I'm not sure if I'm one of the liberal bloggers Megan McArdle's writing about here but I'll proceed as if I am. Distracted as I was by my out of control gloating yesterday, I never really made a point about Paul Krugman's predictive powers, but if I had, it would have been this: For literally years, Paul Krugman warned that we'd be in for some serious economic hard times when the housing bubble burst. This wasn't something he did as a game, but rather in the hope that rightly positioned people would address the problem. They didn't.
Time passed, and eventually conservative and libertarian writers--who either didn't understand what was happening, or didn't think all that highly of Krugman's liberalism, or both--began to mock him for getting his economic forecast wrong. Now, lo and behold, he wasn't wrong at all. And even if we presume that he thought a recession would come sooner than it did, the worst we can say about his economic punditry is that it took longer for him to be proven correct than he and others like him imagined it would.
This is what comes from not reading economics commentators besides Paul Krugman. Though I don't know how Brian can quote me on Krugman almost a year ago, while somehow not noticing that I myself have been predicting that there would be economic trouble when the housing bubble popped. Almost every commenter who is not named David Lereah both recognized that we were in a housing bubble, and expected that when the housing bubble popped, the economic results would be ugly. My personal history with this prediction starts in 2004, when I started doing economic analyses for The Economist. But others, such as The Economist's Pam Woodall, have been saying it even longer.
What I--and, as far as I know, Paul Krugman--did not expect was the magnitude or the direction of the problems it would cause. We expected first, consumption contraction from a reversal of something known as the "wealth effect"--when assets appreciate, people feel richer, so they spend more; they also sometimes borrow against the current or future value of those assets. When the asset prices fall, they contract their spending both because they feel poorer, and because they can't borrow any more money on the assets--indeed, may need to frantically start paying back the money they already borrowed. This puts downward pressure on economic growth.
We also expected that it would hurt bank balance sheets, which would mean retrenchment and therefore a slowdown in lending to other areas. I, and possibly Krugman--I don't really have time to comb through every column he's ever written right now--further expected that it would have deleterious effects on the government fiscal picture, especially in bubbly areas. And, of course, we expected that the eventual decline in the construction boom would show up in GDP, since construction is a major component.
But I did not foresee how tightly coupled our financial system would prove to be. I didn't see how far the problems would spread--I didn't even expect the magnitude of the crackdown in commercial real estate lending, much less the generalized credit freeze. Neither, AFAIK, did Paul Krugman. And one of the areas that we were both very concerned about, the decline of the wealth effect, has proven to be relatively much less important than expected.
Krugman also thought we might be about to get into a recession several earlier times, when I was more skeptical; in that sense, I called it better than he did. My care about calling a recession earlier in the year was not because I thought the economy was in fine fettle. Rather, it was because Britain had, against all theory, dodged a recession despite a popping housing bubble even more impressive than ours. This even though they'd gone more than a decade without one. Having watched the British economy in my professional capacity for most of the current decade, I'd seen it declared on the verge of recession multiple times by various commenters, for what seemed like good and sound reasons; nonetheless, it never quite went there. This made me somewhat cautious about proclaiming that a recession was inevitable based on our fundamentals.
(At this point, let me point out the obvious: a recession is, to a virtual certainty, either underway or about to hit. But in January, we hadn't had a banking crisis yet.)
The belief that Paul Krugman is some sort of singularly talented prognosticator on matters of policy and the economy is almost entirely found among people who do not spend a lot of time reading the financial press, and also, have forgotten the many concerns he expressed that did not come to pass. This is not to claim that Krugman makes more errors than usual, either. He's a somewhat pessimistic columnist whose economic arguments almost always fall well within the mainstream of current debate among professionals. That was the entire content of my crack about his having called eight of the last none recessions--for at least the last eight years, he's been dispositionally a bear. I've made the same crack about Nouriel Roubini more than once, and I have no idea what his politics are.
Krugman is a great popularizer of economics, but his writing is not filled with unique insights that cannot be gleaned elsewhere. He is a participant in arguments that range throughout the economics pages in more than a dozen publications, such as my old employer, the FT, the Wall Street Journal, Barrons, Bloomberg--plus economics blogs, a bunch of expensive newsletters you've probably never heard of, and the coffee machine of every economics department in the country. I do not think it is possible to regularly read those publications and reasonably sustain the belief that Paul Krugman has been uniquely, or even especially, prescient about current conditions. That's no slam on Krugman. It's a slam on people who are unaware that there are really quite a lot of smart people out there writing about the economic issues of the day.
On a final note, several people who didn't read my post on Krugman's Nobel Prize seem to believe that denying Paul Krugman's ability to see the future is somehow to deny that he is a good economist. Krugman's titanic achievements in economic work were not in the field of accurately predicting future GDP movements, which no one is (yet) very good at. They were in developing new models to explain patterns of trade and production. Those models would remain brilliant and useful even if every single prediction Krugman ever made about the US economy proved spectacularly wrong--just as Newtonian Physics would still be pretty cool even if Newton wasn't very good at catching baseballs.
Did Megan just use a C/C++/C# != sign? Why yes she did. Now I know why I love this blog so much.
I think liberals are susceptible to this conclusion because Krugman was more accurate and persistent in predicting and criticizing general Bush Administration policies, especially after the 2004 election when the dwindling Bush critics were told that that elections "decided some things." He appears to me to be one of the most prominent commentators not to be cowed by the electorate's verdict from 2004. When many middle of the road types were pondering a permanent Republican governing majority.
But I did not foresee how tightly coupled our financial system would prove to be. I didn't see how far the problems would spread--I didn't even expect the magnitude of the crackdown in commercial real estate lending, much less the generalized credit freeze. Neither, AFAIK, did Paul Krugman.
I'm guessing this is because nobody focused on the fact that the CDS market was something like $60 trillion. This is why the focus on Fannie, Freddie, the CRA, etc., is so ridiculous. Let's stipulate that loosening lending standards (whether influenced by the gov or not) was a bad idea. Had Wall Street not tied the mortgage market around its neck like a 60 trillion ton anvil, all those bad mortgages would not be threatening to take down the entire US economy.
A year ago you thought there wasn't a subprime mortgage crisis because only 15% of subprime loans were defaulting:
"This seems to be a fairly common sentiment, so I think it's worth pointing out that the latest data we have shows that the overwhelming majority of subprime loans are still in good standing. Subprime securities are taking a bath because defaults are higher than were expected, not because everyone who got one is in trouble. The 85% of homeowners with subprime loans who are currently making their payments might not agree that Alan Greenspan should have, in his ineffable wisdom, prevented them from getting loans.
Nor, so far, is there much evidence that the subprime problems are causing much fuss in the broader financial markets. So it's far from clear to me that Alan Greenspan should have acted--and indeed, far from clear to me that Alan Greenspan could have acted effectively. "
Yes she did.
If she had used ">" like a Basic programmer, I would have lost all respect for her right that moment :-)
Well said but too much nuance, Megan.
Your liberal commenters won't accept it. ;)
I'm still waiting for the deflation that Krugman predicted in 2002 and 2003, as well as the stagflation Krugman predicted in 2005.
But don't worry, if they hit in 2009 or 2010, Brian Beutler will surely be around to tell us how brilliant Paul Krugman is!
Brace yourselves people, Megan's only given us two long-winded defensive posts on this particular topic thus far. If history is any indication, we've got 4-6 more to endure.
Kruggs: right about the Housing Bubble, right about the Iraq Invasion, right about Bush's wildly regressive tax cuts. And a whole buncha other stuff. Megan: ehhhhhh.....
Led,
I agree with Megan's earlier post that the Credit Default Swap (CDS) market should be taking place on an exchange such as the Chicago Merc, but CDS's are important tools for managing risk and making the markets more liquid. Most of the $60 trillion is probably hedging risk, not speculating.
The problem is that it's all so interconnected that no one knows which counter-parties are safe and which aren't, but that's because of the huge numbers of bad loans out there. If there weren't so many bad assets mixed in with the good, the market would be able to sort it out.
Fannie, Freddie, regulatory changes under Clinton and the later refusal to regulate GSEs by Democrats such as Barney Frank are still the underlying causes of this crisis.
I should think "≠" would be Orwell's preferred symbol.
Led, if you think that the CDS market would likely have reached the size that it did, absent a concerted, multi-decade effort by Congress to encourage debt, with Freddie and Fannie being prominent tools employed by Congress, you are in error.
I dislike Barney Frank's and Senator Robert Bennet's behavior, among others, in regards to the housing GSEs as much as anyone, but I think it has to be emphasized that the perverse incentives put in place by the very existence and structure of the GSEs was always problematic, and nearly guaranteed an eventual disaster.
That Krugman's ability as a prognosticator is being reduced to his ability (or not) to predict the current economic problems is something that is either misinformed or misleading.
