No One Saw This Economic Crisis Coming? 127 comments
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A research paper, published in June by Dirk J. Bezemer, Groningen University, addresses this question and says the answer is that many saw it coming but those with the power to act did nothing. Bezemer contends that the problem is that economic policy is executed using macro equilibrium models and what is needed to establish economic policy that can anticipate crises, such as we have now, and take actions to head them off, are micro accounting cash-flow models. The entire paper can be read here.
First, let me show you a table that Bezemer has prepared lisiting some of those who saw it coming. Table is in two parts for graphics processing reasons.
click to enlarge images
In a lengthy appendix, Besemer analyses in detail what each of the individuals did over extended periods of time to highlight the then incipient crisis.
Besemer says that those who foresaw the coming crisis share the general characteristic that they viewed the economy through an accounting models lens. He wrote,
They are ‘accounting’ models in the sense that they represent households’, firms’ and governments’ balance sheets and their interrelations. If society’s wealth and debt levels reflected in balance sheets are among the determinants of its growth sustainability and its financial stability, such models are likely to timely signal threats of instability.
Models that do not – such as the general equilibrium models widely used in academic and CentralBank analysis – are prone to ‘Type II errors’ of false negatives – rejecting the possibility of crisis when in reality it is just months ahead. Moreover, if balance sheets matter to the economy’s macroperformance, then the development of micro-level accounting rules and practices are integral to understanding broader economic development. This view shows any clear dividing line between‘economics’ and ‘accounting’ to be artificial, and on the contrary implies a role for an ‘accounting of economics’ research field. Thus this paper aims to encourage accountants to bring their professional expertise to what is traditionally seen as the domain of economists - the assessment of financial stability and forecasting of the business cycle."
The following graph is how Besemer defines the general structure of accounting models.
He describes the functioning processes in this model as follows:
The finance, insurance and real estate (FIRE) sector includes all sorts of wealth-managing nonbankfirms (pension funds, insurers, money managers, merchant banks, real estate agents etc.), as well asdeposit-taking banks, which generate credit flows. It is conceptually separate from the real sectorwhich comprises government, firms and households. Liquidity from the FIRE sector flows to firms,households and the government as they borrow. It facilitates fixed-capital investment, productionand consumption, the value of which - by accounting necessity - is jointly equal to real-sectorincome in the form of profit, wages and taxes plus financial investment and obligations (principally, interest payments). Funds so originate in the banking part of the FIRE sector and either circulate in the real economy, or they return to the FIRE sector as financial investments or in payment of debt service and financial fees. Total credit flows (in nominal currency units) are normally increasing year on year, reflecting positive profit and interest rates.
Problems arise when the funds that originate in the banking part of the FIRE sector return to the FIRE sector in the form of investments or payment of debt service to the exclusion of circulation in the real economy. These problems can lead to recessionary economic collapse (although soft landings are possible), and, in the most severe dislocations, depressions. (Note: The last sentence contains my summary, not one that I found expressly stated by Bezemer in those exact terms.)
Bezemer describes the details of how the accounting model displays the unfolding of the economic cycle:
An accounting (or balance sheet) view of the economy makes clear that this dynamic – a bubble – is unsustainable in the sense that it is constrained by the real economy’s ability to service debt. Yet without policy intervention, it can last for many years or even decades, if starting from low levels of indebtedness. A burst occurs as investors realize this constraint is approaching or has been reached. The severity of the impact of a burst will be the larger as real-economy consumption (and thereby production) have grown more dependent on capital gains rather than on wages and profit.
This ‘financialisation’ scenario is a self-sustained dynamic separate from real-sector fundamentals (in other words, a bubble) increasing debt burdens but not bolstering the real economy’s potential to create valued added from which to repay its growing debt. It is typically driven by the psychological and political economy factors discussed in section 3. In terms of financial incentives, its impetus is that it brings increased asset price gains for a time, but this is unsustainable in the long term as a source of debt servicing. Borio (2004:5) writes that “contrary to conventional wisdom, the growth of markets for tradable instruments … need not have reduced the likelihood of funding (liquidity) crises”. On the contrary, applying an accounting lens demonstrates that because of the debt growing in parallel with tradable instruments, inevitably a bad loan problem (or debt crisis) develops, credit flows dry up –either in a ‘soft landing’ or in a ‘credit crisis’ - and a repositioning of financial portfolios and real-sector activity follows. The difference with sustainable financial innovation is difficult to draw while a financial bubble lasts, and mostly absent in the mainstream and popular discourses.
The macro model that is used by policy planners in the Fed and in government goes by the name of the Washington University Macro Model. Bezemer describes it thusly:
The “WUMM” is a quarterly econometric system of roughly 600 variables, 410 equations, and 165 exogenous variables. Figure 4 presents a schematic overview. The boxes indicate the variables included in the model. In the present context, the important observation is that all are real-sector variables except the money supply and interest rates, the values of which are in turn fully determined by real-sector variables. In contrast to accounting models, the financial sector is thus absent (not explicitly modelled) in the model.
In other words, the elements in the economy that are at the root cause of the current crisis are absent from the models of economic activity that are used to guide economic policy. The entire financial sector is absent. The very elements that have siphoned the life blood out of the economy have been completely off the radar screen. The FIRE was hidden behind a shield of invisibility, just pumping money into their coffers until the real economy bled out.
Bezemer discusses the result:
Perhaps because of this omission,Macroeconomic Advisers chairman Joel Prakken could tell Reuters as late as September 2007 that the probability of recession was less than 50%, a “slightly higher risk than it was a month ago but not a dominant risk.” This was well after Godley and associates in April 2007 had predicted output growth “slowing down almost to zero sometime between now and 2008” and in November 2007 forecast “a significant drop in borrowing and private expenditure in the coming quarters, with severe consequences for growth and unemployment”.
(Note: Godley is one of the people Bezemer has singled out as having analyzed and forecast the current crisis correctly.)
Bezemer concludes that the reason this condition exists is that macro equilibrium theory dominates academia and has become institutionalized in governments. He defines the objective of his paper to encourage the merging of accounting and economic theory. He has some interesting things to say about factors that are missing from the macro equilibrium view, factors highlighted by John Maynard Keynes.
Most of the analysts discussed in the Appendix reject rational equilibrium on the basis of arguments related to economic psychology and to the Keynesian notion of ‘radical uncertainty’ (as opposed to calculable risks). Keen, in a 1995 article titled ‘Finance and Economic Breakdown’ explained that “Keynes argued that uncertainty cannot be reduced to ‘the same calculable states as that of certainty itself’ whereas the kind of uncertainty that matters in investment is that about which “there is no scientific basis on which to form any calculable probability whatever. We simply do not know” (Keynes, 1937:213-24). Keynes argued that in the midst of this incalculable uncertainty, investors form fragile expectations about the future, which are crystallized in the prices they place upon capital sets, and that these prices are therefore subject to sudden and violent change.
Bezemer points out that the critical elements of human behavior and confidence are not reflected in the snapshots of the macro equilibrium models, but are amenable to modeling in a flow-of-cash model. He is not proposing that the macro models be discarded; he feels they should be supplemented and expanded to include flow-of-cash factors. Bezemer feels research is needed to develop such an accounting lens addition to macro modeling.
I hope Bezemer's work gets the attention it seems to me it deserves.
Hat tip to Barry Ritholtz (The Big Picture) for putting Bezemer's paper on his Friday afternoon reading list.
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This article has 127 comments:
if they did not see this crisis coming, i have no confidence they can steer us out.
This article seems to argue against the concept of securitization or the selling of loan portfolios to institutions in no way connected to the depository. Such activities may create a lucrative secondary market between banks, but if the purchasing bank is not a depository it has little connection with the real consumers or producers of goods. When the bank no longer holds loans funded with its customers' deposits, its balance sheet has no concern for the ability of the borrower to handle debt service. The creditworthiness and risk associated with a particular commercial project or consumer loan is irrelevant if the bank doesn't derive its income from the borrower's performance. The only important factor is whether they can sell the loan, not whether the loan's fundamentals are poor or weak.
Somebody who seen this coming must have a better perspective of the possible scenarios in front of us. Somebody with a track record of calling it right should have been put in charge, rather than those with their own political agendas and commercial interests.
On Jul 12 05:22 AM Steven Hansen wrote:
> we are faced today with a president surrounded by economic advisors
> who all think the same. no presidential advisor foresaw the crisis
> coming.
>
> if they did not see this crisis coming, i have no confidence they
> can steer us out.
It would be nice if those who make national economic policy adopted the use of models incorporating the features suggested by Bezemer. In the meantime, individual investors may be able to use the insights provided to improve their understanding of macro-economic trends that will affect portfolio performance.
On Jul 12 08:15 AM a. palmer jr. wrote:
> Nobody saw it coming? I've read on the Weiss report where it was
> coming maybe two years before it happened. Perhaps nobody in the
> administration exposes themselves to any reading material.
