MSNBC (although she is calmer than me--I gave up on cable news because my voice was giving out).

" however, got in late to the party, as we were busy trying (and ultimately failing) to adopt children. I started reading Schneier for work, which led to some legal blogs such as Balkinization, and then branched out from there. I didn't find the economic blogs until late last year, when we were already in the throes of a foreclosure."

I got in early and blame myelf.

I knew Bruce Schenier since earlly Seventies days when he was a high school fan in touch with other high school friends of mine. I first starting having lunch with him and Karen at Dim sums they'd buy me iIOn the mid-90s. I listened to the lawyers in the seventies and eithties, and read them on the internets in the nineties. I found the ecomic blogs by Brad deLong circa 2001.

I should have known all and known a all. O'm just too lazy and distracted. Blame me.

I have no good excuses save that I suck at being a slan.

Also, clearly Jon Singer is at fault. ;-)

Why is the newspaper industry dying again? It couldn't be because they are selling pure gibberish, written for idiots by idiots.

Seriously though, how does a professional columnist manage to be so utterly worthless, and how does he still manage to sleep at night. I don't think "on top of a big pile of money with many beautiful ladies" applies as it does to his Wall Street buddies (or does it?).

I'm one of those people - bought in 2003, figured there was a bubble but wouldn't be too bad. Watched house prices double from where I bought, figured there would be a pop and the area would lose 30-40% of the value - still on the upside, so it was all good.

However, at the moment prices in my area of Northern Virginia have dropped more than 60% (which means the average price is below what I paid), and in a couple of particular instances about 80%. There's a house for about 33% of what I paid in 2003 currently on the market in the next door neighborhood.

Normally it wouldn't be an issue, that I couldn't sell my house and break even, but there's this damn separation causing us to figure out how to divide up the assets. And is an illiquid asset that's currently a liability a + or a - when neither of us really want the house?

perhaps its not Samuelson's role to point out wrong doing....he's just a reporter presenting both sides, if say in 2006, Krugman is saying one thing about the housing bubble, and greenspan is saying another...how do you know who's right?

It seems to me that one of the big ways we got into this trouble (and lots of other concurrent trouble in other areas) was when the press decided that they were just reporters presenting both sides (a lazy and artificial construct to begin with for many complex issues like this one), and declined to look into the arguments being presented and pass actual judgments on their veracity and utility. I don't know if there ever was some mythical past when they actually did do this or not, but they need to start if our democracy and our society are going to continue to function.

Of course, there are limits to what can be expected of journalists working with limited resources and on tight deadlines. So another big question to worry about is the apparent failure of expertise over the past couple of decades. Chris Hedges has been writing about this, and while I don't think he's totally on the right track, we do need to look into the ways in which the academy and its priorities and criteria for advancement(teaching and/or being a public intellectual are not exactly at the top, put it that way) are failing the larger public, and probably more importantly into the ways in which the very idea of expertise has been degraded by corporate influence in the academy itself, think tanks, astroturfing, propaganda, soundbite culture, etc. The very idea that Greenspan and Krugman are unquestioningly taken as equally valid experts is a problem and has a long backstory in terms of ideas about economics that have been promoted mostly for political or ideological as opposed to empirical reasons. Which is not to say that Krugman's ideas shouldn't have to stand the same kind of examination as Greenspan's, but, well, he's sure got a heckuva lot better track record in that department over the past decade, and that should be recognized and taken into account. The lack of accountability for experts in terms of whether they get things right or not (and whether they learn from their mistakes or not as well) has just got to end.

"....that almost none of us made bets against it."

Your average two-bit investor cannot even short stocks*, much less short the housing market. Selling high and renting would be the only realistic option, but the transaction costs are high, you forego a juicy tax subsidy, any utility derived from 'ownership' is lost, and your timing has to be impreccable.

*Yes. A small fry can purchase put options, but you pay a big spread. You'd be better off trying Vegas.

For more wisdom from Samuelson, see his 11/10/06 column in the Post ("Greenhouse Guessing").

Assuming events unfold along the usual lines, "we" will be in the midst of an environmental disaster next century. Don't despair, there will be a Samuelson to inform us that "we could never have seen it coming".

Samuelson is like George Will. Sometimes they have very good, thought-provoking columns (whether I agree with them or not), and sometimes they are so far off base it's hard to see them from here.

George Will is like that any time he mentions the sixties. Even though he is approximately my age, we might as well have been on different planets during those years. I also don't appreciate reading things like "we" baby boomers being to blame for the national debt or other problems being passed down to our grandchildren.

I agree this is a particularly lame column.

Why does someone who has a BA in Govt and no formal economic/financial training have such prominent presence as columnist for business and economic issues?

Let's not confuse RJS, BA with Nobel Laureate economist Paul Samuelson, PhD (unrelated).

http://en.wikipedia.org/wiki/Robert_J._Samuelson

Your average two-bit investor cannot even short stocks*, much less short the housing market. Selling high and renting would be the only realistic option, but the transaction costs are high, you forego a juicy tax subsidy, any utility derived from 'ownership' is lost, and your timing has to be impreccable.