Krugman's fame as a predictor of recessions began a long time before the current mess. It began with Japan, and then the south east asian crisis, and finally the Argentina default, all situations that most analysts miserably failed to predict.
In fact, most economists know about his excellent contributions about currency crisis, something which is generally not discussed in the general press.
Brace yourselves people, Megan's only given us two long-winded defensive posts on this particular topic thus far. If history is any indication, we've got 4-6 more to endure.
It's worse than you think. If history is any indication, the ineffable, inedible ed will fluff up the comments of every single one with multiple servings of USDA Grade "F" cheese so substance-free and weak that even a mouse wouldn't take it home for dinner.
I never had any problem with Krugman's economic analysis; to engage in the practice is to guarantee making errors. What I always found terrible was when Krugman would employ his extremely well-earned credibility as an economist to behave like a two-bit political hack peddling falsehoods and dishonest insinuations; imagine Karl Rove or Paul Begala as Nobel-worthy economists.
I fianlly gave up on him when he wrote a column early in the Bush Administration, in which he made a dishonest insinuation of criminal activity by George W. Bush, in making a lot of money via taxpayer subsidy and eminent domain abuse as Texas Rangers President. An honest man would simply have pointed out how grotesque it was for George Bush to make millions via successfully lobbying the government for such subsidies and use of eminent domain. Of course, an honest man would have also mentioned that the newspaper which paid him large sums of money, the New York Times, engaged in the very same practices. But I digress.
More pertinently, an honest man, when it was pointed out that the column was not intellectually honest in it's insinuation of criminal activities, would not have chosen his personal blog, with a fraction of the readership that his NYT column enjoys, to make a half-assed retraction.
Krugman, obviously deserving winner of the Economics Nobel, decided at some point to become a common political hack, and that's a shame.
Well stated, and very fair, IMO. One reason I really enjoy your writing even if I do not share your instincts
Ann: The key fact is that because of all the naked swaps on synthetic CDO's, the amount of CDS liabilities are multiples of the value of the underlying mortgages. The naked swaps are giant, uncapitalized "prop bets" on the likelihood of defaults. Now if I bet $1 million dollars on the Phillies winning the World Series and the Phillies lose because they stupidly try to bunt in every at bat, I will go bankrupt and lose my house. In one sense, of course, the "underlying cause" of my misfortune is the Phllies' stupidity. But if I didn't make a bet with insufficient capital cover it, I would be just fine. Any sensible person would say I lost my house because I made a stupid bet I was unable to pay for.
I don't dispute that unwise government policy contributed to this problem (although nowhere near to the extent conservatives are attempting to argue -- the private sector gave out the vast majority of stupid mortgages all on its lonesome), but it was terrible risk management by all the major banks that turned what would have been a bad problem into a world-historical crisis.
Led, when an industry is as dominated by the state as our housing and mortgage industries are/were via the GSEs, nobody, and I mean nobody, does anything "all by their lonesome".
The more proper analogy would be that Congress instructed the Phillies to open a sports book, and to also encouraged me, via a variety of tools, to make a 1 million dollar bet on the outcome of the World Series. Congress started the chain of events, which does not, of course, mean that my actions and the Phillies' are blameless.
Led -
Where are you getting the numbers on naked swaps?
And yes, once banks were induced by the government to lower their lending standards, they got used to the lower standards and lost all discipline. You can blame an addict for continuing to abuse once he's hooked, but that doesn't absolve the pusher that worked hard to force the addiction.
They're all to blame, but it's important to remember that the Democrats voted against regulation of Fannie and Freddie, while the Republicans didn't work hard enough to pass the regulation but at least gave it a try.
"My personal history with this prediction starts in 2004, when I started doing economic analyses for The Economist."
The Economist hired an English major with self-described weak math skills to do economic analysis?
Fred
Yes. The Economist has a deserved reputation for knowing what it is doing, particularly in picking staff.
Megan,
Isn't the Isaac Newton parallel his many years of high quality astrological work; after he launched the Newtonian revolution? Krugman is not up to Newton's standards, of course; but Krugman at his best is both damn good and very relevant. His other work often intrigues; as Newton's astrology did in that generation.
Will: My baseball analogy is better because gov policy did nothing to encourage the giant, unfunded CDS "bets." Even if the gov was solely responsible for every bad mortgage written (which is obviously untrue however much we disagree about the extent of government responsibility), the big banks (and AIG) put their solvency on the line by placing bets on those mortgages that were worth many multiples of the value of the mortgages themselves. I could see blaming the gov somewhat for the mortgages and even for the the toxic mortgage backed securities, but once banks start creating synthetic CDO's with notional values in the billions and then buying/selling credit protection on those CDO's, they've really broken any link with gov policy relating to underlying mortgages.
Megan, you need to stop digging and accept that you look like a tiny, tiny person this week.
Led, why would anyone believe they needed credit protection, if the if they didn't fear bad loans?
Mike, when someone says a Nobel is obviously well deserved, and has been saying it for a long time, in what way are they a tiny person?
Led, to quote a well known Obama supporter, Warren Buffett, the temptation to use these exotic derivatives is huge, because as long as the bubble keeps expanding, the ability to manage earnings is huge. Yes, the temptation was poorly regulated. However, absent the bubble, the temptation is much lower, hence the import of poor regulation is much smaller. Our federal government, unfortunately, actively encouraged the inflation of this giant speculative bubble, and THEN failed to regulate it adequately. You and I would have been much better off if our government hadn't encouraged the speculative bubble, because then we would not have had as much at risk via poor regulation of the bubble.
Megan,
If it makes you feel better, I think you have a lot more in common with Krugman that the liberal posters here give you credit for. You both think mathematical modeling of economic activity is the highest and only true path to economic understanding, and both of you dismiss foundational considerations regarding the nature of money, human activity, and morality.
Don't worry, one day someone will find the 8th order differential equation that would have accurately predicted the housing bubble pop, and the wizards in the Fed could have manipulated, devalued, and otherwise played shell games with paper bills in enough time to mitigate (read: delay) most of the damage before the next pop occurs. Hopefully that person will win a Nobel too.
Diversity,
Get thee to a copy of The Elements of Style. I've seen better use of a semi-colon in Michelle Obama's senior thesis at Princeton.
"Get thee to a copy of The Elements of Style. I've seen better use of a semi-colon in Michelle Obama's senior thesis at Princeton."
I honestly felt bad for Michelle Obama that her paper was leaked.
There should be some type of law which keeps undergraduate papers confidential.
"...the simple fact that the longer you've gone without a recession, the more likely you are to get into one soon."
This is definitely not obvious; at least on face it's like saying that if you flip a coin 10 times and get 10 heads, the next one will almost certainly be a tail.
It is possible that long stretches with no recessions somehow cause recessions (perhaps investors get over-excited, over-value securities, and then the inevitable readjustment screws the economy for some psychological reason). But I certainly don't see any clear mechanism that would cause this, and statements like this need a *lot* more justification than "it's a simple fact."
Mike, when someone says a Nobel is obviously well deserved, and has been saying it for a long time, in what way are they a tiny person?
Because she disagrees with Mike over Krugman's divinity. That's, like, the eighth deadly sin. Or is it the eleventh commandment? I always get confused over these theological questions. Probably should have spent more time studying my left-wing chatechism, but Sarah Silverman sat three desks over and used to be a hottie back before her mouth enlarged, so...
I think Megan was right to give the true credit here to people like Taleb. The real problem is that almost everybody over leveraged because they had faith that they had effective risk management tools that weren't really effective. The problem with this analysis is that there doesn't seem to be any solution. If people never took leaps of faith we'd still be living in grass huts.
For years I have been amazed that a man who could be so right about Japan could be so spectacularly wrong about everything else--including Enron and the war we are currently winning in Iraq.
As for credit default swaps, there is no functioning model for evaluating them. People are working on models now, but the math and the logic behind the ones that have been published so far is extremely convaluted. Trading credit default swaps can best be compared to playing Russian Roulette with a semi-automatic.
You didn't have to be an economist to see this coming. I have an English degree, and I write ad copy for a living. I've been predicting an economy-wide bust on the back of the housing bubble for years.
Krugman, obviously deserving winner of the Economics Nobel, decided at some point to become a common political hack, and that's a shame.
Really, Will Allen? Care to be specific? Did Kruggs get the Iraq War right? How'd other columnists of that time do? How about George Bush, Jr.'s wildly regressive tax cuts? How'd that work out? The Krugmeister deserves credit for getting some important stuff right (even though it was painfully obvious to many of us in the reality-based world). It wasn't because he as a common political hack. It's because he thought it was important (and it was) and because he thought he was right (he was). How was your track record on such important topics? I didn't think so. Good day, sir!
I said good day!
