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Greenspan's Testimony Today:

Greenspan was asked today when he realized there was a housing bubble. His answer was early '06. That's long after other observers (including your friendly neighborhood blogger, e.g.) had recognized that the unprecedented increase in housing prices, unconnected to any discernable fundamental factor beyond easy credit, had created a bubble.

Even more surprising, Greenspan explained that even after he realized there was a bubble, he never expected housing prices to decline so dramatically, because we had never had a nationwide decline in housing prices in the past. I'd heard Greenspan say this before, but I'm surprised he wasn't embarrassed to repeat it. Didn't he ever read a mutual fund prospectus ("past performance does not guarantee future results"). More to the point, given that the level of increase in housing prices, both nationwide and in specific markets, was unprecedented, why would anyone sensible look to precedent in determining to what extent prices may fall? In fairness, Greenspan was hardly alone in this particular idiocy, joined most prominently by the CEO of Freddie Mac.

c.gray (mail):

In fairness, Greenspan was hardly alone in this particular idiocy.


That understates the case. While there were an ever increasing number of people warning that residential real estate appeared seriously overvalued in a number of markets, both in the USA and elsewhere, almost nobody predicted the speed or worldwide scope of the price corrections.
10.23.2008 6:52pm
Anderson (mail):
Greenspan's comments made his ideology seem childish.

Of *course* banks couldn't be trusted to evaluate these transactions fairly -- not when they seemed to offer easy profits and thus dividends/stock-value.
10.23.2008 6:55pm
DavidBernstein (mail):
And what's really odd is that Greenspan doesn't seem to understand that the Fed itself is a non-market actor, that can send distorting signals to the market through policies that make credit relatively cheap. It's very odd to have a central banker say he believed in unfettered free financial markets. It's like the commissar of footwear production in the USSR saying he believes in unfettered production of sneakers.
10.23.2008 7:03pm
J. Aldridge:
Greenspan of all people should have learned by now that whenever Congress or the court usurps it leaves bubbles in the wake.
10.23.2008 7:05pm
D Palmer (mail):
David,

Sometimes economics is rocket science, but the causes of the housing bubble and collapse don't rise to that level. Greenspan is a very smart man, it is astonishing to read his comments.

The reason for the run up in housing prices is pretty straight forward. I have seen people blame the Community Reinvestment Act (CRA) and while I think that CRA pressure on banks did contribute a little to the current high default rate by putting people into mortgages that they could not afford or were not sophisticated enough to understand, the single largest factor was the rise of the Commercial Mortgage Backed Security (CMBS) market.

By bundling their mortgages and selling them as securities in the CMBS market banks could offload their risk to investors. As recently as 15 years ago banks held most of their mortgages themselves. If a loan defaulted it went straight to the bottom line. Banks (and their regulators) don't like losses, so the banks required down payments, and documented income, and acceptable ratios of total monthly debt payments to gross monthly income.

But when the risk is offloaded to a 3rd party, standards can go out the window. Now, factor in the risk ratings assigned by the major agencies (D&B, Fitch, S&P) which, like Greenspan, looked at the historically low default rate on mortgages and gave the securities similar low default probabilities. Now an investor looks at an AAA rated CMBS security, reads all about the stability of mortgage loans and decides to buy.

The strong market for these securities encouraged banks (and more often, non-bank lenders like Countrywide) to create ever more creative mortgage loans to get as much money out the door as possible. Easy money means lots of people can buy, lots of buyers with easy access to money means lots of demand and rising prices.

But at some point the plates have to stop spinning. The taxi driver and his maid wife with an income of $6k/month who bought the $600k home in Southern CA (an actual story from the Journal) with an interest only ARM with a 2% teaser rate discover that they can't actually afford the mortgage payment. Slowly they and hundreds of thousands of buyers just like them start to default. The rising defaults make investors pause and take stock, credit dries up and demand and prices start to fall. Home builders start to lose sales and have trouble carrying all the land they have optioned during the boom times. Condo developers are stuck with products they can't sell regardless of discounts. Prices fall more, defaults continue to rise and the problems with the finance markets spread to other area of the economy.