Kevin Phillip's best-seller on the financial sector came out in 07 and detailed this Wall St. rise. Nicholas Taleb's "The Black Swan" stated and explained the fact that our partial reserve financial model guarantees that society would have to backstop (bailout) Wall St. from time to time.
More proof that the policymakers in place are the ones who can put the best gloss of lipstick on the pig and allow perpetuation of the failed system and main perpetrators the best.
You are missing an obvious point. Suppose you did see it coming. What could you have done? Try to dampen the boom? You would have been politically massacred for destroying the party ...
In fact, you would have been dismissed as a crank, "Of course, property values are going to continue to rise! The Earth's population is exploding!"
It takes a crisis to generate sufficient support to radically change policy.
Bubbles could not be created if the majority of active investors saw a financial meltdown ahead. Therefore most of the investment community, who still commit cash to risky assets in the months before an asset price collapse are obviously wrong, ill-informed, over confident or just plain stupid.
Let me clarify that, most people in our industry are not as smart as they think they are. I provide 2008 as indisputable proof.
Here in London I spoke to maybe a 1000 investment professionals over the year prior to the collapse. Only one was the voice of economic doom. But he has been the anti-christ of confidence for 10 years and a broken clock investing strategy (wait long enough and it will eventually be right), is no strategy at all for a life-time of challenges and changes.
there was little i could do on a national level. there was much i could do on a personal level.
on the national level the best thing i can see is to work on a constitutional party and to try to starve the bloated parasite of government.
And I say to everyone, there is no need to try to (or pretend to try to) digest and understand incomprehensible charts and mathematical formulae (econometrics, my arse!) that purport to explain economics. Come down to earth and educate yourselves in the science of human action - praxeology - which has already done that job for you.
Now, Peter Schiff would agree with everything I just wrote, but in the short list of visionaries above the names of Gary North, Walter Block, Jim Rogers, Robert Higgs, and dozens of other investors, scholars, and economists who understand ABCT are missing. That is a huge disservice not only to them but to the education of the public. I guess that's why I'm here.
On Jul 12 09:17 AM fireball wrote:
> in the early 90s i saw massive debt, massive corruption in >business and politics, and a complete lack of integrity in our >media. i was just amazed the house of cards didn't tumble >sooner. there was little i could do on a national level. there was >much i could do on a personal level. on the national level the best >thing i can see is to work on a constitutional party and to try to >starve the bloated parasite of government.
1. A few members of the tiny governing elite who expected it but could see no way to benefit politically(or financially) by discussing it or advocating an end to the fantasy money/worthless credit based boom
2. A few other members of the same elite who saw it coming and hoped it would come and facilitated its coming because it provided a irresistible avenue for collectivizing the economy,intimidating and co-opting the biggest companies in the land, coercing and squuezing the middle class, expanding the parasitic class under the control of the upper class and aggregating power, fame and later great wealth for themselves at the deliberate expense of scores of millions of American's and America's global stature.
3. Independent analys who simply did not have the ability to reach or persuade retail investors, small and medium business executives and ordinary families. They spoke; no one listened( not even on SA).
4. Private individuals who quietly acted on their views to change their asset mix, income creating focus and even physical location so they could first protect themselves and then profit from the criminality or inertia or ignorance or stupidity of others. This 4th category hardly talks about their view of the world ( much less publishes on SA.....) but they act on it for the benefit of family, friends and financial/invstment partners.
But then ,this is the way it usually is at great inflexions and turning points.
In the U.S., for example, insurance is regulated under state laws, not Federal laws. Commercial banks are regulated by Federal banking laws, whereas investment banks are pretty much unregulated.
BTW, the problem of the current financial crisis is NOT related to the insurance sector. Even though AIG is in trouble, it problem was not originated from its insurance operations. AIG's insurance branches are AIA and AIU that are highly regulated and are almost always in good shape. What got AIG into its current trouble was its investment-bank-like investment operations, not related to either AIA or AIU.
As a parent holding company, after deregulation, AIG can now conduct virtually almost all kinds financial activities, besides insurance. When the parent got into financial trouble, AIA and AIU being its subsidiaries also face substantial risk because these subsidiaries may be repackaged, sold, rearranged, ... because of its parent's insolvency.
No one can foresee a bubble. However, rational beings who know some economics should see the problems of the creation of Fannie and Freddie, the dangerous development of the ever-perplexing inter-linkages of the used-to-be different sectors after their convergence as a result of deregulation, the damage of a prolonged low interest rate regime to the sustainability of a healthy credit market, the long-run problems of trade and budget deficits, the bankruptcy of social security and the health care system, ...
Why are regulators and politicians pretending not to see these problems then? Well, these people are not working for Americans in general, they are working for big corporations managed by short-sighted chief officers. After all politicians need all the money from big corporations to launch their election campaigns to fool ordinary Americans. Regulators don't want to get too much complaints from big corporations about not being able to engage in their "free trade" and other commercial activities because of too much government intervention.
This is not over, not by a long shot (read “The Forth Turning” by Neil Howe, and understand that a crisis was in the making, and those that study history could see it more than a decade ago).
The government is using this crisis, in fact it’s feeding the flames. They cannot stop now, nor do they want to. The roller coaster of history has gone over the tip of the hill and there is a long way down.
For now, Washington is enjoying the moment and crafting the New “New Deal” in a self serving march toward supreme power. The population becomes more helpless and hopeless and continues to ask Washington for advise and help. The politicians (practically the same people who have presided over the entire road to the crises) are all too eager to pontificate and oblige.
“We the people” may have lost the battle, for now. The future economic condition will continue to deteriorate in complete unison with the government’s actions, which appear designed to control the Crisis. They will not control the Crisis but will control he population.
History’s lessons teach us that events taking this course have, almost always led to some major conflict, such as war.
I hung around an alternative party in Colorado for a while and could quickly see the infiltration. I observed the Denver UFO Society (acronym DUFOS) for a few years and saw the monthly attendance of not very covert FBI types and the manipulation of the crowd by facilitators to focus on a New Age religion while solid middle class people who wanted an explanation for what they saw were turned off and went away.
A founder of a grass roots reform movement in Virginia years ago watched as an affluent, well connected couple came into the group, was given power, and then skillfully deconstructed the movement.
George Soros,, according to Wayne Madsen, has his forces infiltrating the Democratic party and other groups in a counterintel operation.
Earlier, people who decades ago were dedicated to Trotsky's vision for international totalitarianism infiltrated and hijacked the Republican party under the cover of neoconservatism, an oxymoron it turned out.
I joined a patriotic group that believes in limited government - they are branded by the brainwashing media as extremists for being neither totalitarian nor anarchists. When I moved up to local group leader I was amazed at the huge numbers who had joined the group and then fallen away, instinctively realizing they were just being used and controlled.
The programs are now so sophisticated for mass mind control, collective false thought, infiltration, deception, manipulation.
When the late governor George Romney said he had been brainwashed, he was ridiculed and laughed at by a nation who did not realize they were - and still are - brainwashed.
The nation still believes the U. S. walked on the moon in the 1960s even though a 500 page book by Helen Bennet et al shows the use of infill lighting when the sun was behind the photographed astronauts, the fact that Kodak has stopped claiming its film emulsions were actually useable under the extreme conditions on the moon, the fact that shadows sometimes ran at illogical angles or even different angles in the same scene, the fact that the suited up astros could not have fit through the hatchof the lander on display at the Smithsonian etc etc. (Another documentary I saw depicted the camera looking past the astronauts out the window as te descended to the moon. Two craters that passed by exactly matched two bomb craters at Area 51.)
Bill Armstrong quickly refused to talk about it, but the others insist they went. They also belong to an organization, one of whose degrees is the hoodwink.
I just use the moonlanding as an example of how effective mind control is and if you are very uncomfortable and angry to have the moonhoax discussed, realize that is just part of the mental programming they have skillfully placed in your mind.
The one unanswered question I have is how many respondents on this board and other boards successfully deprogrammed themselves and stepped away from the smoke and mirrors.
But realize that our expressed thoughts tag us for the brown shirt snitches. The ones who know what we know but say nothing have advanced another step. But they also are less reliable for they obviously lack courage
Any attempts to organize and come together will be futile for infiltration and subversion is inevitable.
Hitler, who was funded by Brown Brothers Harriman, took over Germany with a minority party. Brown Brothers Harriman would not fund people like us who are moderates and believe in limitations as the most moral alternative to totalitarian and anarchist extremists.
On Jul 12 09:17 AM fireball wrote:
> in the early 90s i saw massive debt, massive corruption in business
> and politics, and a complete lack of integrity in our media. i was
> just amazed the house of cards didn't tumble sooner.
> there was little i could do on a national level. there was much i
> could do on a personal level.
> on the national level the best thing i can see is to work on a constitutional
> party and to try to starve the bloated parasite of government.
Essentially what is being said is that the Fed's and government's models did not include DEBT. As User353732 says above, it is difficult to believe that nobody at the central bank understands the effects of debt on a monetary economy. There are billions, trillions of dollars to be made in a debt runup so the money motive trumps the financial sustainability motive.
