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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?

#31

Post by jakarta »

VBprogrammer wrote: post #29
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?

He came up with the credit default swap trade where you buy insurance against mortgage backed securities failing.

This was really a great trade because his losses were capped at around 5% a year while his upside was huge, imagine a 6:1 payout.

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

#32

Post by anamax »

VBprogrammer wrote: post #29
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?

> 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?

"The market can stay irrational longer than you can stay solvent." is the traditional response.

The problem was "obvious" in 2001.

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

#33

Post by anamax »

grandalf wrote: post #11

The only time Greenspan could have meaningfully intervened was back in 2002 or earlier, and even then intervention would have caused enough pain to have the media deem it a "crisis" in itself. Notably he did speak up about Fannie and Freddie in the early 2000s but was silenced by the GOP's drive to make war -- nobody wanted the economy cooled at all when gas prices were already creeping up. So what's the man to do no…

> Notably he did speak up about Fannie and Freddie in the early 2000s but was silenced by the GOP's drive to make war

Wrong. Fannie and Freddie were protected by Dems, not Repubs. Mccain got his teeth kicked in over this one.

Interestingly enough, Fannie and Freddie execs during that time were largely Dems, most of whom who landed in the Obama administration. While at Fannie and Freddie, they took out millions.

Oh, and during this time, Fannie and Freddie were lying about the mortages in their portfolios, which threw off everyone's risk evaluation. (Their portfolios contained far more subprime than they admitted to.)

If Fannie and Freddie weren't politically connected GSEs, folks would be in jail.

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

#34

Post by manderson2080 »

The relationship between Wall Street and Washington blurred the lines too much. As a regulator, its tough to recognize a fundamental flaw in the investing practices of the firms that these people used to work for.

The "good old boy" network was reluctant to admit that they all screwed up.

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

#35

Post by ugh »

jakarta wrote: post #30
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 ex…

This could be total confirmation bias but I myself was somewhat amazed that everyone seemed to have been so surprised by the crisis. I don’t care all that much about what’s happening in the US (not being from there and all) but I have been clicking through the current New York Times cartoons for the past few years or so. In retrospect it looked to me as though there were constantly crumbling houses in those cartoons (I was always confused by them, it was only later that it made ‘click’), years and months before the bubble burst. If even the cartoonists knew it …

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

#36

Post by fauigerzigerk »

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 the phenomenon you describe does exist and explains a lot of correct predictions. I don't think it is what we have seen in this case though.

If you look at long term indicators of indebtedness it is utterly clear that the US (and some other countries) were at extreme levels in 2007. There was never a dispute about that and it's easy to check. The dispute was about the interpretation of these numbers.

Greenspan and many others argued that the more sophisticated financial system should be able to sustain these levels. He thought that the new securitisation market led to more flexibility and risk tolerance. He turned out to be wrong. This time was not different (see Rogoff on that one).

People who predicted that this time was not different and high levels of debt would lead to a crash were not predicting some freak event. They just followed the conservative assumption that history is going to repeat itself. And it has.

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

#37

Post by stretchwithme »

The Fed DID see what was happening. They saw M3 soaring.

So they did the logical thing. They discontinued publishing the M3 statistic in 2006.

Yep, they decided we just need to bury our heads in the sand and the developing crisis would just go away.

But did it?

http://www.shadowstats.com/alternate_data/money-supply-chart...

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

#38

Post by joelhaus »

natrius wrote: post #28
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?

This is precisely what needs addressing. CDS are over the counter trades without a central clearinghouse. Therefore little data is available and the counter parties create terms blindly.

This is what they mean when talking about transparency.

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

#39

Post by hristov »

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…

But that still means that Greenspan was wrong. He said that no-one predicted this crash and this is clearly wrong.

Even if the people that did predict it were the kind of people that always predict recessions, they still should have caused a little bit of head scratching in the Fed and in the top banks and the rating agencies. Somebody could have actually done some simple arithmetic to determine whether the average person can afford the average house. I mean this is not difficult stuff.

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

#40

Post by hristov »

lotharbot wrote: post #26
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 u…

You are absolutely right. If you look at most housing forums on the internet, for example most people looking to buy housing were absolutely certain there was a bubble going on. They just knew that (i) ordinary people in their neighbourhood could not afford the houses in their neighbourhood and (ii) there were no rich people coming in buying those houses either so something had to give.
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