I am over simplifying to some extent, but it was not hard to predict this would happen and Mr. Irrational Exuberance should have been one of the guys predicting it.
10.23.2008 7:09pm
titus32:
This post (especially its strident tone) is a good example of hindsight bias. Hey, at least Greenspan is honest.
10.23.2008 7:11pm
whit:
for pete's sake. greenspan has power - to move the markets. the idea that greenspan has the insight to UNDERSTAND markets is another thing entirely.

i spent YEARS learning how to trade (and losing a fair bit of coinage in the process), and there is one thing that is clear.

there are two types of people when it comes to the markets.

1) those who talk (greenspan et al)
2) those who trade.

anybody who can't demonstrate proficiency at the latter - don't listen to them about the markets.

period.

most brokers crack me up. they are salesmen. if they REALLY had insight into the markets, they'd be rich from their trading. getting market advice from brokers, and/or gurus is like getting driving advice from the guy at the local car lot. i'd prefer to get it from danica patrick. somebody who has demonstrated they can drive (and looks damn good too!)

and of course it was a bubble. i heard the same ridiculous crap from people i work with (and others) about how it was a (in effect) NEW PARADIGM blah blah blah. these are the same people who would buy tech stocks and think they were never going to correct (in the 90's).

the #1 fallacy of the markets (we see it in EVERY bubble) - "it's different this time"

note we also see this in nearly every bear market. iow, the market inevitably makes lows right about the time the (vast) majority of retail investors lose hope that it will turn around. iow, "this bear is different".

hint: it's never "different this time" in that all markets are is the aggregate of all trader/investor decisions over time. it's not rocket science.

prices regress (and overcorrect past on many times) to a mean. period. i don't care if you are trading corn, oil, gold, dow futures, or frozen concentrated orange juice... (SELL MORTIMER SELL!!!)
10.23.2008 7:11pm
DavidBernstein (mail):
It would be hindsight bias if I couldn't link to foresight posts. And as far as tone, the guy has significant responsibility for costing the world trillions of dollars in wealth, and was almost willfully blind as he was doing so.
10.23.2008 7:28pm
Randy R. (mail):
Thanks for the refreshing bit of candor, Whit.
10.23.2008 7:30pm
tsotha:
I don't believe him for a second. Greenspan is a pretty smart guy, and the bubble was obvious long before 2006. From where I sit it looks like a bit of fiction designed to forestall the obvious followup - "why didn't you do anything about it?"

SELL MORTIMER SELL!!!

Heh heh. Now you're dating yourself.
10.23.2008 7:43pm
James Gibson (mail):
In truth the low interest rates he put in place right after 9/11 was the right idea. I know many people who refinanced their home mortages giving them more cash. But where he went wrong was he left them in place after 2003. Once it was seen that housing costs were rising at 20% a year the rates should have been increased to kill the rampant speculation, house flipping, and other actions that just made housing less your home and more your 401K.

But we shouldn't worry, the economy will recover in either 8 months or 14 (according to the experts). And we all know from Nancy Pelosi that it was caused by the Bush economic policies of the last 8 years so after Obama gets in everything will turn around fast. This even though Greenspan is now taking a lot of the blame himself, since he's already stated in his book that it was his policies for the last 20 years. And of course Bill Clinton has stated that even he knew Freddie and Fannie were heading for a train wreck back in the 1990s but couldn't get democratic support. So don't worry, since they know when it started they can fix it real fast.
10.23.2008 7:57pm
Dr. T (mail) (www):
This post (especially its strident tone) is a good example of hindsight bias. Hey, at least Greenspan is honest.
This is not hindsight bias. I remember reading about the housing bubble and its likely impact on the economy here (and on some economic weblogs) in 2005. Look at graphs of average housing prices and see how the slope increased in the late 1990s. This process should have been evident to Greenspan and other supposedly expert economists at the Federal Reserve Board well before 2006. They ignored the writings of academic economists and believed their own rosy scenarios. In my view, Greenspan is among the most overrated economists in recent history.
10.23.2008 8:06pm
Splunge:
It would be hindsight bias if I couldn't link to foresight posts

Wrong. It wouldn't be hindsight bias if most posts that addressed the issue before 2006 contradicted Greenspan, and did so for reasons that have now proved correct. Which turns out not to be the case.