There are 2 sides to every trade. One side takes on debt and the other side collects that money as payment for the sale of an asset to the debtor. Individuals can personally benefit from a debt runup but only 'the system' suffers when it collapses. What is individually rational behavior is nationally catastrophic.
John is right. A simple accounting balance sheet with credit balances on one side and debt balances on the other would show total debt racing exponentially higher than total credit. This is because all the debt is lent at interest, but only the principal is paid out to the sellers and becomes part of the credit balances or 'money supply'. Interest balances grow on the debt side of the balance sheet with no concommitant growth of those amounts on the credit balance side.
It doesn't matter what 'the economy' does. This is monetary arithmetic. The economy does not produce money. The banking system creates money. They are 2 separate systems that require 2 separate accounting models.
As for Greenspan's and others' contention that nobody can see bubbles forming, that is just total BS. My son was building and selling houses during the runup and I warned him repeatedly that prices don't always go up. He sold his last one in 2007 and had to drop the price $150k from what it was appraised at by his bank just a few months earlier for a construction loan draw. According to the bank this was going to be a $700k house, and I asked my son who in hell can afford to pay that kind of money for a place to live.
Even if we see that a bubble is forming it is hard not to want to get in on the insanity while there's money to be made. Timing is everything. Don't get caught owning one of these overpriced assets when the music stops. I personally think it's immoral to know you are selling at bubble prices to people who you know are paying unsustainable prices. But even I can justify it to myself by believing that my buyer can turn around and sell to a 'greater fool' for an even higher price.
The profit motive is very strong in us humans so we participate in bubbles even if we think it is 'wrong'. Apparently this same psychology is at work in the people at the Fed and government who are supposed to be the 'adults' who prevent these things from happening.
On Jul 12 09:33 AM texpat wrote:
> Another one who saw it coming was Jim Sinclair (jsmineset.com). He
> was one of the few talking about the risk from over-the-counter derivatives
> bubble, which greatly magnified the problems when the housing bubble
> burst.
I remember 2-3 years ago reading from both the bull/bear sides, and it over and over again seemed that the bulls quoted no comparisons against history. If the bulls used any data at all, it was in the vacuum of the present, which in my mind easily fits with "this time it's different". Their main argument seemed to be, "well everything will work out somehow", which I find very much lacking.
The bears had tremendous amounts of data that they used to back the argument that we were heading for major problems.
On Jul 12 10:03 AM User 353732 wrote:
> 4 kinds of people saw it coming:
> 1. A few members of the tiny governing elite who expected it but
> could see no way to benefit politically(or financially) by discussing
> it or advocating an end to the fantasy money/worthless credit based
> boom
> 2. A few other members of the same elite who saw it coming and hoped
> it would come and facilitated its coming because it provided a irresistible
> avenue for collectivizing the economy,intimidating and co-opting
> the biggest companies in the land, coercing and squuezing the middle
> class, expanding the parasitic class under the control of the upper
> class and aggregating power, fame and later great wealth for themselves
> at the deliberate expense of scores of millions of American's and
> America's global stature.
> 3. Independent analys who simply did not have the ability to reach
> or persuade retail investors, small and medium business executives
> and ordinary families. They spoke; no one listened( not even on SA).
>
> 4. Private individuals who quietly acted on their views to change
> their asset mix, income creating focus and even physical location
> so they could first protect themselves and then profit from the criminality
> or inertia or ignorance or stupidity of others. This 4th category
> hardly talks about their view of the world ( much less publishes
> on SA.....) but they act on it for the benefit of family, friends
> and financial/invstment partners.
>
> But then ,this is the way it usually is at great inflexions and turning
> points.
www.spiegel.de/interna...
The Maestro apparently dismissed it and so did other central bankers who were in awe of the Maestro. To put it mildly, The Central Bankers had all the tools and staff capability, but chose to ignore them. The author of this blog should include White and his Cohort right up at the top of the table.
SK
Tom Armistead said:
"The important information here is how it was forseeable: by examining balance sheets for consumers, businesses and governments and considering the cash flows necessary to support the debt involved. Specifically the level of debt associated with residential housing assets could not contiune indefinitely, the exact timing of the tipping point was unpredictable but the outcome was certain.
It would be nice if those who make national economic policy adopted the use of models incorporating the features suggested by Bezemer. In the meantime, individual investors may be able to use the insights provided to improve their understanding of macro-economic trends that will affect portfolio performance. "
Rebuilding Something Better
By Barack Obama
Sunday, July 12, 2009
Nearly six months ago, my administration took office amid the most severe economic downturn since the Great Depression (really, since 1980, but we're approaching depression status quickly under your leadership). At the time, we were losing, on average, 700,000 jobs a month (really, about 650,000). And many feared that our financial system was on the verge of collapse (it was, except for Goldman Sachs).
The swift and aggressive action we took in those first few months has helped pull our financial system (yes) and our economy (no, the rate of deterioration has merely slowed modestly) back from the brink. We took steps to restart lending to families and businesses (hasn't worked), stabilize our major financial institutions (if by stabilize you mean nationalize), and help homeowners stay in their homes and pay their mortgages (that really hasn't worked! Forclosures have skyrocked since you took office!). We also passed the most sweeping economic recovery plan in our nation's history (you passed a "stimulus" plan that consisted of 800 billion dollars in spending over 4 years, that no one read before voting into law, that has had minimal economic impact to date).
The American Recovery and Reinvestment Act was not expected to restore the economy to full health on its own but to provide the boost necessary to stop the free fall (still free falling). So far, it has done that (no, it hasn't, the trajectory of unemployment increases is unchanged, foreclosures and defaults are skyrocketing, and California is bankrupt). It was, from the start, a two-year program, and it will steadily save and create jobs as it ramps up over this summer and fall (we hope). We must let it work the way it's supposed to, with the understanding that in any recession, unemployment tends to recover more slowly than other measures of economic activity (what measure of economic activity is recovering?).
I am confident that the United States of America will weather this economic storm (laden with trillions of new debt). But once we clear away the wreckage, the real question is what we will build in its place (France? Cuba?). Even as we rescue this economy from a full-blown crisis, I have insisted that we must rebuild it better than before (and your qualifications to rebuild America better than before are what? and your definition of better than before is what?). For if we do not seize this moment to confront the weaknesses that have plagued our economy for decades, we will consign ourselves and our children to future crises, sluggish growth, or both (el Presidente, economies have cycles, chill out.).
There are some who say we must wait to meet our greatest challenges. They favor an incremental approach or believe that doing nothing is somehow an answer (it almost always is, especially when your idea of change is to destroy the greatest engine of economic growth in the world in the past 100 years). But that is exactly the thinking that led us to this predicament (no, this predicament is a credit crisis and an economic bust. They happen every so often. They end too, of their own accord). Ignoring big challenges and deferring tough decisions is what Washington has done for decades (this is just plain over-reach el Presidente, are you saying no tough decisions have been made in Washington for decades until you were installed in office? that's malignant narcissism if not lunacy), and it's exactly what I sought to change by running for president (actually, you ran as a centrist and won merely 52.7% of the vote, not a mandate to ignore the Constitutional limitations on Federal power).
Now is the time to build a firmer, stronger foundation for growth that not only will withstand future economic storms but that helps us thrive and compete in a global economy (ok). To build that foundation, we must lower the health-care costs (ok) that are driving us into debt (your spending is driving us into debt at the fastest rate in our history), create the jobs (the private sector is the primary creator of jobs and wealth, Federal jobs as construction workers and paper shufflers does not create wealth, it creates dependents on the state) of the future within our borders, give our workers the skills and training they need to compete for those jobs (that's called school, which too many people choose to drop out of), and make the tough choices necessary to bring down our deficit in the long run (it would help if you didn't spend a trillion dollars a quarter on wasteful government programs).
Already, we're making progress on health-care reform that controls costs while ensuring choice and quality (by screwing the doctors, which will lower access to care when they quit), as well as energy legislation that will make clean energy the profitable kind of energy, leading to whole new industries and jobs that cannot be outsourced (by not drilling for oil, not building nuclear plants, and discouraging the use of clean coal. Clean energy is what? battery powered cars that don't exist and solar energy which is prohibitively expensive and unworkable in many cloudy places? el Presidente any job can be outsourced)
And this week, I'll be talking about how we give our workers the skills they need to compete for these jobs of the future. In an economy where jobs requiring at least an associate's degree are projected to grow twice as fast as jobs requiring no college experience, it's never been more essential to continue education and training after high school (ok). That's why we've set a goal of leading the world in college degrees by 2020. Part of this goal will be met by helping Americans better afford a college education (good, those greedy Universities, where you, el Presidente, were educated and worked, have been jacking up tution and fees at many times the rate of inflation for decades. Are you going to mandate tuition reductions like you are mandating reimbursement reduction for doctors and hospitals? that would be terrific.) . But part of it will also be strengthening our network of community colleges.
