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I Saw the Crisis Coming. Why Didn’t the Fed?

nytimes.com

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Re: I Saw the Crisis Coming. Why Didn’t the Fed?

#21

Post by T_S_ »

There will always be a distribution of opinions and therefore people with "foresight".

The real challenge is to design a system with more stability.

My opinion is that while we have had many putative capitalists in charge of regulating markets, we have very little understanding of what it takes for markets to function well. One thing missing from the debate is an interest in reducing informational asymmetries. If I have two bags of apples one paper and one see-through plastic, you are going to buy the plastic bag (environmental issues aside).

Our financial markets don't work very well, because financial accounting is the opaque paper bag.

Re: I Saw the Crisis Coming. Why Didn’t the Fed?

#23

Post by gahahaha »

gjm11 wrote: post #12

There's an old saying: Academic economists have successfully predicted nine of the last five major recessions. That is: One possible answer to the question in the title is: "Because actually the available information didn't make it clear what would happen and when; you thought it did, but actually you just got lucky." Whether that's actually the case here is of course difficult to tell. On the one hand, hindsight bia…

The correct quote is by the late great Paul A. Samuelson and he said:"The stock market has forecast nine of the last five recessions"

The rest of your comment is right on the mark.

Re: I Saw the Crisis Coming. Why Didn’t the Fed?

#24

Post by jakarta »

For anyone interested in learning more about Michael Burry, I wrote a post using material from an old message board he used to run:

http://streetcapitalist.com/2010/03/24/learning-from-michael...

It is pretty amazing to see how far he has come since then, from a young doctor posting about investing on the internet to going head to head with Greenspan.

Re: I Saw the Crisis Coming. Why Didn’t the Fed?

#25

Post by jakarta »

alanthonyc wrote: post #13

"Everybody missed it. Academia, the Federal Reserve, all regulators." - Alan Greenspan That is complete bullshit. Try telling that to Paulson, who made billions on the crash. I saw the signs myself, but did not understand them, not believing that people like Greenspan would allow something so stupid to take place. When studies show that Americans trust their government less than ever, mark me down as a statistic. Whe…

Just to note -

It was Burry that came up with the idea for using credit default swaps (CDSs) to short the subprime mortgage market.

That idea eventually found its way to Paulson, who was able to use it on a larger scale.

Re: I Saw the Crisis Coming. Why Didn’t the Fed?

#26

Post by lotharbot »

alanthonyc wrote: post #13

"Everybody missed it. Academia, the Federal Reserve, all regulators." - Alan Greenspan That is complete bullshit. Try telling that to Paulson, who made billions on the crash. I saw the signs myself, but did not understand them, not believing that people like Greenspan would allow something so stupid to take place. When studies show that Americans trust their government less than ever, mark me down as a statistic. Whe…

There were a lot of us watching the signs in 2005 or so. There were a lot of us who didn't miss it. And it wasn't "crackpot conspiracy theory" types; it was normal people looking to buy a home and wondering why median prices in our area climbed from 3x to 5x median income within a few years, when the 3x figure had been pretty steady since WWII. A little bit of research showed that a lot of houses had been bought on unusual terms -- no-doc loans, very little down, adjustable rates, and so on. For those of us who expect to buy a home with 20% down, a 15-30 year mortgage, and payments less than 38% of take-home income, it seemed very strange that banks were lending people money on considerably looser terms. Easy money leading to a sharp climb in prices, combined with a big increase in speculators/flippers, should have been a tipoff that we were looking at a bubble market.

There's no excuse for "experts" like Greenspan to have missed it, when the everyday people running websites like seattlebubble.com saw it coming.

Re: I Saw the Crisis Coming. Why Didn’t the Fed?

#27

Post by Confusion »

The problem is: Greenspan may very well be right in his assessment that Burry may just have been 'a supremely lucky flipper of coins'. There are thousands of people in similar positions making predictions about all kinds of phenomena. Whatever the outcome, there are always a number of predictions that are 'uncannily' close to that outcome. Unfortunately, these 'correct' predictions are only seldomly made by the same people. If someone truly had better insight, you would expect them to make the right predictions more often. However, if history teaches anything, it is that I can safely predict that Burry will never again make such an accurate prediction and that it will never be clear whether he was a prophet or a lucky bastard.

Re: I Saw the Crisis Coming. Why Didn’t the Fed?

#28

Post by natrius »

muerdeme wrote: post #4

"Mr. Greenspan said that he sat through innumerable meetings at the Fed with crack economists, and not one of them warned of the problems that were to come. By Mr. Greenspan’s logic, anyone who might have foreseen the housing bubble would have been invited into the ivory tower, so if all those who were there did not hear it, then no one could have said it. As a nation, we cannot afford to live with Mr. Greenspan’s wa…

"In the absence of Wall Street's reliance on the Fed, Burry's insurance plays could have further pushed up prices and signaled to everyone else that something was wrong."

Can you explain this point further? How did Burry's investments not raise the prices of credit default swaps? What does Wall Street rely on the Fed for that led to that result?

Re: I Saw the Crisis Coming. Why Didn’t the Fed?

#29

Post by VBprogrammer »

gjm11 wrote: post #12

There's an old saying: Academic economists have successfully predicted nine of the last five major recessions. That is: One possible answer to the question in the title is: "Because actually the available information didn't make it clear what would happen and when; you thought it did, but actually you just got lucky." Whether that's actually the case here is of course difficult to tell. On the one hand, hindsight bia…

I have to agree with the idea that he just got lucky.

If he was really so sure of his assessment back then then why didn't he short sell a bucket load of these mortgage backed securities?

Re: I Saw the Crisis Coming. Why Didn’t the Fed?

#30

Post by jakarta »

Confusion wrote: post #27

The problem is: Greenspan may very well be right in his assessment that Burry may just have been 'a supremely lucky flipper of coins'. There are thousands of people in similar positions making predictions about all kinds of phenomena. Whatever the outcome, there are always a number of predictions that are 'uncannily' close to that outcome. Unfortunately, these 'correct' predictions are only seldomly made by the same…

I think that Burry is simply arguing that the methods he and other shorts used to call this crisis (which Taleb refers to as a gray swan -- since so many called it) should be more closely examined, rather than being simply dismissed as statistical aberrations. Maybe investors/wall street can learn a useful thing or two from them.

To me, spotting bubbles is not so difficult. There are a few great investors who have excellent track records when it comes to dodging bubbles/crises. They may not profit immensely, but their downside is usually protected and they are cash rich to pick up securities on the cheap.

The real difficulty comes from figuring out when a bubble will burst -- which is really anyone's guess. Burry himself ran into trouble on this end which created friction and eventually lawsuits with his investors.

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