There seem to be some commenters that are connecting CDS to the mortgage market. While there are certainly billions of credit default swaps written on asset-backed securities, including commercial and mortgage-backed securities, a huge part of that $62 Trillion of outstanding was, in fact, written on corporate debt. All the synthetic CDOs (a lovely instrument that uses both structure *and* CDS leverage) I ever saw were corporate as well, structured to lever Single-A credit spreads while retaining the A rating.
The Monolines used bespoke CDS as the form of insurance on structured product. Between them and AIG I think they constituted the bulk of resi credit-based CDS.
CDS were a way to both leverage and hedge one's credit ownership, much like the traditional leverage on institutional balance sheets and other techniques such as SIVs and CDO structure. The core problem was a combination of the bubble in housing with a financial system that had adeptly and enthusiastically gamed the industry's conventions and rules around acceptable leverage. Regulators bought into the VAR and Tier I calculations despite these gaping holes and used them as an excuse to pursue simpler and more interesting concepts, such as criminalizing email and pursuing mostly fictional terrorist money launderers.
In an incredibly ironic twist, however, they did catch a Governor who had been a trailblazer in the regulation-by-criminalization movement.
I'm sure Megan's not old enough to use ".NE."
"For literally years, Paul Krugman warned that we'd be in for some serious economic hard times when the housing bubble burst."
I've read this three times and still haven't figured out which part is supposed to impress me. Saying we'll be in for serious economic hard times when a bubble bursts isn't even prognosticating, it's tautologizing. "Economic hard times" practically follows from the definition of "bubble bursting".
This takes absolutely nothing away from Krugman's actual, deservedly-Nobel-winning work in economics, as Megan says.
The Newton example is particularly apt given his absolute brilliance as a scientist and physicist, and his highly idiosyncratic second career (which he personally considered his true vocation) as theologian.
Good God, the level of self-deception is amazing. Okay, for all of those who claimed that they 'made predictions' it's time to put up or shut up: Let's see 'em. Here are a few who didn't see the bubble, at least one of which seems to have been something of an icon for the right:
Or how about this quote:
Contrast this with what Krugman actually wrote:
And as I recall it, Krugman was being widely mocked by the usual gang that couldn't shoot straight. You know the drill: he was shrill, he was partisan, he was suffering BDS, and would say anything to make the administration look bad, etc.
So, all of you guys who claimed you predicted this, let's see some authentication.
SOV is peddling his usual nonsense. His defense of Krugman's 6-year-long record of falsely predicting that a recession was imminent--or even already in progress--is to change the subject to the housing bubble.
And given that half the economists and real estate analysts in the country shared Krugman's view in late 2005 that we were in a bubble, the claim isn't terribly impressive anyway.
It's been really sad to watch the old Krugman, the highly talented academic economist, degenerate into a partisan political hack.
Megan looks small because she's spending the week that he won the prize outlining just what her ostentatious past disses of him were and what they weren't. I'm not commenting on where she is right or wrong. But the length of the post and the extent to which she thinks his prize revolves around what she's said about him just don't speak well of her. Just leave off this week, eat your crow, and then go back to taking him down again next week. It would look silly if she suddenly thought he was great; she should just let him have his week and don't make it about her. It looks petty and self-involved.
Almost every commenter who is not named David Lereah both recognized that we were in a housing bubble, and expected that when the housing bubble popped, the economic results would be ugly.
Not quite everyone.
In 2004, New York Federal Reserve economists Jonathan McCarthy and Richard W. Peach wrote a paper Is There A Bubble in The Housing Market Now?
There conclusion: No housing bubble.
And Bernanke wants the Fed to fight bubbles!
LOL
They have to recognize them first.
""...the simple fact that the longer you've gone without a recession, the more likely you are to get into one soon."
This is definitely not obvious; at least on face it's like saying that if you flip a coin 10 times and get 10 heads, the next one will almost certainly be a tail.
It is possible that long stretches with no recessions somehow cause recessions (perhaps investors get over-excited, over-value securities, and then the inevitable readjustment screws the economy for some psychological reason). But I certainly don't see any clear mechanism that would cause this, and statements like this need a *lot* more justification than "it's a simple fact.""
But it's not a 50-50 proposition, like flipping a coin. It's more akin to a feedback loop, where you aren't even looking for a steady state, but are hoping for a slowly increasing value of the GDP, when you don't know the transfer function of the feedback loop, nor even what all the variables are.
It's incredibly complex.
Mike writes 'I'm sure Megan's not old enough to use ".NE."'
Argh. That makes me feel old, because I've used that form. I'm not older than dirt, but I am older than FORTRAN.
And given that half the economists and real estate analysts in the country shared Krugman's view in late 2005 that we were in a bubble, the claim isn't terribly impressive anyway.
That's complete BS the CW in 2005 was "buy now or be priced out forever" In fact in late 2007 Bernake still believed that the subprime problem was largely contained.
JordanT,
It's your claim that's BS. Even back in 2004, BusinessWeek suggested there was a housing bubble. Ian Morris, U.S. economist at HSBC, wrote a report called "The U.S. Housing Bubble." In mid-2005, the Economist magazine editorialized that the housing price boom in the U.S. "looks like the biggest bubble in history." The same month, Federal Reserve Chairman Alan Greenspan said "it's hard not to see that there are a lot of local bubbles." Famed Yale real estate economist Robert Schiller wrote that the housing market "is in the throes of a bubble of unprecedented proportions." In August 2005, Fortune magazine said there was a housing bubble. And so on and so forth. The idea that Krugman was defying the conventional wisdom in saying that there was a housing bubble is laughable. Numerous major economists and economic publications had come to the same conclusion.
Right on, Ms. McArdle. Almost everyone with half an economic brain predicted some sort of economic troubles...The real question is: what does that say about Greenspan who may have been one of the few who didn't take the warning seriously when WSJ and the Economist warned almost every other week about keeping interest rates too low. Does he have less than half an economic brain?
SoV: I can personally vouch for Megan's prediction.
Back in the end of 2005, my husband and I were thinking of buying a house. Since Megan had been regularly banging away on the bubblicious nature of the housing market, and I was a regular AI reader, I asked in the comments section of one of her posts (http://www.janegalt.net/blog/archives/005614.html) whether I should still consider buying in our unusually stable area.
Incidentally, she advised me to go for it, but only if we could make a sensible purchase that we could afford to stay in if the market went south and we couldn't sell for a while. I'm sitting in a house of that description now. We still could sell it if we needed to; our local market is still in decent shape, and we have not lost equity as far as I can tell. (We may simply be on the top deck of the Titanic, but I'm hoping not.)
Give it up Jordan. They're not going to give you the point even though you're right.
Also note none of them bothered to even respond to your basic assertion that BERNANKE stated the sub-prime problem was largely contained. Instead they did what right-leaning economists always do, shift over to a different topic, generally Alan Greenspan, thus taking attention away from any of their own credibility.
And Megan criticizing Krugman is laughable. Don't worry they still won't give credit to people who tried to warn them Iraq would be a disaster either. Even if it's someone from their own side, like Pat Buchanan.
One of the most infuriating and disappointing traits this country has gained during the Bush years is people's total inability to admit when they're wrong and others are right. And rather than fighting it attempt to learn from it. Instead we have a bunch of petulant people who have been largely wrong, fighting with those who were right.
If you don't like the term clairvoyent for Krugman, would you rather prescient, Megan? Nothing you say or try to spin is going to change the fact Krugman was clairvoyent on this one. For the same reason most people are.
He is:
a) smarter than you
and
b) simply read the signs correctly and better than you did.
Live with it.
Looking at 'Jane Galt' and 'housing' I managed to dig this up:
So she can say she predicted it, but look also at her prediction of the severity. 'Not as bad as people have argued' eh?
And on the general subject of dissing people for poor phrasing, didn't Megan write this not too long ago:
While I don't particularly care about these particular types of gaffes, Megan apparently thinks they mean something. So what are we to make of this:
Newton? Baseball? Now, are we going to get a frank admission of error of type Biden made, or are we going to get another series posts explaining how she wasn't really wrong after all? Or how she 'really' didn't mean her statement that literally? What do they say about it not being the crime, it's the cover-up?
Nobel for Megan! Too!
Oh, and clicking on Dictyranger's link, here is apparently what she means when she vouches that Megan 'predicted' the housing bubble:
That's some 'prediction', eh? Now, I'll repeat my challenge to all those who claimed that they 'predicted' the housing bubble: why don't they post those predictions they were making back in 2003 or 2004 or 2005?
