Quote:
Originally Posted by sebastian_dangerfield
Bill Gross (the PIMCO letter he authored quarterly was always all over the financial press) called for a downturn in housing in 2008. https://www.reuters.com/article/us-p...22392620071114
I’ll accept the argument the banks did not know what was going on to a point. But only to a small point. These people do exist in clueless enclaves of like minds where people only know charts which do not always offer an accurate picture of what’s going on in a market.
BUT, these banks also have loads of economists and analysts on their payroll. And no one - no one - with a basic grasp of economics could miss the fact that the housing bubble replaced the economic activity and wealth lost in the dot com bust (which had replaced a lot of economic activity and wealth otherwise lost from preceding jobless recoveries from earlier recessions).
People at the street level were living off gains from trading residential r/e via flips (or simply mining equity out of their homes’ increasing values).
But what would happen when the run up in prices plateaued? Well, in that instance, the owner of residential r/e would have to pay his mortgage with money from his job. But what if these people didn’t have jobs adequate to do this? What if they’d been living off a bubble economy in r/e? Uh oh.
This wasn’t hard to see coming. Of course, no one knew the depths of it.*. That was shocking. But a significant correction in r/e prices was bound to test whether the novices in that bubble economy could carry their investments (or their primary residences) when the prices flattened (nevermind fell).
That Michael Lewis wrote a book about a few people who made a fortune on the collapse doesn’t mean legions of others didn’t see it. They did. And this cannot be refuted: A ton of the bankers who claim they didn’t were employing willful ignorance or simply following IBGYBG.
I don’t disagree with the bailout. It had to be done. I disagree with the argument that the assets at issue actually had value near that at which they’d been booked (Adder’s argument) and the fact that management of these financial institutions weren’t all barred from the industry. (Making them wear a sign that says “I’m a failed business person and recipient of corporate welfare” would perhaps suffice.)
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* I’m being generous there. It is an often made argument that the more severe the bubble, the more extreme its fallout. Taleb would blame this on fragility increasing with size, which I think he’s supported with math. This would seem to be proven by the fact that only a 3% uptick in delinquencies, when honestly booked, set off the chain that brought it all down. It’s partly a feature of the structuring of the securities but also a behavioral issue (people freak and stop buying the securities and the banks, in herd fashion, have all placed themselves in uniquely fragile positions). |
I'm not sure how many times I can explain that a bubble is a bubble. Talking about how easy it was to see the fact that we were in a big bubble
after-the-fact is absolutely ridiculous. And you are conflating the real estate bubble with the financial products which were basically bets taken out on the failure of the packaged MBS.
A correction in the real estate market is one thing and we all could have survived that easily, letting those mortgage farms fail. I agree with you that mortgage brokers and banks looked the other way and handed out and bought mortgages that were terrible credits. But the MBS and the insurance products (read: gambling) sold in multiples on the packaged MBS is what destroyed everything. And the fact that (again)
almost no one thought the real estate market would drop, is what created the bubble.
As for the underlying value, you are missing the point. Of course the packaged mortgages had value. A stream of income has the value of that income. But if you only
book that value based on what you can actually sell that packaged stream of income for during a near-depression, then when you can't sell it,
by definition, it has no value. If your bank is counting on that value as part of its capital requirements and can't sell the product, its fucked. But if I buy those mortgages, I will receive that stream of income.
Your focus on those (like PIMCO) who saw an issue is delusional. In every market, bubble or not, there is someone who "sees" impending doom. When it doesn't occur, no one goes back and analyzes why those people were wrong. So stop pushing back on the definition of "bubble." If everyone knew we were in a bubble, tons of people would have bet against it, instead of just the few that did. Hell, if everyone knew we were in a bubble,
there would not be a fucking bubble.
TM