Your logic is as sound as the person who points to a prediction in Nostradamus that, holy shit, actually came true 500 years later, and concludes post hoc ergo propter hoc that Nostradamus had some weird uncanny vision.
10.23.2008 8:12pm
tsotha:
Splunge, he's referencing one of his own posts.
10.23.2008 8:15pm
c.gray (mail):

I am over simplifying to some extent, but it was not hard to predict this would happen and Mr. Irrational Exuberance should have been one of the guys predicting it.


If it was so easy to predict, why didn't the hedge fund managers, pension fund managers, investment bankers, etc. buying the various MBS products and insuring them against default take a pass instead? Unlike Greenspan, they were being paid small fortunes to rate these thing-a-ma-jigs as investments.
10.23.2008 8:21pm
DavidBernstein (mail):
I'm at a loss to understand why the stock market didn't go down 20% when housing prices started falling in 06, and much of the damage to the economy that has occurred could have been predicted, instead of waiting until now to fall harder. BTW, I don't claim such hindsight, but there were plenty of commentators on the Housingbubbleblog.com predicting the demise of Countrywide, Indymac, Fannie and Freddie, and severe damage to investment banks.
10.23.2008 8:25pm
DavidBernstein (mail):
I mean foresight.
10.23.2008 8:25pm
whit:
plenty of hedgies made money off the housing drop. i trade with a hedgie, and he made bank shorting a # of homebuilders, etc.

the hedgies that got really crushed were the ones chasing yield through some really crap derivatives and those selling volatility naked.

i won't even sell a call naked. selling volatility naked is even more risky.

iow, par for the course. some hedgies got crushed, others made bank.
10.23.2008 8:26pm
whit:

I'm at a loss to understand why the stock market didn't go down 20% when housing prices started falling in 06, and much of the damage to the economy that has occurred could have been predicted, instead of waiting until now to fall harder


because that's not how markets work. markets move when they HAVE to, not when they want to.

study price action, and you start to realize the biggest moves in either directions are the ones that involve forced liquidation. those cascade, others sell stops get hit, etc.

there was still massive euphoria in 06, and MORE importantly there was no fear whatsoever. look at the VIX for instance over that period. funds were trying to outperform, not protect themself, and the price action reflected that.

just remember more money is lost by stubborn traders trying to sell the top in a bull market and/or buy the bottom in a bear market than by anything else. there were still enough people willing to short into strength, we had the transports going off the richter scale, etc. etc.
10.23.2008 8:31pm
BaxterJ:
10.23.2008 8:39pm
Commenterlein (mail):
David Bernstein,

You have strong opinions on many topics, most of which you seem to know nothing about. Inevitably you will be right after the fact from time to time. That doesn't prove that you had any real insight before the fact, and looking at the arguments you advanced about why house prices were overpriced, I'd say you didn't.
10.23.2008 8:49pm
D Palmer (mail):

If it was so easy to predict, why didn't the hedge fund managers, pension fund managers, investment bankers, etc. buying the various MBS products and insuring them against default take a pass instead? Unlike Greenspan, they were being paid small fortunes to rate these thing-a-ma-jigs as investments.


Because there was such an enormous amount of money to be made creating, marketing, and rating CMBS securities. Once the gravy train was rolling the momentum was almost impossible to stop. And the cycle of growth was very long so some very smart people who should have known better decided that maybe there really was a "new paradigm"
10.23.2008 9:24pm
A. Zarkov (mail):
The housing bubble and its consequences were absolutely obvious and hindsight bias has nothing to do with it.

The historical price to income ratio for residential real estate is less than 3, which sets the upper limit of what someone can afford. During the bubble this ratio reached absurd levels. For example the ratio exceeded 10 in southern CA. As we know people got into homes based absurdly low teaser rates. Many people believed that they could keep refinancing into a new teaser rate indefinitely. This assumes that housing prices must continue to rise forever. How can anyone with an ounce of sense believe that?

Here's another approach. Buyers were paying below market rates on their mortgages. Investors were buying securitized mortgages to get above market rates of return. How can both goals be realized? They can't. The system has to break and it did.
10.23.2008 9:44pm
tsotha:

Unlike Greenspan, they were being paid small fortunes to rate these thing-a-ma-jigs as investments.