We believe it's time to reform our community colleges so that they provide Americans of all ages a chance to learn the skills and knowledge necessary to compete for the jobs of the future (you're going to reform the most cost effective colleges around that actually work well at a reasonable price? crap. you know, el Presidente, it seems that you are so out of synch with reality that you want to break what is working and leave untouched what is broken). Our community colleges can serve as 21st-century job training centers, working with local businesses to help workers learn the skills they need to fill the jobs of the future (el Presidente that is what they already do). We can reallocate funding (you mean spend lots more money that we don't have?) to help them modernize their facilities, increase the quality of online courses and ultimately meet the goal of graduating 5 million more Americans from community colleges by 2020.
Providing all Americans with the skills they need to compete is a pillar of a stronger economic foundation, and, like health care or energy, we cannot wait to make the necessary changes (we've waited 233 years, a few more won't matter). We must continue to clean up the wreckage of this recession (but it's still getting worse, you're writing as if its over), but it is time to rebuild something better in its place (like Cuba?). It won't be easy, and there will continue to be those who argue that we have to put off hard decisions that we have already deferred for far too long (count me in that group). But earlier generations of Americans didn't build this great country by fearing the future and shrinking our dreams (true enough, America was founded and thrived on the notion of individual and States rights, and limited Federal Power. Our Founding was inspired by a hatred of an oppressive English Government, "Give me Liberty or give me death" and "Don't tread on me," were rallying cries. What you are doing, el Presidente, is the opposite of the spirit of our Founding and our history). This generation has to show that same courage and determination. I believe we will (only if we vote you and your co-conspirators out of office as quickly as possible).
The writer is president of the United States. The commentator is a citizen of the United States.
Education itself and the popular curriculum have led many analysts astray. How could we not expect poor outcomes when the educational and policy inputs were insufficient to come to natural conclusions.
So I am vindicated and of course knew all along that the accounting major of mine really did pay off and may be much of the reason I have confidence in my own big picture predictions.
I have read so many times that "nobody" could have predicted the financial crisis and of course that is nonsense. Some of us did forsee it coming but instead found ourselves just shouting into the wind like idiots while virtually everyone we knew blazed a trail to financial Armageddon. What a waste of breath.
I got out of the markets in plenty of time though and did not lose a dime on last falls carnage but it was with insights into the macro trend. The information set is less useful at being predictive of estimating stock sectors though and so I have sometimes found I can be quite right in the big picture yet still lose money. Fortunately not this time.
Anyway, thanks for the tip on the Bezemer paper John.
Or is there just a bit more to it than that?
On Jul 12 08:58 AM American in Paris wrote:
> Hey Folks,
>
> You are missing an obvious point. Suppose you did see it coming.
> What could you have done? Try to dampen the boom? You would have
> been politically massacred for destroying the party ...
>
> In fact, you would have been dismissed as a crank, "Of course, property
> values are going to continue to rise! The Earth's population is exploding!"
>
>
> It takes a crisis to generate sufficient support to radically change
> policy.
On Jul 12 09:17 AM fireball wrote:
> in the early 90s i saw massive debt, massive corruption in business
> and politics, and a complete lack of integrity in our media. i was
> just amazed the house of cards didn't tumble sooner.
> there was little i could do on a national level. there was much i
> could do on a personal level.
> on the national level the best thing i can see is to work on a constitutional
> party and to try to starve the bloated parasite of government.
"Community Reinvestment" on steroids, Fannie and Freddie, non-"brick and mortar" lending institutions, the means to hide toxic debt with bad bookkeeping and a complicent Congress all contributed greatly to what we are facing now.
Our Government is largely responsible for the global economic mess, not from lack of regulation, but from the actual encouragement to make loans to people who could never pay them back. Now the same people who caused the problems are charged with fixing them.....forgive me if I don't have much confidence.
I believe this article would imply that the current policy of getting credit flowing and increasing debt will make things worse.
If you believe, like I do, that Mr. Obama needs to change course and has had enough time I urge you to write the white house explaining why he has had enough time, and why he doesn't deserve more. Below is the link:
www.whitehouse.gov/con.../
skwestorange - - -
I agree the list of 12 by Bezemer may be far short of the possible full list. He goes to great length to describe how he narrowed the list down to just 12. I did not try to critique his process, being more interested in the results of his analysis. White most certainly might possibly have been included, in my opinion, as could others mentioned by GlenL and texpat.
doc tari - - -
You wrote: "Anyone with half a brain saw it coming 4 years ago..and the smart people were writing about that. Where were you."
Was the second sentence a question?
I'll assume it was. I was not writing four years ago. I guess I qualify as one not smart enough even to be writing for the public four years ago. I apologize for that dumbness.
I was busy in the fall of 2007 into January, 2008 systematically moving my clients portfolios away from stocks and into bonds and cash. By the end of January, 2008, the average portofio position was 30% stocks for my clients; by mid-summer 2008 it was 20% long stocks and 20% short stocks (different stocks long vs.short); by fall, 2008 it was 10% long and 30% short. I closed all short postions the last two weeks of February, 2009. I did not participate substantially in the big rally since March and remain under 20% in stocks. In the past 4-5 weeks I have reopened some smaller short positions.
I started writing on my own blog in November, 2007, to keep my clients informed of how I was thinking regarding the investment outlook. This was done because many clients indicated they would prefer this form of communication to the hardcopy letters I had been sending them 3-4 times a year.
Less than a year ago I started writing for Seeking Alpha, and recently started writing for Real Money at TheStreet.com.
doc tari, be careful when you ask a question (even without a question mark). You may get far more information than you wanted.
There are other economic models which take into account real world cash flows and debt levels which are a common basis by which the 12 people mentioned in the paper came to their correct predictions of this crash years before it happened when everything in the economy was supposedly in a "Goldilocks" period. These include the commentators that have an Austrian Economics basis. In the paper the criteria used to distinguish between a "lucky bear" vs a prognosticator with a consistent theoretical basis, and actually published predictions with rough dates of the fall of the economy are outlined. Only 12 people made the cut. Many others did predict the fall, but failed to put specific dates and consequences into their predictions.
Anyway, read the paper. It has a few typos (due to translation from German), but it is a superb piece of research, well referenced.
The author's suggestion that this was simply a case of "good" people with "bad" models who made an "honest" mistake is UTTER NONSENSE.
U.S. home prices TRIPLED while real incomes were falling. Not ONE DOLLAR of those price-increases was sustainable, and EVERY dollar of that price-appreciation will be lost (and more) - meaning a total price-decline in the U.S. housing market of greater than 67%.
Putting aside that ONE totally obvious indicator, NO ONE (with their eyes open) could POSSIBLY have failed to see the rampant mortgage-fraud in the U.S. Many of those loans had already received the nick-name of "liars' loans" a YEAR before the bubble burst.
Is there anyone with an I.Q. greater than their shoe-size who could NOT understand how writing HUNDREDS OF BILLIONS OF DOLLARS in fraudulent mortgages, and then LEVERAGING that fraud by a MINIMUM of 30:1 would implode in a very short period of time?
As Swaps pointed out in his comment, the only reason why this multi-TRILLION dollar Ponzi-scheme lasted as long as it did was that the U.S.'s corporate propaganda-machine (i.e. the "free press") was preaching Wall Street propaganda 24/7 (rather than INFORMING people about what was REALLY going on).
The author is nothing more than another Wall Street apologist looking to explain-away (through specious arguments) the largest corporate crime-wave in global history (see "U.S. bank-fraud SYSTEMIC and INTENTIONAL - William Black" www.bullionbullscanada...).
On Jul 12 10:03 AM User 353732 wrote:
> 4 kinds of people saw it coming:
> 1. A few members of the tiny governing elite who expected it but
> could see no way to benefit politically(or financially) by discussing
> it or advocating an end to the fantasy money/worthless credit based
> boom
> 2. A few other members of the same elite who saw it coming and hoped
> it would come and facilitated its coming because it provided a irresistible
> avenue for collectivizing the economy,intimidating and co-opting
> the biggest companies in the land, coercing and squuezing the middle
> class, expanding the parasitic class under the control of the upper
> class and aggregating power, fame and later great wealth for themselves
> at the deliberate expense of scores of millions of American's and
> America's global stature.
> 3. Independent analys who simply did not have the ability to reach
> or persuade retail investors, small and medium business executives
> and ordinary families. They spoke; no one listened( not even on SA).
>
> 4. Private individuals who quietly acted on their views to change
> their asset mix, income creating focus and even physical location
> so they could first protect themselves and then profit from the criminality
> or inertia or ignorance or stupidity of others. This 4th category
> hardly talks about their view of the world ( much less publishes
> on SA.....) but they act on it for the benefit of family, friends
> and financial/invstment partners.
>
> But then ,this is the way it usually is at great inflexions and turning
> points.
Now we have the bubble of babble.
You wrote: "The author's suggestion that this was simply a case of "good" people with "bad" models who made an "honest" mistake is UTTER NONSENSE."
Exactly where did I say that? That is exactly not what I intended to say. My intent was to suggest people should question whether or not economic policy gurus that hold banking and governmental power have been using the right tools. I clearly suggested they, at the very least, lacked complete understanding, and, it could be inferred from my commentary, perhaps they lacked general competence.
