Posts filed under “Really, really bad calls”
One of the more fascinating things about a crisis and its resolution is the post-mortems: The after-the-fact analyses that some folks do to explain what occurred.
These analyses are fascinating for what they reveal about the beliefs, methodologies, biases and cognitive failures of the many crisis watchers.
Human fallibility being what it is, we can divide this universe into 3 buckets of observers:
1) Those who get it mostly wrong.
2) Those who can correctly describe a small slice of what happened;
3) Those who understand the full boom and bust — how all the moving parts came together to cause the crisis.
The first bucket is the easiest to both understand and dismiss: It contains the ideologues and market worshipers, as well as the perma-bulls — none of whom have much in the way of methodology. They are believers who know that in the long run stocks (and houses for that matter) will come back, whether we are dead or not. For the most part, they missed all of the warning signs of recession, credit crisis and boom and bust of the housing collapse. They called it a “mental recession.”
This motley crew says it was all the fault of too much regulation, no it was CRA/Fannie Mae — Why do we even have a Fed? That was the cause — No its mortgage interest deduction — no its all Barney Frank’s fault, no wait, it was caused by too much minority home buying — no, it goes back to FDR — No, Its all the Government’s fault, there should be no State — All hail John Galt, we should be free without any government intervention whatsoever — Bababooey!
As you might imagine, their ravings throw off a lot more heat than light. They provide no insight into the what actually occurred — But hey, its great theater.
The second group is a lot more instructive and interesting. They accurately detail a tiny aspect of the crisis in great detail. These observers are like the 6 blind men describing an elephant: Partly correct, yet mostly incomplete. Their individual descriptions accurately describes various body parts (Trunk, tusk, ear, etc.) but they never describe the creature in its entirety.
This group includes those who blame the entire debacle on derivatives or the formula for Value at Risk. The original concept of securitization. Wildly misaligned compensation incentives. They blame the ratings agencies and/or the the deification of markets via EMH, or the massive increase in use of credit since the 1950s. Some blame allowing Lehman to fail as the cause; others blame bailing out Bear Stearns, yet still others say it was all Goldman Sach’s fault. Fill in your own blank.
In the hunt for the unified field theory of the economic crisis, these observers may accurately describe a single aspect of what happened, but they fail to capture the fullness of what caused the debacle. They miss the crisis’ gestalt.
Lastly, we have the Big Picture observers (no pun intended). These folks try to put all of the moving pieces together. They look for proximate causes, not abstract theories. They try to see how one event led to the next event and the next and so on down the entire cascading collapse. These folks understand complexity, causation, risk, statistics and cycles. They are pragmatic, not ideological.
They are unfortunately, all too rare.
I only can wish that more of the people trying to repair what happened, and prevent the next crisis, were in the third group . . .
I read articles like these with dread and horror: “As the White House begins to ponder whether to reappoint or replace Ben Bernanke when his term expires in January, the Federal Reserve chairman’s standing on Wall Street is on the rise while attacks on him from Congress mount. Treasury Secretary Timothy Geithner is expected to…Read More
The CRA brouhaha last year led the Orange County Register to run an analysis of “more than 12 million subprime mortgages worth nearly $2 trillion” in late 2008. What did their data based analysis discover? “Most of the lenders who made risky subprime loans were exempt from the Community Reinvestment Act. And many of the…Read More
“The end to House price depreciation in the vast majority of areas in this country has at last arrived.” -James Cramer > Do we even need to mention the absurdity of this? James Cramer, who has called an inordinate number of Housing Bottoms since the market topped in 2005, now declares that “Housing Has Officially…Read More
The rush to repay TARP monies gives us another opportunity to consider why the hell this absurd financial giveaway ever happened in the first place. A close inspection suggests some dishonesty on the part of the prior Treasury Secretary. From its inception, the TARP never made much sense. Forcing banks that did not need money…Read More
In this morning’s NYT, Joe Nocera takes on one of my favorite subjects: Why the market is neither rational nor efficient. He does a nice job, interviewing both Jeremy Grantham and Burton Malkiel. Along the way, he mentions Justin Fox’s new book, The Myth of the Rational Market: A History of Risk, Reward, and Delusion…Read More
Will someone please explain to me why we are giving $22 Billion to Insurers? “The Treasury Department will make federal bailout funds available to a number of U.S. life insurers, acting on the embattled sector’s long-running effort to get government help. The Treasury is prepared to inject up to $22 billion into the insurers under…Read More
“We are finally beginning to see the seeds of a bottoming [in the housing industry. The U.S. is] at the edge of a major liquidation [in the stock of unsold properties, which may help to stabilize prices].
—Alan Greenspan, May 12 2009
“I don’t know, but I think the worst of this may well be over.”
—Alan Greenspan, October 2006
Why does the public — and the Press — constantly seek out reassurances from the same people who misled them time and again in the past?
That was the question on my mind as I pondered yet another declaration from Alan Greenspan that the Housing Market has bottomed. That he has consistently made similar such statements before is cause for doubting him here. That these prior bottom calls were as far back as 2006 is cause for ridicule.
Few people have been worse than Greenspan in analyzing the Housing market. In fact, the only person / group I can think of with a consistently worse track record than Greenspan’s of analyzing the housing market was the group he spun his foolishness to yesterday: The National Association of Realtors.
Indeed, consider this golden oldie from David Lereah, the NAR’s chief economist, circa December 2005:
Home sales are coming down from the mountain peak, but they will level out at a high plateau, a plateau that is higher than previous peaks in the housing cycle.
That 2005 declaration, made 5 months after Hosuign prices had topped out, was typical of the reality denial we saw from the NAR over the entire housing cycle. They continuously got it wrong, spinning all data, good or bad, in a shamelessly self-promotional manner.
That this group of blind flacks paid Greenspan $100,000 plus to spin them lies is somewhere between ironic and pathetic. At least it wasn’t taxpayer monies . . .
NOTE: These older Greenspan/Lereah quotes were were pulled from Chapter 21, The Virtues of Foreclosure, Bailout Nation.
“Close them down, get them out of business. If they’re dead, they ought to be buried.” -Richard C. Shelby, the senior Republican on the Banking Committee, on ABC’s “This Week” > Thus, the strangely inverted world of bank bailouts continues. Republicans who started the entire lurch towards Socialism under George W. Bush at least understand…Read More