True, but they were getting paid by the companies offering the investments they were rating. As a country we didn't learn much from Aurthur Anderson and Enron.
10.23.2008 9:52pm
DavidBernstein (mail):
Comm., please identify all the posts you read in which I explained why house prices were overvalued, and why my views were incorrect. What, you didn't actually read any such posts before leaving an anonymous obnoxious comment? Wow, what a surprise. (For the record, housing prices were overvalued on every accepted historical metric--price to income, price to rent ratio, etc.)
10.23.2008 9:55pm
Anderson (mail):
So, is anyone open to what seems the obvious answer -- that Greenspan wasn't stupid or oblivious, but rather that his "ideology" was simply for the financial sector to make as much money as it could until the boom went bust?

I'm certainly open to alternative explanations, but sheer bad faith seems persuasive.
10.23.2008 10:08pm
Assistant Village Idiot (mail) (www):
Nassim Taleb, of The Black Swan and Fooled By Randomness fame, did see it coming and said so. I think he would approve strongly of Whit's comments.
10.23.2008 10:10pm
SenatorX (mail):
Hey, at least Greenspan is honest.

Oh please. Greenspan is just using the popular scapegoat of the day to spare himself from blame. He sees the way the wind is blowing and gave congress exactly what they wanted to hear, and he gets to ride off blame free. Indeed lets praise him for his "honesty". Puke.
10.23.2008 10:17pm
Cornellian (mail):
The historical price to income ratio for residential real estate is less than 3, which sets the upper limit of what someone can afford. During the bubble this ratio reached absurd levels. For example the ratio exceeded 10 in southern CA. As we know people got into homes based absurdly low teaser rates. Many people believed that they could keep refinancing into a new teaser rate indefinitely. This assumes that housing prices must continue to rise forever. How can anyone with an ounce of sense believe that?

As I recall, The Economist had been very big on the price to earnings ratio for a long time, noting how much higher it was than what it had been historically, and casting doubt on whether that ratio was sustainable.
10.23.2008 10:21pm
DavidBernstein (mail):
Indeed, the Economist first alerted to me at the issue, though at the time, it just seemed like houses were overpriced, not into bubble territory.
10.23.2008 10:24pm
Nunzio:
DB,

Did you make any money whacking companies short like Whit's buddies?

If not, why not?
10.23.2008 10:46pm
DeezRightWingNutz:
I'm sorry Zarkov, but why was the claim that there's a new paradigm on the housing cost/income ratio obviously absurd. If my income doubled tomorrow, I'd spend the vast majority of it on housing, since I'd like to live in a nicer house in a nicer neighborhood, but otherwise am pretty satisfied.

When someone told me that the country's income had doubled over the last 25 years, and people decided to spend most of this increased wealth on health care and housing, it didn't seem obviously wrong... maybe wrong, but not obviously so, at least to me. Add in the the fixed/restricted supply arguments in many major metro areas, and I didn't find it too implausible that certain areas had been substantially underpriced. Now, I still know that people getting liars loans might be liars, and I didn't think that 20% appreciation would be sustained, but I didn't think a plateau at new levels was impossible (at least in some areas).
10.23.2008 10:47pm
Nunzio:
I'm with Anderson. Greenspan's childish fealty to the Ayn Rand ideology blinded him here.

Either that or he was too old. Maybe both.
10.23.2008 10:48pm
Javert:

Greenspan explained that even after he realized there was a bubble, he never expected housing prices to decline so dramatically
Why, because somehow housing is different from, say, technology and tulips? Apparently, "Potomac Fever" wiped out his ability to think in principles.
10.23.2008 10:53pm
Perseus (mail):
I'm certainly open to alternative explanations, but sheer bad faith seems persuasive.

I can only assume that your professed good faith openness to alternative explanations is intended to be ironic.

As for Greenspan, I don't think it was utterly ridiculous for him to think that a modest decline in nominal prices combined with inflation of 2-3% over a period of years would result in a less dramatic deflation of the housing bubble.
10.23.2008 10:58pm
A. Zarkov (mail):
Commenterlein:

I'm sorry, but David Bernstein identified the problem and explained his reasoning. It seems to me that you are simply flinging unfounded accusations.


David was not the only one. Here is a short (incomplete) list of people and blogs that correctly identified the housing bubble and its consequences.

Robert Shiller
Nouriel Roubini
Peter Schiff
Mike Shedlock
Michael Panzner
Chris Thornberg
Didier Sornette (correctly predicted when the blowup occurred)
...