You know, I could have sworn Alan Greenspan was harping about Fannie Mae and Freddie Mac for years. CNN got what was going on way back in 2005
"In the longer run, if such a move were to make Fannie's and Freddie's investment base less risky, it could mean that the U.S. financial system would be able to weather storms such as a recession or a big pullback in the housing market without any kind of meltdown."
http://money.cnn.com/2005/05/19/news/economy/greenspan_fannie/
SOV, JordanT -
I started thinking that we were in a housing bubble in 2006, when I started looking at houses. However, this man, Ben Jones, has been predicting a housing bubble since 2004, and started his blog in 2005, after previously posting on another blog.
http://thehousingbubbleblog.com/index.html
He's just a man on the street, but a lot of people saw this coming.
Anybody who didn't recognize the housing bubble for what it was by 2006 at the latest had their head in the sand. But the thing was less pronounced in 2003, so it might have looked like a short-term or local trend. By 2006, though, the insanity was fairly obvious.
If you look at salaries and house prices in a region, you can pretty well figure out what houses should cost. If what they actually cost is way more than that, there's a bubble building.
Or if new houses being built look tacky and distorted and difficult to live in, but still manage to find buyers, then normal critical thinking has been suspended in favor of some kind of mania.
Both these things happened recently. And I think we will find that some of the new construction out there won't find buyers at any price, except perhaps buy-to-let landlords who end up owning the slums of the future. This boom has left us with some pretty hideous buildings.
Yes, John, it is a dissapointing trend, as evidenced by your inability to admit that when Fortune, The Economist, Business Week, etc. are stating that there is a housing bubble, is is absolutely moronic to claim that the conventional wisdom is....
""That's complete BS the CW in 2005 was "buy now or be priced out forever".""
Just what the hell is wrong with your intellectual faculties which would cause you to think that Fortune, The Economist, and Business Week don't comprise the conventional wisdom? Do you normally live in such a state of denial?
That "buy now or be priced out forever" line was the conventional wisdom among people who had just bought and were trying to reassure themselves about what they had done. They helped whip up the frenzy among their friends and relations. This had nothing to do with analysis in business publications.
Those of us with contrarian instincts just got pissed off by the real estate boosters. I'll admit they sometimes made me wonder if they were right -- if immigration and new household formation really was driving the boom. But then I remembered that the Baby Boom generation is approaching retirement, and I realized they they are about to start selling the houses where they raised their families in favor of smaller quarters. There was no way a boom would continue with all that property on the market.
ed, when you falsely insinuate criminal activity by people you oppose politically, while rightly criticising grostesque practices, while failing to mention that the media outlet, which pays you large sums of money, engages in the very same practices, and then, when your false insinuation is noted, you run a disingenuous retraction in your blog, instead of the media outlet which has a much larger readership, then you are political hack, plain and simple.
By the way, I said the invasion Iraq was quite likely going to extraordinarily difficult and expensive endeavor, and would quite likely end up making George Bush a very unpopular President. I also said it was the quickest way to give the broad Iraqi population a greater voice in how their mineral resources were governed. I also said that Bush's tax policies would be far better with a few hundred billion dollars in spending cuts, which I strongly supported. I said as early as 1999 that Bush would likely be a very bad President in terms of domestic policies, given his background of making a fortune via taxpayer subsidy and abusive eminent domain.
Statistically, someone is going to "call it right" every time. But people forget that economics is not actually a physical science based on highly predictable rules like thermodynamics, but a social science based on the best guesses available and completely incapable of dealing with all of its variables simultaneously. The idea of handicapping economic predictions is farcical - no person can predict with any regularity what is going to happen in the economy. Economists just scramble around after the fact and explain what already happened.
Nearly every criticism of Krugman highlighted his excellent, likely Nobel quality work in Ecnomics, his great writing for Slate, and then the aneurysm he had when Bush got elected and then Krugman got a NYT column. I've done it, Jonah Goldberg has done it, Megan has done it.
EVERYONE liked and agreed with Krugman's economic work, putting him in the likely Nobel camp. It was his political work that lost him fans.
The other problem that Krugman and so many on the left have is that predicting doom isn't useful. Timing is IMPORTANT. Many, many people recognized the tech-bubble. Lots of them lost money by the boatload. You don't have to be right, you have to be right at the right time - "the market can stay irrational longer than you can stay solvent".
An example - I've long thought that GOOG was over valued. Didn't like the share structure and the long term model was lacking. Never mind an absolutely ridiculous PE for such a large company. If I'd looked at the share price of GOOG on Jan 06, 2006, and said that at $466 it was too high, I'd have been right. It's currently trading at 378.5 and has been as low as 332 last Friday. I wouldn't have made any money if I'd created a short position, as I'd have gone bankrupt due to the margin calls when GOOG was trading at more than 700 in Nov and Dec of 07.
Krugman constantly predicting a recession doesn't mean that he's brilliant, it means that he's pessimistic. But he's on the left, and Bush is de evil, and remember Iraq was WRONG! So Krugs is great. Right.
The other problem in ranking economic forecasting, like ranking investor performance, is the tiny sample sizes involved. Even someone with a decades-long record, like Buffett, has not developed a large enough sample size to discern with confidence how much of that record is not the result of random outcomes. It is akin to saying a major league hitter is Hall of Fame quality two months into his rookie year.
Or how she 'really' didn't mean her statement that literally?
Why would you assume she meant it to be taken literally? I don't take you so literally as to believe that you are literally an ephemeral wisp of olfactorily detectable molecules. The "baseballs" remark was merely a way to comment on the difference between theory and practice, and how being good at one doesn't make you good at another.
Chuckle. Look at the quality of scholarship on the right - lots and lots and lots of claims about 'predicting the bubble' (and no, per Megan's own quote above saying that 'The market is probably at or near its peak' is not predicting the bubble.) And a definite paucity of cites to support those claims, or any cites at all for that matter. I phrase this as I did because we have, for example, cases like one bozo on another thread citing statements that were not even predictions, let alone predictions about a recession as 'proof' of a botched recession prediction Krugman had made.
I, otoh, have done the unthinkable, and actually posted - drumroll - cites and quotes showing that a) Krugman was definitely very concerned about the housing bubble and the implications for its collapse, and b) Bernanke, Greenspan, Megan, et al, didn't think anything particularly bad was on the horizon. Fer gosshakes, I've got the quotes right up there so you can't miss 'em. Greenspan and Bernanke both in late (October) 2005 are going on that at worst there is 'froth' in 'some areas'. And that even if 'housing prices are unlikely to continue _rising_ at current rates', this won't significantly affect the growth of the economy.
Of course, none of these dead-enders are going to -gasp! shudder!- admit to anything so humiliating as the fact that they were wrong. I suspect that this will be one of the longest lasting and most hurtful implications of the right, the conservatives/libertarians/Republicans in our midst: the deliberate rejection of empiricism as a tactic (a tactic!) to get one's way. That goes clear beyond being anti-American and goes to being anti-enlightenment.
Really? Then why all nastiness about Biden then? Why does Megan get a pass, but Biden doesn't?
A little consistency please. To go along with a little responsibility.
Spoken like a person who maintains that Freddie and Fannie were private entities from 1968 until September 2008, because the word "privatised" appeared in a Wikipedia entry. Bravo!
Very good post above by Mindles H. Dreck. Fair point that a large chunk of the CDS market is corporate debt. But a large chunk is also MBS. And there were/are lots of synthtic CDO's referning MBS. Bear Stearns, in particular, was deep into that. This point Mindles makes is right on:
The core problem was a combination of the bubble in housing with a financial system that had adeptly and enthusiastically gamed the industry's conventions and rules around acceptable leverage.
It's also notable that corporate CDO and CDS instruments are older and subject to much better models than their MBS counterparts. That's another factor in the risk management failure.
Why does Megan get a pass, but Biden doesn't?
Well, two reasons.
1) Because it is reasonable, in context, to read Biden's statement as a literal, factual (and at least somewhat erroneous) assertion about what FDR actually did at a particular moment in history. Our gracious hostess has used the conditional--and as punctilious a parser of grammar as you can hardly have missed it--and I think it would still be clear from context even without it that her point was metaphorical. She has not asserted that Newton struck out duirng the
2) She was hardly "nasty" to Biden. Mockery is perfectly fair for dumb gaffes, even when you can tell what the gaffer "really" meant. If you want to write something mildly humorous about the baseball thing, feel free; I won't criticize you for it, and you can have the satisfaction of knowing that she didn't get away with it.
That should be "She has not asserted that Newton struck out duirng the 1662 World Series"
My bad
Sigh. How about a demonstration?
Note that the first cite is:
www.fanniemae.com/faq/faq8.jhtml?p=FAQ
Not that there's anything wrong with the wiki in this instance of course. But it does show how negligible lightweights like Will are, no matter how much effort they put into trying to start poo fights. Let me guess: Will gets in a whine about how what he said was technically true, and that he never implied that there weren't other cites. Sure, Will, whatever you say.