*Yes. A small fry can purchase put options, but you pay a big spread. You'd be better off trying Vegas.

Just about any half decent online broker makes it pretty easy to short stocks. Buying options isn't usually much harder. If they're any good, they put restrictions on who is allowed to sell options, but that's because it's easy to lose a lot of money in a hurry on them, and they don't want to be stuck holding the bag.

The reason most people shouldn't get involved in shorting the market is because, the vast majority of the time, it's a losing proposition. Stocks generally, though clearly not always, go up. Even if you are right that there is a bubble, you can get wiped out by going short too early. As several people have said, it was pretty clear that there was a housing bubble by late 2004, or mid 2005. How would you have done shorting then? Would you still have been around to take advantage of the market fall starting in 2007?

"perhaps its not Samuelson's role to point out wrong doing....he's just a reporter presenting both sides, if say in 2006, Krugman is saying one thing about the housing bubble, and greenspan is saying another...how do you know who's right...?"

People like Samuelson--supposedly respectworthy talkers and writers--are symptoms of our cultural decline. I can't think of the right word--what is the word for when a culture decays and declines? Not corruption. A word that means to gradually become a sort of dumbed down decayed shell of what used to be. Our pundits are for the most part incurious, smug, and lacking in intellectual honesty. Our press is too cowardly and unprofessional to ask hard questions or even bother to distinguish truth from spin or myth.Our business leaders are in large part selfish, greedy, and amoral. Many of the leaders of the one political party that is capable of addressing real propblems are, in spite of winning two elections, afraid to or unwilling to take actions that will be criticized by the other party. (Harry Reid, I'm looking at you).

Decadence!

That's the word I was groping for! Samuelson's existance as a supposed person with something worthwhile to say is, like Will, Broder and a whole host of others, a symptom of decadence.

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The passive voice gives a certain authoritative air to pronouncements, and is almost a requirement in setting up strawmen.

It was widely known that an unsustainable bubble was inflating; but it was also felt that one could find a chair when the music stopped.

It was not generally understood, even by Paul Krugman, just how the bubble would deflate itself.

I remember, back in the mists of time, Samuelson wrote a column in his Newsweek capacity that was a response to someone who called him out very much like hilzoy did in this post. Not as eloquently and persuasively, to be sure; I remember the letter writer telling Samuelson that he "was a lousy economist".

Samuelson's response was basically, and I'm paraphrasing from memory, "I'm not an economist at all. I would never call myself an economist. I'm a journalist who writes about economics."

I took things that he wrote a great deal less seriously after that.

Likewise, a lot of smart people knew that an invasion of Iraq would be disastrous, not because Saddam would be difficult to defeat, but because the result would be a combination of anarchy and civil war, with the US left holding the bag. Heck, even I knew that, and I'm nothing like an expert.

Why does someone who has a BA in Govt and no formal economic/financial training have such prominent presence as columnist for business and economic issues?

Because the fundamental ideology of American media is that any hardworking newsman is better qualified than any expert, no matter how long the expert studied or how much field experience they have.

Some of "us" have known that things were totally f*cked up since we realized that our graduate students were buying, yes buying, houses and condos with no money down and only the income from their stipends (in biomedical sciences, so larger than those in humanities and social sciences, but not that much larger). Nothing good could come of that. Nothing good did come of that.

"Because the fundamental ideology of American media is that any hardworking newsman......will do pretty much as their boss asks them to do.

And anyway, what did you do about the bubble you warned of? Did you short the S&P 500 like Warren Buffett did? Did you sell your house, at least? "We" did not do those things because "we" did not see this coming. What's your excuse?

Others (most notably JMN) already addressed this above, namely that detecting a bubble is much easier than timing the top of it, and if you don't get the timing of the decline just exactly right the market will crush your shorts ("the market can remain irrational longer than you can remain solvent").

I think is is also worth pointing out that unless you already possess extensive surplus wealth the only way to play shorting games is to speculate on margin or by using wealth you can't really afford to lose, something that is a very risky thing to do. Anyone who had enough common sense to spot the bubble in all likelihood also had enough common sense not to imperil themselves via speculation.

Regaring Samuleson's column - passive voice constructions are the last refuge of the guilty. When I read an author's declaration that "mistakes were made", I know I'm looking right at the perp. He might as well wear a dunce hat and hang a signboard around his neck with "hoocoodanode" stamped on it. Idiot.

"Just about any half decent online broker makes it pretty easy to short stocks."

Really? If I buy 100 shares of a stock at $100/per, I pony up $10,000 plus commission (unless you're using margin, but that takes 'security'). So what does it take to waltz in off the street and ask to go naked short 100 shares of that same stock? Morever, nearly all the two bit investors I know have their "stocks" in 401k's or small IRA's in mutual funds. Shorting is not generally an available option.