Blogs

Calculated Risk
Dr Housing Bubble Blog
Housing Crash News
Mr Mortgage
Marin Real Estate Bubble
Econophysics blog

I could go on but that's enough.

People you should never have listed to.

CNBC
Alan Greenspan
Any politician
Ben Stein
Jim Kramer
Larry Kudlow
Almost any realtor
Ben Bernake
Any TV program dealing with real estate
New York Times (with occasional exceptions)
Wall Street Journal (with occasional exceptions)


They you have it. I have told you who got it right and who got it wrong. Those who got it right did not do so on a guess.
10.23.2008 11:04pm
RainerK:

I believe the people making and those disseminating the news were blind, still are.

DB had and has it EXACTLY right, despite all the comments to the contrary. If he could do it, why couldn't Greenspan?
Can't help but feeling that most of the country's institutions are being run by people with a masters in marketing and self-promotion. Who to trust any more?
10.23.2008 11:35pm
Mahan Atma (mail):
..."joined most prominently by the CEO of Freddie Mac."



David, please explain: Why is the idiocy of the CEO of Freddie Mac more prominent than the idiocy of the CEOs of dozens of purely private companies, like Countrywide, HSBC, Chase, Wells Fargo, WaMu, etc. etc. etc.?
10.24.2008 12:24am
Commenterlein (mail):
David Bernstein,

My obnoxious comment was provoked by the first sentence of the old post you so proudly linked to: "Just read that 61% of all new California mortgages this year are interest only, no money down."

To anyone who has even a rudimentary clue about the mortgage market, that claim is at best a joke. I am too lazy too look up the actual number, but my semi-educated guess is that the total fraction of interest only and adjustable rate mortgages combined for all levels of down payments may have been in that range.

I have also seen several posts of yours discussing price-to-rent ratios, but never one mentioning the crucial comparison - interest rates. When interest rates fall, price-to-rent ratios rise. At the national level, it was easy to justify the average price-to-rent ratio with low interest rates, which lead many knowledgeable analysts to suggest that a nation-wide decline in house prices was unlikely.

PDF(!)

You may have had a brilliant counter argument, but I certainly didn't see it.
10.24.2008 12:24am
Mac (mail):
Call me crazy, and some have, but I swear I lived through and lost money in a housing meltdown in the early 90's. Not as bad as this, but bad. We moved to Va. in 1991 and there were sub-divisions all over the place with the model homes and roads in and lots waiting to be sold. And, 2 years later, there were the same model homes, roads and lots waiting to be sold. As I recall, Congress made an abrupt change in tax laws and caused the S &L crisis which brought on the whole mess. I kept telling my son that nothing goes up forever and that I have lived through down housing markets in the past. Where was Greenspan then?
10.24.2008 12:58am
Tatil:

When interest rates fall, price-to-rent ratios rise. At the national level, it was easy to justify the average price-to-rent ratio with low interest rates, which lead many knowledgeable analysts to suggest that a nation-wide decline in house prices was unlikely.

Greenspan was the one responsible for interest rates being so low for so long. As the real interest rates were negative for a long while, it was obvious they were going to rise, so it was not prudent to continue this policy for so long.
10.24.2008 1:04am
Tatil:
There was a similar argument after the tech bubble. There were enough publications and reputable pundits, such as Greenspan, who warned about the bubble in the late 90s, years before it burst. Greenspan did not do much to deflate the bubble at the time, either. He argues that the market is best placed to decide on asset prices, so it is better for the Fed to use interest rates to create a soft landing after the bubble bursts than try to deflate asset prices before the market.

This method worked well enough after the tech bubble, so he used the same argument. I don't think he did not see the housing bubble, but he did not think that the bubble was large enough to cause such historic problems. The size of crisis is certainly shocking to most observers and market participants, so it is difficult to argue he should have seen it.

Of course, the devil is in the details. By keeping interest rates artificially low for very long to avoid a recession, he created an even bigger bubble.
10.24.2008 1:12am
Mac (mail):

Here's another approach. Buyers were paying below market rates on their mortgages. Investors were buying securitized mortgages to get above market rates of return. How can both goals be realized? They can't. The system has to break and it did.


