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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.
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What does "A bubble is a bubble" mean? That any time anything is called a bubble, people within it are absolved from responsibility for failing to see that it was a bubble? You cannot be asserting that bubbles are impossible to see while they are occurring. Again, as Charles Prince, head of Citi in the mortgage bubble, noted -- when the music's playing, you have to dance. He was a rather lousy executive and even he admitted knowing he was in a bubble. His defense was, "When everyone else is making cash on the bubble, you have to do the same."
I'm conflating MBS with the housing market because they are inextricably interwoven.
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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.
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No one thought the r/e market could drop? People were saying it for years before 2008. And for fiance professionals who I'd assume have some schooling in probabilities, the argument that it could not drop because it had never dropped before is amazing. That a thing goes one way for an amazingly long period of time can be proof that it will continue to do so. But there's an even greater probability that its long overdue for an adjustment.
Why would housing, on the heels of a dotcom bust, and following so many jobless recoveries, be a unique market, immune to downturns? Because it never happened before is a really scary answer for a finance professional to have offered. But I agree with you that many indeed did think that, which is nuts.
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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.
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I wasn't asserting that the MBS should have been marked down to its lowest value (when the downturn was at its worst). I was asserting that during the run-up, the credit risk of the mortgages which justified the value of the MBS was not accurate. It was in fact fraudulently or incompetently rated far better than it was.
Adder's suggestion that the MBS's valuation pre-collapse was close to accurate is just wrong. The middle and lower tier credit risks were lousy. The people who bought the middle tier stuff were either dumb, defrauded, cynical, or all three.
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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.
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IBGYBG. Herding. Thinking they were going to win at a game of musical chairs. There are loads of reasons people suspend disbelief or just keep doing as they've been doing in bubbles.
It's way easier to just go with the flow and mint another bonus than it is to pull a Michael Burry or John Paulson style mother-of-all-shorts.