It may just come down to defining just how "big" a two-bit investor is. If you have 25k in some kind of account, you're doing better than most working people. If you have a $million, you're most likely at or pushing retirement (and in the top 10%), and shorting stocks should most likely be avoided unless you just can't live without the thrill.

Here's an interesting bit of actual journalism (something that Samuelson might want to check out, just for the sheer novelty) - using a GIS display to show the geographic distribution of TARP funds which have been disbursed to date.

I wonder what the late 19th Cen. Prairie Populists would have made of this? William Jennings Bryan call your office.

ThatLeftTurn,

Your TARP map looks an awful lot like a population density map of the US. I'm not sure I see anything wrong with that.

Turb,

It's a political issue. People in the High Plains and interior West pay taxes just like everybody else, yet there is a vast swath running through that region which is not seeing any direct benefit from the TARP. A program that large (remember that the orginal TARP request of $700 billion is more than the entire annual budget of China's govt.) has the same political patronage issues as the Military Industrial complex - you have to spread the gravy around or risk losing support for the program.

I'm predicting that this will become a political issue - don't be surprised if resistance to Obama's stimulus package comes in large part from the Western US (excluding California), including some nominally blue interior western states like CO and NM. The TARP is going to morph into a Financial-Industrial complex under political pressure, just as the M.I. complex once did.

ThatLeftTurn,

You may be right about political resistance. On the other hand, I don't see much political resistance to agricultural subsidies or MIC subsidies. I'm also not sure TARP is benefiting the average taxpayer in most coastal states. I mean, companies are benefiting but most of those companies do business throughout the country. I don't know of anyone who has benefited directly from TARP funds in my little coastal enclave (although I do know one financial planner in the midwest who just got laid off from Merrill Lynch). If TARP funds aren't getting injected into the local economies of the favored states, I'm not sure what the complaint from unfavored states would be: "we want you to give us as much nothing as you gave them"?

TLT, thanks for the geographic distribution link.

I was especially amused to note that one of the three entries in the Boston area was "$.015 billion" for LSB Corp. of North Andover MA. According to this, Lawrence Savings Bank Corporation had an "already strong capital position" and the Treasury's investment "in the form of preferred stock and warrants to purchase common stock" will allow River Bank (LSB's sole operating subsidiary) to increase lending and "build on the momentum of the first three quarters of 2008", whatever that means. It's a slightly different story than I was expecting. Lawrence MA is an old mill city a few miles down the Merrimack River from my old home town of Lowell MA. In recent decades, Lawrence has struggled even harder than Lowell economically. It has been especially hard-hit by the foreclosure crisis. I'd have thought something called LSB Corp. might need a bail-out rather than $15 million to "build on the momentum" with. Color me confused.

As for the shorting-the-bubble business, it was of course mostly tongue-in-cheek. I agree that short-selling is a gamble, pure and simple, to be indulged in solely with money you can afford to lose. But I claim that "going long" is merely taking the other side of the bet.

--TP

FWIW:

A professional I know in the banking industry told me that everyone realized the bubble existed, that the banks had gambled on unsustainable assets, and the bubble would pop. And he told me that for a fiduciary (say a pension trustee), this posed an ethical dilemma; in the long run, you serve society as a whole best by staying clear of bubbles. In the short run, you may serve the beneficiaries of the pension best by profiting from them.

Not everyone charged with managing economies succumbed to the irrational exuberance of the tech bubble or the housing bubble that followed.

In years of pointing out that an economy sinking into a sea of red ink (as in both trade and government deficits) has at least one of its fundamentals out of whack, I have encountered every excuse for running into the red. I have had people tell me that deficits don't matter, that only taxes mean anything, that they hate my country, that only sissies or communists believe in fiscal sanity, and so on. If you need to predict the health of an economy, it seems to me that it makes sense to pay attention to how well the people in that economy produce enough to provide for their own needs.

I think a lot of people marched to Greenspan's tune because he was, well...The Alan Greenspan. To Average Joe Citizen, the man was supposed to have been the modern god of economics because he had been Chairman of the Fed longer than some religions have existed. I count myself among those average people, because up to a couple of days ago, I accepted his expertise on that basis. Silly me.

Yesterday, I happened on the transcript of a debate between Greenspan and Naomi Klein which aired in September of 2007 on Democracy Now! I expected everything I read from Ms. Klein, but I was flabbergasted at Greenspan's pronouncement, "I think it would be a terrible mistake if we look at the sub-prime market and decide it should be eliminated."

I reread the transcript several times, and each time, I discovered another piece of clay on the man's feet. He defended crony capitalism, the actions of the World Bank regarding emerging nations, privatization of Social Security, and every other brand of Chicago School balderdash ever to come down the pike at various places in the debate. In the end, I came away fully convinced that the Alan Greenspan everyone had trusted to be right about the economy either was the architect, or had become one more apologist, for the policies that got us where we are now.

It was a very disappointing moment.

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