And then there was Franks, Schummer and Dodd getting way below market interest rates from the very folks they were supposed to be regulating. Think they will take any of the blame or even explain themselves?
10.24.2008 1:12am
DavidBernstein (mail):
Comm, a quote from a Fed Study, " According to a study conducted for the Wall Street Journal, 61% of mort-
gages in California during the first two months of 2005 were interest-only
compared with less that 2% in 2002 (Wall Street Jour- nal, May 17, 2005)."

Now that you've embarrassed yourself further by making accusation that you are too lazy to actually check the accuracy of, maybe you will shut up.
10.24.2008 2:00am
DavidBernstein (mail):
Here's another source for the same stat. Google is your friend.
10.24.2008 2:03am
DavidBernstein (mail):
(Admittedly, some fraction of these I/O loans may have had some down payment, but the stat does NOT, as Comm lazily suggested, include adjustable rate mortgage that were not I/O loans.)
10.24.2008 2:06am
Mahan Atma (mail):
David,

Still waiting to hear why you decided to single out Freddie Mac when there were some many purely private institutions that were just as idiotic (if not more so)?
10.24.2008 2:12am
Commenterlein (mail):
Look David, you claimed that 61% of all California mortgages were interest only with 0% down. This is complete, utter nonsense!

By now even you admit that the 61% number contains all kinds of downpayments - so the number of 0% down interest mortgages is what, 10%, 20%?

Further, rest assured that much less than 61% of all California mortgages were interest only. It is a bogus number that has been floating around for a while, and I frankly never knew where it came from. Thanks to you, I now know that it comes from an incorrect article in the WSJ. Unlike you, I know enough to recognize a way-off number when I see it.
10.24.2008 2:24am
DavidBernstein (mail):
First of all, you don't seriously believe that 5 of 6 I/O mortgages in early '05 had a down payment. I'd guess that more of them had subsidies for closing costs than had down payments. The whole point of the surge in I/O mortgages was to sell houses to people who couldn't afford them, and few of these people had down payment money, and if they did, the lenders didn't ask them for it.



Second, I was just recounting what I read. You suggested that no such stat existed, that at best it included ALL ARMS. You now won't even concede that you were wrong that I made up the stat, and suggest instead that the stat is wrong. So we have your anonymous word versus the Wall Street Journal, repeated by the Chicago Federal Reserve bank.



Third, and most important, your original point was that I had misconstrued the origins of the housing bubble based on my prior posts. You still haven't provided any evidence that this is true, and admit that you are in fact too lazy to back up what you say. That's all well and good, if you would give your real identity. But in fact, you happy to sling unsupported insults while hiding behind a pseudonym, which makes it hard to take you the least bit seriously.
10.24.2008 2:44am
DavidBernstein (mail):
Mahan Atma, even though you write trollish comments on my posts, I'll nevertheless be happy to respond to any question you pose to me for my standard billing rate of $500 an hour. You can send a five hour retainer to me at my law school address.
10.24.2008 2:46am
Mahan Atma (mail):
"Mahan Atma, even though you write trollish comments on my posts, I'll nevertheless be happy to respond to any question you pose to me for my standard billing rate of $500 an hour"


I'm not asking you for legal advice; I'm questioning something you said.

Apparently you are unable to defend your statement. That's your problem, not mine.
10.24.2008 3:00am
Brian K (mail):
Apparently you are unable to defend your statement.

Ironic, no?
10.24.2008 3:17am
A. Zarkov (mail):
No one has provided direct data on what fraction of loans were both zero down payment and interest only. However we know banks and mortgage companies targeted low income people for loans who generally have little or no money for both closing costs and a down payment. Fannie Mae's loan handbook identified these as "barriers" to homeownership that should be overcome. President Bush used the same language in a speech. We also know that in many cases seller financed (and added to the price) both by laundering money through community organizations. This is one reason prices rose so rapidly. So many of the borrowers in foreclosure really had no skin in the game at all, and that's why they are walking away from their loans.
10.24.2008 7:00am
A. Zarkov (mail):
Both Mahan Atma and Commenterlein have engaged in trollish behavior by flinging personal insults at your host. Try that kind of stuff over at Bradford DeLong's blog and he will delete you without warning or acknowledgment. Actually, I've seen him delete comments that were on point, polite, and short simply because he didn't like the political viewpoint of the commenter, or it refuted his post. The VC is actually fairly tolerant of opposing viewpoints, and I have never seen any of the hosts delete someone without acknowledging it.
10.24.2008 7:10am
mls (www):
Here is my problem with this discussion. Three months ago (it only seems like three decades) the price of oil was at $147. Every day CNBC would have various oil "experts" making predictions about where the price was going. (The greatest respect, of course, was given to those who had previously predicted that the price of oil would go to where it was at the time.) Some of the experts predicted with great confidence that the price would go to $200 or beyond. I recall at least one suggesting $500. Some experts said it would stay in the $150-200 range, others in the $130-150 range. Many suggested a floor of anywhere from $100-120. Some argued that the "true" price of oil (defined, apparently, as what the price would be without speculators) was $60-80. I imagine there were some that predicted even lower prices.