And, of course, the larger point is that if you're going to say something, it's best to be backed up with cites and sources, and to have done a little research before actually making inflammatory statements that you can get called on.
SOV: http://www.janegalt.net/blog/archives/004573.html
That is the first link you get when you search for "housing bubble" on my old site. You are invited to concede your error at any time, though based on your past behavior I will offer a fairly confident prediction: you will either ignore your mistake, and bluster about some other irrelevancy, or disappear from the thread.
As for your Newtonian "gotcha", you seem to have made a common error that catches so many on middle-school reading comprehension tests: confusing the subjunctive with the past tense. I do not know what Newton's catching abilities were, and obviously he was not participating in an American sport that emerged sometime in the nineteenth century. The point was to make a distinction between theory and practice, as Lyman so painstakingly explains. Joe Biden was making a factual historical claim, not offering an example of something that Roosevelt might have done in an alternate universe.
Led, if government action, from the tax code, to the structure and behavior of GSEs, and what I think are less important factors, like the Community Reinvestment Act, played a very large role in creating the housing bubble, why is it ridiculous to cite government action as being a primary factor in our current mess, given you agreee with Dreck's statement? I think you are entirely correct that the behavior of management, and lack of regulation thereof, of AIG, Lehman, et. al., played a primary role; I just don't see why you wish to discount the effect that government action had in inflating the bubble to begin with.
Iow, Rob, she gets a pass, just because. Would it hurt you to at least try to be a little less partisan, maybe say something to the effect that if you're going to mock someone for what they said, that it's best that you don't indulge in similar constructs? And no, making vague references to a 'conditional' (no it was not correctly used; you'd have to add 'if baseball existed' as a modifier) doesn't cut it. She could just as easily have said: '--just as Newtonian Physics would still be pretty cool even if Newton wasn't very good at catching (a ball).' She didn't.
Of course, you can quote the text where I made the error, right? Shouldn't be difficult at all. I'm waiting. You seem to be having difficulty with the concept that everyone just has to be as stiff-necked as you.
The ball is in your court.
I pause to note another successful prediction . . .
Golly, SOV, you mean the people who were making gigantic bonuses at Fannie, primarily off the fact their implied taxpayer guarantee on the paper they sold allowed them to, in turn, borrow money at a lower rate than any potential competitors, for decades, would claim that they were a normal private entity subject to the normal competitive pressure a private entity is exposed to? What a shocker! Of course, they actually even admit that they are not a private entity, by stating that Congress has required them to support the housing finance system. Guess what, Keynes? Wells Fargo, prior to this month, if the management and shareholders so chose, could have left the regulated banking industry, and deployed it's capital to other endeavors, because unlike the GSE's, Congress had not required it to stay in the banking industry. That's a private entity. Geez, it must be asked again; how unspeakably stupid are you?
Look, every time you adress that nature of the GSEs, you establish yourself as a nitwit, by focusing on the word "private" on a Wikipedia entry or on Fannie Mae's site, instead of observing how the GSE's actually behaved, and how their Congressional support gave them unique advantages that no other entities could possibly benefit from, no matter what they did. You really are the single most stupid person who posts in these threads, and your stupidity appears deliberate, which is a bit odd, to say the least.
maybe say something to the effect that if you're going to mock someone for what they said, that it's best that you don't indulge in similar constructs?
Oh, I agree with that. Indulging in different constructs, however, is still allowed.
And no, making vague references to a 'conditional' (no it was not correctly used; you'd have to add 'if baseball existed' as a modifier) doesn't cut it.
Why not?
You know, this reminds me of the time somebody complained to me that no matter what evidence and argument he presented, his interlocutors insisted that it wasn't sufficient. He found it frustrating that they took their own denial of its sufficiency as 'proof' of their own correctness. Also their use of bald assertions in the nature of "not good enough" without further argument.
She could just as easily have said: '--just as Newtonian Physics would still be pretty cool even if Newton wasn't very good at catching (a ball).'
Indeed, and the ease of that substitution--and the greater difficulty of a similar simple substitution for Biden--serves as one contextual cue suggesting that the two quotes are not parallel examples. One being a metaphor, susceptible of multiple alternatives based on the author's whim, and the other being a literal factual claim, which is either true or not true.
And as an aside, if we're playing insane grammar games, it would have been clearer to use brackets [], not parentheses, around "a ball." Also, double quotes would have been appropriate for a direct quote.
Oh, let's look at Megan's quote, btw:
Nowhere do we see anything about severity (notice this is 2004, and I quoted a cite from 2005, as did another poster), in fact, I would say, given the follow-up, anything but. And further, from what I wrote up above:
and:
So, Megan, I'm anxious and eager for you to point out just where I made this supposed error(assuming that you think my error is that I said you never predicted it.) Do go ahead. I'm not running away or going anywhere for this one :-)
Why, Megan, it's not like you to say something before you have verified it's factual authenticity! Let's see this error that I've made, rather than simply insisting that I've made one without even bothering to tell us what it is.
I pause to note another successful prediction . . .
Unfortunately, the market had already priced that risk in and I was unable to profit off of your predictive abilities.
Look, every time you adress that nature of the GSEs, you establish yourself as a nitwit, by focusing on the word "private" on a Wikipedia entry or on Fannie Mae's site, instead of observing how the GSE's actually behaved
Without endorsing the insult, I'd point out that literalism over context is a continuing theme in SoV's commenting oeuvre. It actually suggests a rather promising career as a patent examiner.
And _you_ get to decide what is similar and what is different, eh?
Sigh. Can you say, 'projection'? _All_ you offered up was 'Because it is reasonable'. No. That definitely doesn't cut it.
Really? Substituting 'radio' for 'television' is a 'more difficult' substitution? Can you say 'special pleading'? They look just about the same to me.
Uh, Rob, _I'm_ not the one trying to plead out based on fine details of grammar and style. To me, the two statements look pretty much the same. Hardly evidence that I'm trying to pull a fast one based on 'insane grammar games'. No, that would be _you_, you know, the one who is insisting on these fine distinctions, so that the two cases are, like, totally different?
_I_ make no claims to any special grammatical expertise. Though I will point out that the single quotes are also taken to mean a paraphrase (look it up); I started doing this some time ago when someone else claimed that I was quoting them out of context (though I included the sentences before and after), but wouldn't tell me what the proper context was.
And _you_ get to decide what is similar and what is different, eh?
I would say the generic "reader" gets to decide. I happen to think you have decided wrongly.
_All_ you offered up was 'Because it is reasonable'. No. That definitely doesn't cut it.
Because it isn't reasonable to read a conditional statement differently from a declarative one? Because a metaphorical illustration of of a banal point is "pretty much the same" as an claim that the alleged actual behavior of Person A should serve as an model for Person B?
Substituting 'radio' for 'television' is a 'more difficult' substitution?
No. If Biden is correct, historically, that the governor of New York went on the radio promptly after the crash in 1929 or so and said 'this is what happened,' then his statement is a very minor gaffe, worthy of mockery by Leno but no more.
_I'm_ not the one trying to plead out based on fine details of grammar and style.
You are, however, the one that insisted that a proper conditional would have included the existence of baseballs, and that omitting it makes it, like, totally wrong.
You really would make an excellent patent examiner, by the way.
"if government action, from the tax code, to the structure and behavior of GSEs, and what I think are less important factors, like the Community Reinvestment Act, played a very large role in creating the housing bubble,"
Will Allen -
I agree with you that LBJ's idea of 'privatizing' Fannie Mae while still giving it special privileges and using it for government policy was stupid from the start. He wanted to bring in outside money and get the company off the government balance sheets without actually losing control. It was an accident waiting to happen...
But the trigger for that accident, which also heavily influenced the size of the accident, began with the changes introduced by the Clinton administration to force banks to lower their lending standards.
I was worried about mortgage pass-throughs in the early 1990s, because banks could make loans and then sell them. Why should banks care about loan quality if they weren't going to keep the loans? But the system worked for quite some time because there were established standards for income, loan-to-value, etc.
Then the Clinton administration demanded that banks make subprime loans, and allowed Fannie and Freddie to handle them. This started the trouble, which was made worse when Fannie Mae was caught cooking the books in 2003 and had to rely on protection from friendly Democrats. In exchange for shelter from Democrats, Fannie focused more and more on lowering standards to increase home ownership.
Some sort of trouble was probably inevitable from the time LBJ chose such a bad arrangement. But there's no reason to think that it would have been such a major crisis if Democrats hadn't chosen (in Barney Frank's words) to "roll the dice a little bit more in this situation towards subsidized housing".
Per predicting doom:
Like Ms. McArdle states, Krugman was predicting doom since about 2003. If Krugman really believed his predictions of doom, he would have put his money where his mouth was and got seriously short REIT's or bank stocks in his brokerage account. If he actually did that in 2003 he would have been wiped out long before the current selloff. Even with the current selloff, unless Krugman picked the right stocks, he wouldn't be up much if anything at all, if he got short when he first started doomsaying.