You further wrote: "The author is nothing more than another Wall Street apologist looking to explain-away (through specious arguments) the largest corporate crime-wave in global history (see "U.S. bank-fraud SYSTEMIC and INTENTIONAL - William Black"
Jeff, did you read this article? Did you understand it? Have you read my many articles condemning the corruption that has transpired? Until you do, please confine your comments to your opinions, my expressed opinions and the facts as you understand them. If you do all the homework that you have not done, then I will welcome a discussion of opinions you want to impute to me. At that point in time, the discussion would be worthwhile. Right now, the personalization of your comments are beneath the intellectual capacity that you have shown on other occasions.
Jeff, this is a serious comment that I hope can lead to future productive discussions. Please read my comment above again if you have any doubt about my intent here.
Be that as it may John: I have read many of your posts with valuable insights including this one. Do you think that the US Govt including the Fed, had any other choice but the wholesale bailouts, and debt binge that we are into? I don't think so. It would be interesting to read you perspectives on the remedial actions, the lessons to be learned from this epic crisis, and societal/governmental actions to prevent the next one?
Author Said in one of his responses:
"My intent was to suggest people should question whether or not economic policy gurus that hold banking and governmental power have been using the right tools. I clearly suggested they, at the very least, lacked complete understanding, and, it could be inferred from my commentary, perhaps they lacked general competence."
so making it smaller won't help. it will just make infinitely worse
On Jul 12 09:17 AM fireball wrote:
> in the early 90s i saw massive debt, massive corruption in business
> and politics, and a complete lack of integrity in our media. i was
> just amazed the house of cards didn't tumble sooner.
> there was little i could do on a national level. there was much i
> could do on a personal level.
> on the national level the best thing i can see is to work on a constitutional
> party and to try to starve the bloated parasite of government.
I have repeatedly expressed the opinion that the "too big to fail" banks that really are failing should go through a full receivership process, with equity at risk written down to through bankruptcy-like reorganization (like GM), rather than the "partly pregnant" process that has been used for AIG and C, which has a high probability of ending up in the same place anyway, only at higher cost in the end. This process would be a much cleaner method (and quicker) of getting viable companies back into private hands through IPOs, with the government eating whatever toxic waste losses we will end up with anyway. This process would have involved:
1. Banishing (and prosecuting where appropriate) the excutive old guard that drove the car into the ditch;
2. Dividing the viable businesses up into a number of new corporations that would not pose systemic risk if they were to fail in the future (no more too big to fail);
3. Establishing the process to follow if more banks got to the point of failure (BAC?) and needed "help" to reorganize;
4. Defining the financial system structure template for other too big to fail corporations to move to without using bankruptcy procedures.
There are a number of articles I wrote in the first 3-4 months of this year discussing these options.
Simon Johnson (read posts by The Baseline Scenario here on SA) has made more eloquent arguments than I regarding this course of action. This process is often called "The Swedish Model" and the path we are now on is often called "The Japanese Model", but neither previous course of action exactly fits what I have discussed nor what the government is pursuing for the current situation.
To summarize my position philosophically: "Too big to fail" is "too big to live with".
In an ideal world we would like to believe that rational thinkers acted in what they believed were the best interests of the populace and attempt to explain what happened via rational models so it doesn't happen again. I think this model as a way of thinking certainly has its uses.
Another camp, myself included, believes this was deliberate theft and that it wouldn't matter what model you used. What matters in the character of the people in power.
John, you are a rational insightful writer and I always learn something. There are however when all avenues of rational behavior have been exhausted and one watches those who we have elected continue to fail to make reform efforts because of the influence of special interests and against the interest of this country. I believe that time is now, and strident language that galvanizes the masses is called for, because our government appears to respond to no other from the voting public.
So, maybe you are both right but at some point one has declare what team they are on. Unfortunately being a rational citizen clearly isn't going to get the job done anymore.
Thanks for the comment.
I occasionally do rant, and often feel better for having done it. But I do like to try to address things with logic. The problem I have to keep addressing (for myself) can be summarized by the oft quoted statement (I'm sorry to not remember the attribution): "If you can keep your head when all around you are losing theirs, then maybe you just don't understand the situation."
My problem is that every time a discussion group starts sounding irrational, I have to step aside and ask: What don't I understand? Surprisingly (or maybe not), this process has opened my eyes more than a few times. Therefore, sometimes I agree with your last statement: "Unfortunately being a rational citizen clearly isn't going to get the job done anymore. " But not always.
Thanks for the summary on the Bezemer paper, also the reference to The Big Picture blog.
The comments are very interesting.
From the Spiegel article on William White;
"Ultimately, an economic model can only be defeated by an opposing model," says BIS Chief Economist Stephen Cecchetti, White's successor. "Unfortunately, we don't have a generally recognized model yet. Perhaps this partly explains why our warnings were less effective than would have been desirable."
White and the BIS economists recognized and warned of many of the issues leading up to the housing bubble. As Cecchetti points out though, they had no macro model. Their major concern was right on the money; "Credit Risk Transfer", but they couldn't sell it.
As you point out, the major contribution from Bezemer is seeking a common thread among those who also got it right: micro accounting cash-flow models. This sounds like a central conundrum of economics. Isn't macro the sum of all the micro players? We'll have to wait and see what new theories develop from this "natural experiment."
Not surprisingly for some of the commenters, the Spiegel article is subtitled:
The Man Nobody Wanted To Hear
My favorite quote is White's comment that "the economy is not a science." Reinforcing the idea that economists don't understand everything.
Also, not surprisingly revealed in the article, many central bankers are effete, arrogant intellectual snobs. Must be a failing of human nature.
When you create a multi-trillion Ponzi-scheme, you KNOW what the outcome will be. This was not a case of models "breaking down". The models of these con-artists were merely the "lures" to draw in the "marks".
My frustration with your commentary is you obfuscate the "big picture" by lending credence to these "models". The models, and the "financial products" themselves (i.e. the scams) were INTENTIONALLY created to be to too "complicated" (i.e. convoluted) to be understood by ANYONE.
This was the excuse which the ratings agencies used (i.e. the primary accomplices). Because the "models" and products themselves were too "complicated", this "forced" the ratings agencies to rely upon Wall Street "models" - in other, words to let Wall Street self-rate their own scam-products.
What is the point of "mathematical analysis" of a crime-spree?
As I have observed before in my own writing, the ONLY ethical course of action for the ratings agencies, while this crime-spree was taking place was to REFUSE TO RATE anything they were incapable of independently analyzing (rather than using their "AAA" ratings as rubber-stamps, so that they could maximize their own profits).
Had all these scam-products being rated as "unrated", this would have either ended or grossly diminished Wall Street's crime-spree by CORRECTLY alerting investors to the risk of investing in ANYTHING which is too complicated to be understood.
On Jul 12 02:45 PM John Lounsbury wrote:
> Jeff Nielson - - -
>
> You wrote: "The author's suggestion that this was simply a case
> of "good" people with "bad" models who made an "honest" mistake is
> UTTER NONSENSE."
>
> Exactly where did I say that? That is exactly not what I intended
> to say. My intent was to suggest people should question whether
> or not economic policy gurus that hold banking and governmental power
> have been using the right tools. I clearly suggested they, at the
> very least, lacked complete understanding, and, it could be inferred
> from my commentary, perhaps they lacked general competence.
>
> You further wrote: "The author is nothing more than another Wall
> Street apologist looking to explain-away (through specious arguments)
> the largest corporate crime-wave in global history (see "U.S. bank-fraud
> SYSTEMIC and INTENTIONAL - William Black"
>
> Jeff, did you read this article? Did you understand it? Have you
> read my many articles condemning the corruption that has transpired?
> Until you do, please confine your comments to your opinions, my expressed
> opinions and the facts as you understand them. If you do all the
> homework that you have not done, then I will welcome a discussion
> of opinions you want to impute to me. At that point in time, the
> discussion would be worthwhile. Right now, the personalization of
> your comments are beneath the intellectual capacity that you have
> shown on other occasions.
>
> Jeff, this is a serious comment that I hope can lead to future productive
> discussions. Please read my comment above again if you have any
> doubt about my intent here.
It didn't take Albert Einstein to realize that eventually home prices had to come down or people would just stop buying them and that you could only squeeze so many home equity loans out of them. Not rocket science.
Hopefully we have learned a lesson now about giving people mortgages who have bad credit and cannot save up for a down payment.
When I saw your title I had to mention a book written by one of those
unlisted sages who saw it coming : The Global Class War, by
Jeff Faux, founder of the Economic Policy Institute , and published
in early 2006. It is a non-partisan explanation of how we ended up with
global agreements which have nothing to do with "free trade" and
much to do with legal protection for an international investor class.
It faults Reagan and Clinton, both parties' operatives and advisors.
Very dense reading, but HIGHLY informative.
He predicted a bitter end to the housing bubble.
Those with the power haven't changed much. Expect them to continue to be behind the curve as the valuations continue to erode with deleveraging.