Now one could go back and pick out the expert whose prediction was closest to today's price, declare that person a genius, and suggest that everyone else was an idiot who should never be listened to about anything. Except that tomorrow you would need to pick another expert.

Why isn't this discussion more or less the same as that futile exercise? It is one thing to have an opinion that turns out to be correct. It is another thing to claim some unique knowledge or insight that enables you to say, with virtual certainty, that a particular market price, whether oil, housing, gold, stocks, whatever, is the "wrong" price. If you have the latter, you should be very, very rich right now.
10.24.2008 7:41am
titus32:
It would be hindsight bias if I couldn't link to foresight posts.

This doesn't make sense (although it's catchy). Your calling Greenspan an idiot for being slow to recognize the bubble, and your weak arguments in support thereof (come on, an economist is not allowed to rely on the past to make projections about the future -- surely you don't believe that?), are influenced by the fact that the bubble did burst, arguably with grave consequences.
10.24.2008 10:15am
Anderson (mail):
I can only assume that your professed good faith openness to alternative explanations is intended to be ironic.

You and the flying horse you rode in on, Perseus.

I don't pretend to understand the complexities of the present crisis, but Greenspan's professed naivete is obvious even to me, and it doesn't persuade in the slightest.

I've heard no reason to think that Greenspan is stupid, so I'm left with (1) bad faith on his part or (2) blindness due to ideology.

Perhaps I'd rather believe the former because the latter is so pitiable.
10.24.2008 12:48pm
plutosdad (mail):
well actually not all markets had big runups in housing prices, and the conventional wisdom printed all over in every magazine was back in 05 (when I purchased) was that if you live in an area that did not experience a large runup in prices, then you would not expect a downturn, but more of a flatenning out - your home value would not increase, but not decrease.
So he's hardly alone in not thinking there'd be a nationwide downturn. However I think everyone realized there were bubbles in almost every urban center long before 06.
10.24.2008 1:12pm
MarkField (mail):

You and the flying horse you rode in on, Perseus.


That was Bellerophon who had the flying horse. Perseus did have the cool ankle wings, though.
10.24.2008 2:29pm
Anderson (mail):
That was Bellerophon who had the flying horse. Perseus did have the cool ankle wings, though.

Damn, I fear I was actually thinking of Clash of the Titans ...
10.24.2008 3:08pm
MarkField (mail):

Damn, I fear I was actually thinking of Clash of the Titans ...


Did that happen after 1066? If so, I missed it.
10.24.2008 4:47pm
Harry Eagar (mail):
Anderson sez: 'sheer bad faith seems persuasive'

Plausible, not persuasive. Nunzio is closer, I think.

But this is what you get when you hire a mystical economist. Some of us have been making fun of the Smithians for 200 years now (me personally only about 40).

There have never been any rational economic actors (not even whit), and markets can be observed and they do not behave like the mystics say they should.

Unsupervised financial markets always crash. You cannot predict which sector will crack first, but you can count on some sector cracking.

Every 6 to 20 years (the real cycle is more like 6 to 10, but occasionally foreign wars unpredictably goose a market).

Greenspan is a mere ideologue, not a student. He was, at best, slipshod; and, more likely in my view, trying to throw an offspeed pitch when he said this credit crisis is a once-in-a-century event. In actual fact, once in 80 years; and there's a reason there were no credit panics during the 60 years since 1936.
10.24.2008 11:00pm
tsotha:
Supervised, unsupervised, what difference does it make? To call the US markets "unsupervised" is to fail the laugh test. From what I can see the "supervision" makes the boom last longer but fail more spectacularly when it fails.

This particular bubble was created by the government, not unsupervised banks.
10.25.2008 3:58pm