A prediction of doom isn't a good one, if acting on it leads to disaster, which it would have in Krugman's case. If you want to credit someone for predicting the current situation, that Paulson guy (the hedge fund manager, not the Treasury secretary) is your man. He predicted it when it actually occurred, and put a huge amount of money where his mouth was.
Last, but not least, if Krugman really believed his own prediction, he would have put his money where his mouth was, but he didn't really believe it, given that he didn't (assuming he had some money, which I am assuming that he did). Though I'm not familiar with his pre NYT column work, I am inclined to believe that he deserved his Prize, at least when one sees some of the other guys who've gotten one in economics, (I think some years they just shouldn't give one at all, when one examines what the winner did to get it).
As a pundit, predicting doom, he's just another blowhard filling column inches between the ads.
Per Krugman's credit, I remember reading his column the Monday Lehman filed for bankrupcty and the gist of it was "Is Lehman too big to fail? There's only one way to find out, and were going to find out and I hope the answer is no." I thought it was smart because I was thinking the exact same thing, which may or may not be a good yardstick to use for stuff that that. I think we've found out, and the answer to that was definitely YES, no matter how distateful doing it would have been.
Has Krugman weighed in on the answer to the "Is Lehman too big to fail?" question?
Are we in a housing bubble? Aren't we? I tend to think we are...
Is this a prediction of a bubble?
If it didn't come to pass, with the use of not one but two qualifiers, this could be offered up as evidence against the predicting a bubble.
Or so it seems to this reader.
If Krugman really believed his predictions of doom, he would have put his money where his mouth was and got seriously short REIT's or bank stocks in his brokerage account.
A couple weeks ago, he said he had his money in money market accounts. I believe that's the correct strategy if he believed his predictions but knew the time frame was uncertain.
Ann, we mostly agree, but I differ somewhat regarding the stability of sound underwriting pre-Clinton. I've been invloved, off and on, in the marketing of Fannie Mae paper since the mid-80s. By 1991 and 1992, I'd already noticed a significant erosion in underwriting standards for what was considered a prime, grade-A, Fannie Mae-backed loan. The relationship between downpayment, credit history, and income requirements had become much more loose than it was just five or six years earlier. No doubt it was in part due to confidence in more sophisticated credit scoring, but, for instance, even before the new era of widespread usage of Fair Isaac, Fannie Mae, always hungry to benefit from it's priviledged position, was delving into 3% downpayments, so as to eat into the FHA market. Of course, the loan limit on Fannie paper was about twice that of FHA paper, so there was usually more exposure on a minimum downpayment Fannie loan, as compared to a minimum downpayment FHA loan.
Yes, nearly every step by the Federal Government since Clinton took office made things worse, but I have doubts whether the eventual installation of the trigger mechanism could have been avoided, once the rest of the gun was assembled, and huge compensation was available for those willing to build such a trigger mechanism, one bonus check or campaign contribution at a time. It is one of the tragedies of the human condition that putting in place perverse incentives often nearly guarantees a huge disaster eventually, because the perverse incentives causes powerful, extremely motivated, interest groups to form, which will fight to the death any proposed reforms which might head off the huge disaster.
It's been said that there are two general theories of history; life is one damned thing after another, and life is the same damned thing, over and over. I tend to subscribe to the latter view.
Tony, when I read someone who asks the question "Are we experiencing condition x? Aren't we. I tend to think we are", I read it as saying the writer is not completely sure that we are in condition x, but thinks it is more probable than not. No, it isn't the strongest voice a writer could have, but I don't think it allows the writer to categorically say he or she did not say that condition x existed.
Smart people have been writing about economics for a long time.Ralph WaldoEmerson even wrote about the economics of today , way back when.
Will Allen -
Thanks for your response, and for discussing what you saw in the late 1980s/early 1990s. I think that we agree overall, and I learned something from your posts.
Without endorsing the insult, I'd point out that literalism over context is a continuing theme in SoV's commenting oeuvre. It actually suggests a rather promising career as a patent examiner.
Ouch.
Will Allen,
"Even someone with a decades-long record, like Buffett, has not developed a large enough sample size to discern with confidence how much of that record is not the result of random outcomes."
I think Warren Buffett himself would disagree with this. Two decades ago, he argued that the long, successful track records of the "Superinvestors of Graham-and-Doddsville" (Walter Schloss, Bill Ruane, Charlie Munger, and other investors influenced by Benjamin Graham and David Dodd) couldn't plausibly be the result of random coincidence.
Economists and economics pretty much avoid the topic of finance. Finance isn't in the economics departments, it's in the business departments. Finance pretty much avoids the topic of economics, of the macro variety. And never the twain shall meet.
Krugman is a totally mainstream economist and thus pretty much has avoided a deeper look into the functioning of the financial world. If he like Megan foresaw trouble but not the magnitude it's because they missed how finance came to dominate the entire economy. How it gained an ever increasing share of all profits for itself and with those profits came power. Power to propagandize their case. Power to influence government. Power to allocate and misallocate capital. Eventually putting a huge portion of our capital into leveraged bets on their own products, ie. financial assets.
The really hard corp Libertarians were the biggest critics of the whole process. A process lead by the Federal Reserve. Find any alt economics sites on the web and you will find real libertarians, some far right wingnuts and the very very very rare liberal.
The correct Libertarian response to the crisis is the call to eliminate the Fed, FDIC inurance and fractional reserve banking. No other perscription deserves the title Libertarian.
As the oddball liberal in those forums I don't argue but my prescription has always been applying sound principals of central banking and thus regulation on the banking system as well as rational regulation of the financial markets. By rational I mean primarily discouraging transactions which serve no economic purpose other than making the deal maker money. In addition I advise an overhaul of corporate accounting with the same thing in mind. If the accounting practice is irrational or serves only to make the company money then forget it.
The banking system has been using Enron accounting, unbelieveably, since the day Enron went down.
"The banking system has been using Enron accounting, unbelieveably, since the day Enron went down."
Did Sarbanes-Oxley disappear down the memory hole for the general public?
Citi Group as of July had $1.1 trillion dollars held off the balance sheet. The crisis at the large banks primarily involves the fact that as those off balance sheet assets deteriorate they are forced to put them back on the balance sheet, and take the losses.
I rest my case.
Oh yeah, I forgot. Kruggs also nailed the phony bologna California energy crisis as Enron traders created a shortage. I wonder how the Will Allens and Megan McArdles fared in that instance.
Those folks complaining about lack of regulation would do well to read this article.
The Three Major Memes of the Great Bailout Bonanza
This link provides an in person view of just how pervasive the regulation of the financial industry has been.
A few thoughts before I re-enter the fray..
Tony, when I read someone who asks the question "Are we experiencing condition x? Aren't we. I tend to think we are", I read it as saying the writer is not completely sure that we are in condition x, but thinks it is more probable than not.
Will, I agree, but I'm going to say the writer expresses considerable doubt.
"I tend to think we are" shows a lower level of confidence than "I think we are," which in turn has a lower confidence level than simply "we are."
Compare and contrast with "Of course, some people still deny that there's a housing bubble. Let me explain how we know that they're wrong."
Contrast:
"Almost every commenter who is not named David Lereah both recognized that we were in a housing bubble, and expected that when the housing bubble popped, the economic results would be ugly."
"Are we in a housing bubble? Aren't we? I tend to think we are, but most people disagree with me."
Rapier,
The phrase "Enron accounting" (to me at least) refers to the fraudulent accounting Enron engaged in using its off balance sheet entities, not the use of off balance sheet entities per se. Sarbanes-Oxley was enacted in response to the fraud committed at Enron (and other companies, e.g., Worldcom).
But in January, we hadn't had a banking crisis yet.--MM
and, all these posts later, noone has called her out on this major oversight?
it's a beautiful thing..
MM,
you really need to channel Jane Galt again..this enviro, The ATLantic, has corrupted more than your LINO-political stance..
see: Ivan,
you're in good company, see: "Soros predicts worst recession for 50 years
Amid collapsing stock prices worldwide, the billionaire investor George Soros has told an Austrian daily, the Standard, that the United States is threatened with recession and the world is facing the worst financial crisis in half a century. "The situation is much more serious than any other financial crisis since the end of World War II," Soros was quoted as saying.
He said over the past few years politics had been guided by some basic misunderstandings stemming from something that he called "market fundamentalism" - the belief that financial markets tended to act as a balance. "This is the wrong idea," he said. "We really do have a serious financial crisis now."
The rate cuts are Inflationary. Contra to MM's assurance the BAC is Profitable, they and their assorted 'Money Center' bank cohort are Insolvent. One might think they learned a new term of art with 'CDO', structured finance is one thing, OTC derivatives are quite another..the Quants had their algorithms broken, sometimes 100-yr floods are found in the same decade, ask Taleb..