Politicians are always the last to get what the rest of the public already knows. That's why - like generals - they fight the last war with current legislative efforts.
It took 60 years of inflating to bring us to this point in time. Expect several more years to wring out the excess credit created and put in the hands of borrowers certain to default: Alt A, Option ARM and credit card balances destined to be written down or written off.
Last I heard, when liabilities disappear, so do the counter-party assets.
On Jul 12 02:19 PM Jeff Nielson wrote:
> As User353732 (and others) correctly point out, this was a "surprise"
> which could not possibly have been missed by anyone with their eyes
> open.
>
> The author's suggestion that this was simply a case of "good" people
> with "bad" models who made an "honest" mistake is UTTER NONSENSE.
>
>
> U.S. home prices TRIPLED while real incomes were falling. Not ONE
> DOLLAR of those price-increases was sustainable, and EVERY dollar
> of that price-appreciation will be lost (and more) - meaning a total
> price-decline in the U.S. housing market of greater than 67%.
>
> Putting aside that ONE totally obvious indicator, NO ONE (with their
> eyes open) could POSSIBLY have failed to see the rampant mortgage-fraud
> in the U.S. Many of those loans had already received the nick-name
> of "liars' loans" a YEAR before the bubble burst.
>
> Is there anyone with an I.Q. greater than their shoe-size who could
> NOT understand how writing HUNDREDS OF BILLIONS OF DOLLARS in fraudulent
> mortgages, and then LEVERAGING that fraud by a MINIMUM of 30:1 would
> implode in a very short period of time?
>
> As Swaps pointed out in his comment, the only reason why this multi-TRILLION
> dollar Ponzi-scheme lasted as long as it did was that the U.S.'s
> corporate propaganda-machine (i.e. the "free press") was preaching
> Wall Street propaganda 24/7 (rather than INFORMING people about what
> was REALLY going on).
>
> The author is nothing more than another Wall Street apologist looking
> to explain-away (through specious arguments) the largest corporate
> crime-wave in global history (see "U.S. bank-fraud SYSTEMIC and INTENTIONAL
> - William Black" www.bullionbullscanada...;view=article&...
>
Here is a link to the Michael Lewis piece (not on Bloomberg, after all) about the early careers of Meredith Whitney, Steve Eisman and others who saw it coming (and continue to call things right):
www.portfolio.com/news...
For example, look at the huge number of balloon mortgages that were documented and listed in numerous publications last year. The figures were specific as to how many of those loans would "balloon" - and in which states - by the end of 2008 or earlier, and on into 2009. It was clear that the owners' monthly payments would then increase an average (average, mind you) of approximately 65%.
We also all knew most of the borrowers were living on equity and credit and beyond their means - that also was published and specific.
Put the two together, and those ALONE spell disaster, bankruptcies, defaults, and recession. Those alone are indicators the lenders - or whoever they shamelessly sold the loans on to - were going to have trouble collecting, consequently also revenue/income problems because of defaults. They would also never be able to sell repossessed homes at anything near the loan amount, considering how inflated home values had become. So they would invariably take a loss. What other possibility was there, based on the figures?
Simplistic? Of course. Probably phrased wrongly and badly in places. I don't claim to understand all the ins and outs of everything that occurred, except, of course, the massive misrepresentation and fraud by so many lenders.
But just those few facts were enough to make me completely rearrange my investments to be very conservative, stressing preservation-of-capital and leaning toward more overseas investments for the small percentage left in stock funds. As a result, I lost very little - about 5% in the first few months of 2009, all of which I have since regained, and much more.
I'm not an economist. I have a degree in Music Theory. I do tech support. I don't subscribe to the Wall Street Journal or Barron's, or spend much time at all reading the financial pages or the economic news, or keeping up with housing prices, except to realize - along with all my friends - that they were artificially, ridiculously high.
And if I could tell a ton of manure was about to impact the rotating blades...well, you know the experts could too. So how many lies and cover-ups took place to protect those who were walking away with the loot? How many who could have done something agreed to look the other way for the sake of profit? Who manipulated and spun the situation to prevent any correction or preparation?
Paranoia? Well, I'm not the paranoid type. Cynical, yes. I believe that is reasonable here.
No doubt, I've written some things here that will make financial experts giggle. But I still say, "No One Saw" is the wrong phrase. "No One Told the Truth About This Economic Crisis" might be a better title.
Those who went short back then would have their pants margin called as early as July 2003.
On Jul 12 06:37 PM puravidavid@yahoo.com wrote:
> Another unsung prophet is the author of the presecient 2002 book,
> "Conquer the Crash," wherein wave technician Robert Prechter details
> why, how and when the collapse would occur.
In all his annual meetings from 2005-2008, he warned about housing bubbles, lending standards, and securitizations.
In the end, it still didn't prevent him writing almost 40 billion in index puts, thus costing his company the AAA rating.
What people predict and what people do are often contradictory.
Nonetheless, I continue to believe the fundamental problem was not modeling, but mendacity, on the part of those with the power to prevent the abuses and modify the outcome.
"Bezemer contends that the problem is that economic policy is executed using macro equilibrium models and what is needed to establish economic policy that can anticipate crises, such as we have now, and take actions to head them off, are micro accounting cash-flow models."
Sooooo, they have figured it all out now. This experiment didn't work. What we need is some OTHER government intervention experiment. What crock of $hit. The government needs to stay the fvck out of the economy and stick to enforcing the constitution. The free market will fix everything once the government promises and crutches are removed.
Will people never figure out what a gigantic GD scam this whole thing is???
PATSIES!!!
Thanks for another good article as always, and the many good comments above.
In 2007, a less well-known author in this post at dandelionsalad.wordpre...
had indeed predicted almost word-for-word exactly what, where, when, how, and why the present crisis would unfold.
Unfortunately no one in power heeded the coming catastrophe and a "Train Wreck" in Market Sniper's words ensued.
Isn't this part of human folly? My mind goes back to the 1987 movie "No Way Out" where Lt. Cmdr. Tom Farrell (starred by Kevin Costner) was being chased relentlessly in the vast stretches of hallways and corridors at the Pentagon, and the bystanders, both military and civilians just looked on the drama with bewilderment.
Most of us ordinary citizens are bystanders, myself included. I recall a quotation: "...true leaders are far and few in between..."
Teutonic
On Jul 12 06:57 PM mkreisel wrote:
> That book came out exactly at the bottom of the previous bear market,
> October 2002.
>
> Those who went short back then would have their pants margin called
> as early as July 2003.
i call bullshit. it is one thing to put out opinion on a subject and not know what you are talking about; it is quite another to say something about another person and not know what you are talking about.
as a contributor, you are held to a higher standard to fact checking in a comment stream.
i can assure you john saw this coming. but the question of knowing it was coming is not enough - it is knowing when to react and how to react is the problem.
any person who has studied our economy knows something went terribly wrong in 2000 and really never recovered.
The galling thing is that many of the jokers who brought us to where we are are still at and those who have left took their millions in bonuses for the work they did to destroy our nations economic fabric. A pox on all of them.
Your point about the many of same folks are at still the helm in the aftermath of this saga is worrisome. If this situation continues I can see but only one outcome which is akin to sinking of the Titanic.
TK
On Jul 12 08:13 PM EttU wrote:
> It is not a matter that no one saw it coming, it is the fact that
> no one wanted to deflate the bubble while Wall Street and the Banks
> were cleaning out our pockets. In 06 and 07 everyone was feeding
> the bubble the banks, wall street, the media all the talking heads
> on TV. It is the same pattern which repeats itself each time the
> economy goes down the drain.
>
> The galling thing is that many of the jokers who brought us to where
> we are are still at and those who have left took their millions in
> bonuses for the work they did to destroy our nations economic fabric.
> A pox on all of them.
On Jul 12 08:18 PM Teutonic Knight wrote:
> EttU - - -
>
> Your point about the many of same folks are at still the helm in
> the aftermath of this saga is worrisome. If this situation continues
> I can see but only one outcome which is akin to sinking of the Titanic.
>
>
> TK
1) Too many people (especially those associated with the ruling elite) were making money to do anything to put an end to the good times.
2)No when knew for sure when the chickens would come home to roost, it could have happened in 2010 just as well as 2008, so why rush things and not enjoy it.
3)The ultimate severity and duration of the downturn was very difficult to calibrate. Depending on the economic assumptions being used there was a whole lot of well educated guesses on what might happen anything from a big bump in the road to armageddon..
Finally, it,s human nature to believe fiction which justiifes your current prosperity. Its kinda like preaching to the choir.
All the media comment, "Isn't this the best shit we've ever smelled!"
And the process repeats itself ad nauseum.
America, "we have seen the enemy, and he is us."
I see the effect with which the Republicans use emotional messages to galvanize the public. I ask myself why The american people stood up against the Iraq war, but sit silently while the government and wall street steal our future.
My posting language has become more strident, but that is because I fear that unless the populace can be made to realize what is going on nothing will change.