Posted by MEH | January 22, 2008 7:20 PM
Megan,
please don't ever call out Krugman for being a political-hack, that type of hypocrisy threatens to rend the space-time continuum, and I'm not interested in hunting T-Rex with my Rail-Gun, anytime soon..
Sarbanes-Oxley is irrelevant to the issue of the collapsing banking system. The relevant authority for banks is the Federal Reserve. No member bank should have been allowed to hold assets off their balance sheet.
The various flavors of CDO's particularly the mortgage paper there were often fraudulent, if not illegal. Meaning every step along the way in underwriting them was often fraudulent to some degree but proving it in even one case, say an appraisal would be near impossible and fruitless. Everyone know about the liar loans, the ridiculous assessments, the art departments at mortgage companies. Everyone including Citi, and the Fed.
Both also knew exactly why it was stuffed off the balance sheet. The motives were no different than Enron's, only the timing. Citi and the rest did it before they were in trouble.
Krugman probably never looked at this or contemplated what it meant.
http://www.comstockfunds.com/files/NLPP00000%5C292.pdf
(the post 29 spike was due not to credit expansion but due to GDP contraction)
The relentless rise in credit was the mother of all our economic growth since 1982. In 82 $1 in credit lead to appx. $1 in GDP growth. By 06 it was probably around $7 to $1. It doesn't take a PhD to understand the implications of that.
We have just conducted the biggest financial experiment in world history. Accounting tricks are not going to save us.
Great last sentence, Megan.
I appear to have aroused Scent of Violets' ire. :) I'm not seeing an obvious qualitative difference between his Krugman quote and Megan's writings, but unto each his own.
I am interested in one aspect of Krugman's quote, though, which is the mention of isolated strong markets. Housing is one of the least portable assets out there, so there have to be areas that were generally passed by in the boom, and which have not seen major dips in home values since the bust. In my newly trendy immediate area, in fact, we're undergoing a renewal process after a decades-long slump: the overall stock of housing is decreasing slightly as decrepit urban row houses are replaced with high-end commercial structures, and the remaining housing stock is being extensively renovated. (Much of the impetus is from one of the local colleges, which has risen to national prominence under a very dynamic president and has created a financial "blast radius" around itself.)
I don't know how this would be modeled in the context of a national banking crisis, but it doesn't look like what you'd expect from a collapsing bubble. Is there a mechanism for disambiguating mortgages with different locational risks? You'd naively think so, but some of what's been reported about re-sale and bundling of mortgages makes me think perhaps not.
Chuckle. I guess you could say that being non-reality based is a defining characteristic of the right. Let's look at where my ire was supposedly aroused:
So now there is no 'qualitative difference' being a market being at its peak, and a bubble(gee, I guess there was a 'bubble' for charcoal briquettes this summer which has now collapsed. Everyone watch out for the fast-approaching bubble in which scarves and gloves prefigure.) And pointing this out is evidence of 'ire'. Well, maybe to a partisan nitwit.
I also see that Megan, in yet another paroxym of hypocrisy has, in her words 'ignored her mistake, and bluster about some other irrelevancy, or disappear from the thread.' Although the irony quotient is rather high as well. Doubtless Rob will come up with yet another self-evidently 'reasonable' answer as to why this is not hypocrisy at all, and accuse me of reading Megan too literally ;-)
Can we put this one to bed yet, folks?
Perhaps Megan will actually learn something from her mistakes and stop producing drivel like this. Or perhaps the Yankees will sign up Isaac Newton.
A lot of what Krugman got right should have been obvious. Did it really take a Nobel economist to point out that sub-prime mortgages were a bad idea? Someone who can barely afford their mortgage payments when rates are low will, it seem to me, obviously default at a future date. Anyone with eyes and a brain could see the real estate market was in a bubble. How else to explain houses doubling in price within a couple of years?
As for the Iraq War, only the incredibly afraid or the incredibly stupid could fall for the arguments made in favor of the 2003 invasion. It says for more about the people who supported the war than those who opposed it and you don't deserve a prize for not walking up to a hornets nest and punching it with a bare fist. You're just plain stupid if you did. As for the rest of Bush's policies - unless you're a hyperventilating partisan, it should have been obvious in the summer of 2001 that this guy was a dud. Krugman's a first rate talent and I love his articles, but let's not nominate him for god just because he makes a good case when stating what should be obvious to everyone.
Everyone keeps saying Krugman is a "brilliant economit." I suspect that what he really is is a decent mathematician. s Rod Long shows here, he fails to understand one of the most elementary principles of economics.
Dave, I have the utmost respect for Buffett, but the article empolys, once again, a small sample size, especially if he is not contending that the seven examples he cites were the only people adhering to value investing principles.
For some reason I thought about the Wall Street Commentators when I read this. They all talk about analytical stuff while holding degrees in English. How rigorous! I now you have an MBA but common! Mcardle and Krugman have in common that they are political commentators. But only one of them is what in my view is a real economist. At the end of the day it takes much analytical skills to get correct insights from the data. I feel that Mcardle knows what she knows from the real world and there is nothing wrong with that, but knowledge from experience can only go so far without a rigorous framework, which is not what you get in an MBA. Knowledge from experience suffers from every irrationality ingrained in the brain. There are only very few people who do not come off as arrogant when they compare themselves to a person who has worked as hard as Prof. Krugman. Its like criticizing a seasoned pitcher when you yourself have only been pitching for three years and skip all the hard training sessions.
Please neglect my post. After reading your post on the prize I feel like a fool. I misread you. Apologies.
SoV:
Mm. Perhaps my limited intellect is incapable of discerning the difference between a durable good for which demand should be (all other things being equal) relatively constant, and a consumable item with seasonal demand patterns. My bad.
As several other commenters have noted, it was being noted by many people by 2005 that the price of housing was rising far faster than it "should" have been, since there did not seem to be an objective reason (such as increasing population with fixed housing stocks) why this should be so. Of course, many other people did not agree. Your quote clearly demonstrates that Krugman was, indeed, correct that housing was a bubble at that time. Can you explain, using small words please, the qualitative difference between Krugman's quote and Megan's? Not just the one you pulled using my link, but also the one she quoted upthread. I'm also curious as to how you know that housing has not, in fact, bottomed out, given that prices have dropped something like 25% in some markets. (I have no idea one way or the other.)
(PS: Could you also clarify the people/causes to whom I am a partisan? I'm very eager to make new friends, but I have no idea what meetings I should be going to.)
Fred,
Should you want a style guide, I commend one produced by the Economist.
Style in blog comment is for fun. Try it.
You want a _do-over_!!!! Look, _you_ posted a quote in which _you_ claimed Megan predicted a housing bubble. It is entirely fair criticize you for what you yourself have posted. And it is quite, quite clear that what you posted was in no way predicting a housing bubble. The lack of keywords or phrases like 'bubble' or 'drastically overvalued' may have been something of hint.
It's pretty obvious - you won't have the basic decency to admit that you were wrong. This right-wing nonsense of never, ever admitting to a mistake really does no one any good, including right-wingers. It is, in fact, why so many people have thrown their hands up in disgust and dismissed them as a pack of congenital defectives who simply cannot argue in good faith.
Note that Megan called on me to admit I made an error, and I replied that I certainly do so . . . just as soon as she points out where I made one. Since she seems to be reticent about doing so, perhaps you could point out just where my error was. Quote the post, highlight the offending statement in bold, that sort of thing.
Or, you could say that Megan made yet another mistake.
As I said to Megan, the ball is in your court.
Had Wall Street not tied the mortgage market around its neck like a 60 trillion ton anvil, all those bad mortgages would not be threatening to take down the entire US economy
Led, if government action, from the tax code, to the structure and behavior of GSEs, and what I think are less important factors, like the Community Reinvestment Act, played a very large role in creating the housing bubble, why is it ridiculous to cite government action as being a primary factor in our current mess, given you agreee with Dreck's statement?
First, while government action (including the fed's interest rate policy, by the way) probably played some role in increasing the severity of the housing bubble, it wasn't a primary cause of the bubble. Second, as I've said before, the bubble would not have threatened the stability of the financial system without the enormous amount of leveraged bets in the derivatives market. They had a multiplicative effect on the bad mortgage debt. So although the housing bubble was the initial cause of our current troubles, excessive leveraged betting on mortgage-related derivatives was the efficient cause.
Let's look at another example to try to illustrate the point. Reinsurance is a method to spread risk, which increases the amount of capital available to provide insurance to policyholders. It does this because many different reinsurers take small pieces of the underlying risk for small pieces of the original premium. So when 9/11 happens or Katrina strikes, insurers don't go bankrupt and most policyholders get the insurance they purchased even if the direct insurers engaged in poor underwriting, as often happens when investment returns are high. It's is a very effective system. If, in contrast, reinsurers increased risk throughout the system by insuring multiples more than the value of the insured assets rather than simply spreading the original amount of risk, then they would make big profits most years but something like 9/11 or Katrina would probably bankrupt the insurance system.
Here, the mortgage originators were like insurance companies writing stupid risks for too little premium. The bursting of the housing bubble was like a 9/11 or Katrina event. The derivatives market, rather than spread the risk to maintain the solvency of the system, multiplied the risk and threatened the solvency of the system. That is the biggest problem here. Poor lending practices would have been subject to market correction without threatening the system if the default risk had not been multipled throughout the financial markets.
Rapier,
The use of off balance sheet entities doesn't equal Enron. Sarbanes-Oxley mandated all sorts of internal controls and other rules to prevent the sort of fraud committed by Enron. It didn't ban the use of off balance sheet entities because there are legitimate uses for them. There was no one "relevant authority" for publicly-traded banks; on the other hand there were different regulators (e.g., the SEC, the FDIC, state regulatory agencies, etc.). That multiplicity of regulators will probably be simplified in the coming regulatory overhaul. One lesson of Sarbanes-Oxley is that whatever new regulatory regime is enacted will probably solve yesterday's problems and not anticipate tomorrow's. It may also have unanticipated costs and consequences.
Will Allen,
You may believe that randomness explains the success of the "Super-Investors" (and perhaps that of later adherents of Grahamian value investing, e.g., Seth Klarman, Joel Greenblatt, etc.), but your initial claim was about what Buffett believed. I think his "Super-Investors" speech demonstrates that he doesn't believe that the success of value investing, as evidenced by examples of the practitioners he mentions, is due to randomness.
Oh, for Heaven's sake. OK, here you are:
This is from the comment thread on the post I linked, so I trust it meets your standards about not wanting a "do-over". (Incidentally, I never claimed that that particular post contained all of Megan's writings on the subject, as implied by my original note that Megan had been regularly talking about the bubble by the end of 2005. This is simply the post I was able to pull up with the least effort, since it also contained my Web handle and was easily Googled.)
This quote specifically mentions the bubble by name, as you requested, and cautions that a new homeowner should be prepared for a long-duration downturn. Sounds like a reasonably accurate description of the situation to me.
So, how is Krugman's writing qualitatively different?
(PS: I am fascinated by the way that you can infer my politics from a discussion about who said what about housing prices. Do go on. Can you tell me what my favorite color is?)
Sigh. Stop playing games. No, it doesn't meet it, and you're trying to change the rules. Let's see what you originally wrote about the comments section:
Also, even according to you, even using your rather, shall we say, elastic notions (does anyone think Dictyranger would let me get away with this sort of redefenition): "The bubble is nowhere near as bubbly outside of the coastal urban areas."
Shades of Greenspan and his 'froth', eh? Which apparently no one has disagreed that he wasn't living in a bubble of his own.
So, again, no, housing downturns are not 'bubbles', and neither are local downturns. And to say something is 'nowhere near as bubbly' is not 'predicting the bubble'.
Why, I'll be happy to tell you - just as soon as you answer my question about where my supposed error that Megan was talking about lies. As a freebie, to show I'm no welsher, I can already tell that you have the right-wing characteristic of refusing to admit you're wrong, even when you've had your nose blatantly rubbed in the fact. By more than one person.
"Had Wall Street not tied the mortgage market around its neck like a 60 trillion ton anvil, all those bad mortgages would not be threatening to take down the entire US economy"
"The derivatives market, rather than spread the risk to maintain the solvency of the system, multiplied the risk"
Where is everyone getting their numbers? Many people are talking as if we know that there are huge unhedged bets in the CDS market, but I've looked and can't find the actual figures they're using.
What I've found, which surprised me, is that AIG's exposure to Lehman CDS's is only about $6.2 million, according to a spokesman for the company who said that their exposure had been 'grossly overstated' by some.
And the Depository Trust and Clearing Corporation estimates that, of about $400 billion in CDS swaps on Lehman, the net exposure is only around $6 billion. Their bankruptcy filing was for $613 billion in liabilities, but I think that the estimate is that they had about $150 billion outstanding in bonds. So a $6 billion CDS net exposure means that at most only 4% of Lehman's outstanding debt was hedged. And even that couldn't have been hedged if someone hadn't taken the other side. Why was this such a bad thing?
Of course, tomorrow (Oct. 21) we'll see if the net $6 billion number is correct, and if it can all be covered without any defaults. If there are even a few defaults, it could ripple through and affect many counterparties by forcing others to default. Also, these aren't mortgage CDS's. Still, I don't see what data people are using to claim huge net gambles rather than moderate hedging. Does anyone have the numbers?
David, I made no claim regarding what Buffett believed, nor did I claim that the superinvestors' success was definitely the result of randomness. I simply stated that randomness COULD reasonably explain Buffett's success.
SOV, I'm not admitting my "error" because every single person on this board except you can see that you are making insupportable definitional quibbles in order to avoid conceding the fact that in 2004 I did, in fact, correctly call the bubble. The fact that--as is completely true!--the bubble was worse in some places than in others, does not mean that I said it wasn't a bubble. The fact that I was more willing than other commentators to countenance the possibility that I might be wrong does not negate the fact that I said we were in a bubble. You are now reduced to trying to redefine the word "bubble" to mean something other than "bubble" when I say it. You would look far, far less ridiculous if you simply admitted that you were in error and let us all move on.
So is that it? You are saying that my error is to refuse to admit that you predicted a bubble?
I want to be sure this is what you are saying. Wouldn't want to be making insupportable definitional quibbles, you know.
To make a definitional quibble, I don't think there's anyone who "predicted" a bubble, in the sense of saying in 1995 or so, "There will be a real estate bubble beginning in a few years." I think the issue is in "calling" the bubble, as in "we are now in a bubble," which might be reframed as "predicting" the ultimate collapse.
So, that said, I will ask a question and make a prediction.
Question (for SoV): do you admit that our gracious hostess "called" the bubble correctly in 2004, as evidence by links posted above?
Prediction: SoV does not answer the question, but rather demands to see where he claimed that she had NOT called the bubble.
Okay, since we're all on the same page now; let's look at this:
I said this many, many comments ago, and it's not hard to find.
So: It seems like you, Megan, and you, Rob, have made an error. And there's no ducking, twisting, waffling or two-stepping away from it.
You. Were. Wrong.
Period.
Now, I want both of you to admit this. To own up. To take some of that goddamn responsibility you keep on preaching about, but always for other people; 'taking responsibility' never actually seems to mean the libertarian making the noises about doing so.
Or is this where we get the quibbling that - again - other libertarians are so quick to condemn in others?
I will admit that my prediction at 8:05 was in error.
I will admit no other error unless you can point it out.
Sigh. Rob, you've run rather strongly with the narrative that I've refused to admit that Megan called the bubble (however weakly).
In point of fact, that is simply not the case. Or is this where the waffling and equivocation begin? The very things you he-man-don't-blink-in-the-face-of-accepting-consequences types claim to despise?
Oh, and if you fail to point out any of my errors related to bubble predictions, leading to an inference that I did not in fact err, then I'd like you to admit that you were in error about me having been in error.
Rob, you've run rather strongly with the narrative that I've refused to admit that Megan called the bubble (however weakly).
No. I have run strongly on the notion that the Newton/baseball comment was perfectly sensible. I have not involved myself in the bubble prediction discussion until just now.
If you disagree, then do your famous cite-y thing and show me my own words.
Chuckle. Rob, this is why, as I said once before and it took you many many posts get right, I could care less what you think (it took you - what? - twenty exchanges to get the idea that 'could care less what you think' is not the same thing as calling you a 'liar' as I recall. But only 'technically', even so, according to you. The same series of posts that, ironically, you said were not examples of my finest moments.)
I could point to your 'prediction' right up above, for example - if you thought Megan was wrong in what she wrote, you could have added a third (and correct, and obvious) prediction that SOV calls her on her blarney. In fact, for making the same type of mistake she habitually makes - a lack of basic scholarship. A willingness to shoot her mouth off before she gets all her ducks in a row (I couldn't resist the mixed metaphor.)
But then you would say that you didn't specifically say she was incorrect, and that your failure to list the obvious prediction proves nothing.
And you 'wonder' why I have such contempt for certain people. To jump ahead to another thread, libertarianism fails precisely because libertarians are not the type of people that can make the philosophy work; quite the opposite, in fact.
I see that Megan has chosen to remain silent, to refuse to make a reply. Gee, and after all those heart-felt accusations too. Like I said about the libertarian personality . . .
All righty, then.