The American people want to believe the best from their president, after all who wants to think they have been a sucker in the voting booth. Well, Obama (the yes we can man) has chosen his side and unfortunately it isn't with the American people and isn't in our best interest. So, when will the democrats see him for what he is. A man, just like Bush who ran on a platform but has no intention of delivering, and let him know we are watching and waiting for him to become the person we elected. Someone who will stand up against special interests and actually tell the truth to the public. whne confronted with the truth and the hard choices we must fact I believe the American people can pull together. When given continual spin, so the elites can continue to hoard our diminishing resources it is time to raise our voices as one and demand a halt to what is happening.
2. We just have to have people in charge who are not beholden to the Wall ST Oligarchs..
3. Thirdly.: "too big to fail implies too big to exist"
And, yes, moon guy, I have been brainwashed.
On Jul 12 10:00 PM dcb wrote:
> I have great respect for the rational pundits like Simon Johnson
> who can clearly see what is happening but unfortunately doesn't appear
> to want to step into a leadership role to galvanize the public to
> take some action.
> I see the effect with which the Republicans use emotional messages
> to galvanize the public. I ask myself why The american people stood
> up against the Iraq war, but sit silently while the government and
> wall street steal our future.
>
> My posting language has become more strident, but that is because
> I fear that unless the populace can be made to realize what is going
> on nothing will change.
>
> The American people want to believe the best from their president,
> after all who wants to think they have been a sucker in the voting
> booth. Well, Obama (the yes we can man) has chosen his side and unfortunately
> it isn't with the American people and isn't in our best interest.
> So, when will the democrats see him for what he is. A man, just like
> Bush who ran on a platform but has no intention of delivering, and
> let him know we are watching and waiting for him to become the person
> we elected. Someone who will stand up against special interests and
> actually tell the truth to the public. whne confronted with the truth
> and the hard choices we must fact I believe the American people can
> pull together. When given continual spin, so the elites can continue
> to hoard our diminishing resources it is time to raise our voices
> as one and demand a halt to what is happening.
The Wall Street Journall called him "The man who saw it coming":
stressonomics.wordpres.../
By and large the United States being the most affluent and highly developed, would to some have become "soft" and even "up-side down" in the eyes of some beholders.
By this I would mean that the economists, lawyers, M&A specialist, bankers, movie celebrities, talk-show host/hostess, beauty pageants, comedians, singers, etc. get the limelight and calling the shots.
Of late, I noticed that Chrysler LLC (the resurrected one by his holiness) put on some ads featuring a female engineer preaching the vibrant virtues of technical excellence at Chrysler. Sorry to say that I almost dropped onto the floor wriggling with a burst of laughter. Since the 70's the fast track up the corporate ladder is the finance, marketing, sales, and administration types.
Now you know what it means by "you get what you paid for".
TK
On Jul 12 09:58 PM dragonpaw wrote:
> All "economists" are crap looking for a place to drop. All politicians
> are that place, surprisingly movable, into which that crap drops.
> Most voters , willingly and wontenly, step into that crap and declare.
> "this is the USA at its best and greatest."
> All the media comment, "Isn't this the best shit we've ever smelled!"
>
> And the process repeats itself ad nauseum.
> America, "we have seen the enemy, and he is us."
And, this is a turning point, the big question is, which way will we now go?
Finally, I know there is much talk of elites and hidden agendas, but we should never completely discount, the irresistable "power of one", to upset the best laid plans!
On Jul 12 10:03 AM User 353732 wrote:
> 4 kinds of people saw it coming:
> 1. A few members of the tiny governing elite who expected it but
> could see no way to benefit politically(or financially) by discussing
> it or advocating an end to the fantasy money/worthless credit based
> boom
> 2. A few other members of the same elite who saw it coming and hoped
> it would come and facilitated its coming because it provided a irresistible
> avenue for collectivizing the economy,intimidating and co-opting
> the biggest companies in the land, coercing and squuezing the middle
> class, expanding the parasitic class under the control of the upper
> class and aggregating power, fame and later great wealth for themselves
> at the deliberate expense of scores of millions of American's and
> America's global stature.
> 3. Independent analys who simply did not have the ability to reach
> or persuade retail investors, small and medium business executives
> and ordinary families. They spoke; no one listened( not even on SA).
>
> 4. Private individuals who quietly acted on their views to change
> their asset mix, income creating focus and even physical location
> so they could first protect themselves and then profit from the criminality
> or inertia or ignorance or stupidity of others. This 4th category
> hardly talks about their view of the world ( much less publishes
> on SA.....) but they act on it for the benefit of family, friends
> and financial/invstment partners.
>
> But then ,this is the way it usually is at great inflexions and turning
> points.
On Jul 12 05:22 AM Steven Hansen wrote:
> we are faced today with a president surrounded by economic advisors
> who all think the same. no presidential advisor foresaw the crisis
> coming.
>
> if they did not see this crisis coming, i have no confidence they
> can steer us out.
Thanks for your comment in reply. I look forward to having discussions and debates with you in the future.
On Jul 12 05:23 PM Washburn University Market Commentary wrote:
> For the record, I attended a talk given by UCLA's Ed Leamer (www.anderson.ucla.edu/.../)
> in Spring 2007, and Professor Leamer laid out the impending economic
> crisis on a silver platter to an audience of approximately 200 top
> money managers. Ed explained why macroeconomic conditions were unsustainable,
> and how the unwinding would proceed. He really nailed it. Ed is the
> director of the UCLA Anderson Forecast. You might want to bookmark
> the link, it's updated regularly and has been accurate for quite
> a while (uclaforecast.com/). In my opinion, it's a good "smart
> money" resource.
The comments have digressed from who saw it coming and tried to explain it (economists), to who saw it coming and perpetuated it to keep making money (conspiracies), to those who just saw it coming and cashed in (rare). Here's a good story on one of the later:
articles.moneycentral....
Along with a few commenters, I'm more interested in the explanations for the simple reason that they provide a basis for remedial action now and future preventive measures. Apparently, nobody who saw it coming was in a position or motivated to do anything about it. Conversely, nobody who could do anything saw it coming. Which begs the questions- what would they have done then? Are they doing anything substantive or appropriate now?
It is painful and expensive to be "right" too soon. In fact, its so painful and expensive that its little different from being wrong. So the temporal aspect of the calculation is critical; particularly for a policy maker.
A second aspect of "it" is that so far as I'm aware, no one saw clearly the web of derivative products that had increased implicit leverage far higher than we understood-- I'm thinking specifically of AIG. One reason that we didn't see AIG coming, was that like Enron, they'd structured their business to make it hard to see the parts that were contributing risk.
The FIRE sector didn't get modeled as Brezmer notes-- but not because people didn't want to. It couldn't modeled because AIG had purposefully established AIG Financial Products in a domicile outside of the Fed's ambit, and as such the Fed simply didn't have data to model their exposures. If you don't have AIG CDS exposure (and the similar exposures of counterparties) in your model, how _could_ you see "this" coming?
This is what is famously called the "shadow banking system". The essence of the shadow banking system is that it represents the movement of capital -- and leverage -- from the traditional, observable, regulated financial institutions to an alphabet soup of opaque entities.
We created a perverse set of incentives for the FIRE entities to move their risks to precisely the place where we couldn't see them clearly.
On Jul 13 07:23 AM Crocodilian wrote:
> Saw "it" coming? Really depends on what the "it" is.
>
> It is painful and expensive to be "right" too soon. In fact, its
> so painful and expensive that its little different from being wrong.
> So the temporal aspect of the calculation is critical; particularly
> for a policy maker.
>
> A second aspect of "it" is that so far as I'm aware, no one saw clearly
> the web of derivative products that had increased implicit leverage
> far higher than we understood-- I'm thinking specifically of AIG.
> One reason that we didn't see AIG coming, was that like Enron, they'd
> structured their business to make it hard to see the parts that were
> contributing risk.
>
> The FIRE sector didn't get modeled as Brezmer notes-- but not because
> people didn't want to. It couldn't modeled because AIG had purposefully
> established AIG Financial Products in a domicile outside of the Fed's
> ambit, and as such the Fed simply didn't have data to model their
> exposures. If you don't have AIG CDS exposure (and the similar exposures
> of counterparties) in your model, how _could_ you see "this" coming?
>
>
> This is what is famously called the "shadow banking system". The
> essence of the shadow banking system is that it represents the movement
> of capital -- and leverage -- from the traditional, observable, regulated
> financial institutions to an alphabet soup of opaque entities.<br/>
>
> We created a perverse set of incentives for the FIRE entities to
> move their risks to precisely the place where we couldn't see them
> clearly.
Silly me, I thought "dollar diplomacy" and "consumer economy" patterns were proof that people in government had done their homework and was preparing us for a future with tight commodities and a national economy based on something other than manufacturing. Little did I know it was democrats trying to bribe people who innately wished us dead into tolerating us, and a financial sector betting on people ignoring their credit card debt because it wasn't right in front of them.
If the United States of America were a ship, her name would be the Titanic. The iceberg which has opened up our national economic hull and which is ultimately responsible for the current economic decline of our nation is easy enough to see, but, our collective national hubris kept us on the foolish path of ultimate destruction, because too many of us were busy betting on office football pools or gobbling the latest morsel of "news" about the latest celebrity of the week.
The iceberg's name is greed, and, she may only float in a sea called "Apathy".
I have money invested in a mix of stocks, metals, and currency, and, I got rid of ALL my debt a few years ago, because I believe this economic crisis will persist for a a very long time.
If we want the crisis to end sooner, we need to fire our professional politicians and replace them with ones who just work in Washington for a few years and go back to being human again before they become too corrupt to function ethically in the morality-vortex which swirls around DC like a dark storm.
We also need to get rid of the barriers to the entry of third parties, so we can have real change, that we REALLY CAN ALL BELIEVE IN... and, I KNOW, and YOU KNOW that average Americans want systemic socialism about as much as we want to volunteer for a frontal lobotomy!
Oh, and another thing:
Anyone who thinks it's a good idea to borrow from China, so we can be the world's ROBO-COP is in need of a brain transplant!
Those who say 'nobody saw it coming' are the ones that themselves didn't see it coming, and are trying to share the blame.
Here were the facts that made my colleagues and I cautious:
1. Massive housing boom (2001-2006) driving huge economic growth. Take away housing boom, and you take away the economic growth.
2. Summer 2007: Housing market rolls over and Bear Stearns hedge funds can't find markets for their securities. They close, signalling securitization market is dead and assets on (or off) financials balance sheets are worthless. Other hedge funds can no longer fund using short-term paper. Another sign that the securitization market is dead. If securitization is dead, and housing prices are falling, a big portion of finance industry's profits are gone. Another big bearish signal.
3. Summer 2008: Fannie and Freddie are flipped on their backs. The 2 pillars of the 'American Dream' die, therefore the American Dream is dead. If the American Dream is dead, then the consumer is tapped out.
All I'm trying to point out (along with many other posters here) is that there were a few big signs out there that should have raised the 'caution' flags.
I'm just tired of hearing from investment managers (with access to far more resources than I) who say 'nobody saw this coming' when asked about their 2008 performance.
On Jul 13 10:31 AM Plan B Economics wrote:
> Lots of people saw it coming.
>
> Those who say 'nobody saw it coming' are the ones that themselves
> didn't see it coming, and are trying to share the blame.
>
> Here were the facts that made my colleagues and I cautious:
>
> 1. Massive housing boom (2001-2006) driving huge economic growth.
> Take away housing boom, and you take away the economic growth. <br/>
>
> 2. Summer 2007: Housing market rolls over and Bear Stearns hedge
> funds can't find markets for their securities. They close, signalling
> securitization market is dead and assets on (or off) financials balance
> sheets are worthless. Other hedge funds can no longer fund using
> short-term paper. Another sign that the securitization market is
> dead. If securitization is dead, and housing prices are falling,
> a big portion of finance industry's profits are gone. Another big
> bearish signal.
>
> 3. Summer 2008: Fannie and Freddie are flipped on their backs. The
> 2 pillars of the 'American Dream' die, therefore the American Dream
> is dead. If the American Dream is dead, then the consumer is tapped
> out.
On Jul 12 08:15 AM doc tari wrote:
> Anyone with half a brain saw it coming 4 years ago..and the smart
> people were writing about that. Where were you.
like the lookouts of todays crisis, all of those screaming to be heard by the masses that" they made the call".... they will all also survive....
However, like the Titanic lookouts, who were too late to save the ship, out modern day lookouts were way to late to save the economy.
Perhaps we should not pay as much homage to our modern day wannabe seers as we do.....after all, we did hit the damned iceberg....
On Jul 12 08:53 PM User 357705 wrote:
> Titanic. Good metaphore. USA today is exactly where the Titanic was
> after the stern section broke away from the forebody.
The term "liars loans" actually originated in the 1980's...but you knew that, I'm sure...
Actually, most of what transpired during the last 5-7 years in mortgage lending actually dates back to the 1980's...which is one of the anomolies in the current crisis...thee actually was a knowledge base available for review and guidance....
The real delta was the changes in agency underwriting, and development of overly complex and risky (yet highly profitbale) ways to manage the mortgage investments at the back end of the system......
On Jul 12 02:19 PM Jeff Nielson wrote:
> As User353732 (and others) correctly point out, this was a "surprise"
> which could not possibly have been missed by anyone with their eyes
> open.
>
> The author's suggestion that this was simply a case of "good" people
> with "bad" models who made an "honest" mistake is UTTER NONSENSE.
>
>
> U.S. home prices TRIPLED while real incomes were falling. Not ONE
> DOLLAR of those price-increases was sustainable, and EVERY dollar
> of that price-appreciation will be lost (and more) - meaning a total
> price-decline in the U.S. housing market of greater than 67%.
>
> Putting aside that ONE totally obvious indicator, NO ONE (with their
> eyes open) could POSSIBLY have failed to see the rampant mortgage-fraud
> in the U.S. Many of those loans had already received the nick-name
> of "liars' loans" a YEAR before the bubble burst.
>
> Is there anyone with an I.Q. greater than their shoe-size who could
> NOT understand how writing HUNDREDS OF BILLIONS OF DOLLARS in fraudulent
> mortgages, and then LEVERAGING that fraud by a MINIMUM of 30:1 would
> implode in a very short period of time?
>
> As Swaps pointed out in his comment, the only reason why this multi-TRILLION
> dollar Ponzi-scheme lasted as long as it did was that the U.S.'s
> corporate propaganda-machine (i.e. the "free press") was preaching
> Wall Street propaganda 24/7 (rather than INFORMING people about what
> was REALLY going on).
>
> The author is nothing more than another Wall Street apologist looking
> to explain-away (through specious arguments) the largest corporate
> crime-wave in global history (see "U.S. bank-fraud SYSTEMIC and INTENTIONAL
> - William Black" www.bullionbullscanada...;view=article&...
>
zerohedge.blogspot.com...
The bubble master (Greenspan) could never see a bubble coming, I wonder how he is able to see the burst of the bubble and act on it aggressively. The “officials” and corporations believe in bubbles – that has been the economic model of US for the last two decades- and of course in America everything has to be bigger and biggest. We have been having bigger bubbles and more frequent bubbles.
We had the dot com bubble – in the aftermath – everyone would have thought there would not be another bubble for a long time – at least a generation – but we had another one even much bigger within a few years. Have people become foolish or bubble prone – I think the answer is yes. People are very easily swayed by get rich quick schemes especially if they come from ‘authoritative” sources like –“Fed” or Goldman and some such.
Problem with bubbles is not some much the difficulty of predicting but whose job is to take away the “punch bowl” – everyone says ‘not me’ – and the bubble goes on. I was not able to convince any my friends not to buy a home in during the bubble (in Southern California). And I tried hard, and these people who I term as smart and intelligent –would succumb to the power of the bubble. Another historical episode to recall during the 17th century ‘South sea’ bubble days, England outlawed issuance of equities to prevent another bubble. English travelled to France by boat to participate in bigger bubbles there. It is the 'animal spirits'.
I think we have another bubble brewing right now in commodities – people are once again very very eager to participate. Time will tell how it unfolds.
There is no worse rogue than an ideologue.
On Jul 12 09:46 AM Glen L. wrote:
> Once again the Austrian School of economics, which not only saw the
> crisis coming but saw the Great Depression coming, and foresaw every
> other bubble and downturn in the last 100 years, gets short shrift
> in a mainstream research paper and this article. The Austrians
> not only foresaw the bubbles and crashes, they developed and refined
> Austrian Business Cycle Theory (seekingalpha.com/symbo...)
> over the last 8 decades to explain the cause, which in turn points
> us to the solution. That solution involves rejection of all "policymakers"
> - aka central plannners - which would also require the separation
> of economics and state, regardless of whether the state is represented
> by the Welfare Party or the Warfare Party or an indistinguishable
> blend of the two. And it would entail a true free market in money,
> i.e. gold/commodity based money produced by market entrepreneurs,
> not governments. The details make for great summertime reading,
> Lounsbury -- go to mises.org and indulge yourself.
>
> And I say to everyone, there is no need to try to (or pretend to
> try to) digest and understand incomprehensible charts and mathematical
> formulae (econometrics, my arse!) that purport to explain economics.
> Come down to earth and educate yourselves in the science of human
> action - praxeology - which has already done that job for you.<br/>
>
> Now, Peter Schiff would agree with everything I just wrote, but in
> the short list of visionaries above the names of Gary North, Walter
> Block, Jim Rogers, Robert Higgs, and dozens of other investors, scholars,
> and economists who understand ABCT are missing. That is a huge
> disservice not only to them but to the education of the public.
> I guess that's why I'm here.
On Jul 13 02:54 AM Peter Cooper wrote:
> OK so let me add that I can see another crash coming this autumn.
> But even with this warning very few people will take any notice,
> either out of ignorance, optimism or an entrenched position. Forecasters
> are only acknowledged as right after they are right, never before
> because until then they could be wrong!