Who fortold the financial crisis?

Howard Husock did in 2000

2 Responses to “Who fortold the financial crisis?”

  1. Bill says:

    There are two related problems with this kind of retrospection. First, although it is not that hard to recognize bubbles and regulatory insanity. it is very hard to figure out when the shit is going to hit the fan. Second, there is always somebody predicting disaster. These two things together mean that this kind of retrospection about “who got it right” is not that useful. Colloquially, the gold bugs have predicted twenty of the last three gold price spikes.

    Predicting bad things in 2000 just isn’t that useful or convincing. Hell, *I* thought mortgage securitization was a bomb waiting to go off when I became aware of what it was back in the 90s. Anyone who understands what “moral hazard” means and who understood what mortgage securitization is thought it was a bomb waiting to go off. It’s still a bomb waiting to go off, though much less so since many investors are wiser now. Thus the fraud has to be better done to work. You can’t do anything useful with a prediction like that, even when you are obviously right. You have to get the timing right to make money. You have to get the timing right (consistently) to convince people you have genuine insight. I still don’t get why things blew up in 2006/7 rather than earlier or later.

    There are other, similar bombs waiting to go off. In fact, modern finance looks like a total minefield to me.

    • jim says:

      I still don’t get why things blew up in 2006/7 rather than earlier or later.

      In retrospect, it took about six years for the money to run out – the operation was covered by ever rising housing prices concealing the fact that many of the mortgages were dud the day they were written, and of course, optimistic bond ratings. It crashed when the amount of money needed to keep it going was too great – though, of course, none of us made that dated prediction in advance.

      People started to panic late in 2005, but there was big effort to deny, to keep the panic under control, to cover things up, to maintain the appearance of normality. Nothing to see here, move along, move along.

      Indeed the crisis is still unrolling, the cover up still going, and the easy money FHA loans still being made. But, as you say, the next bomb will be something new, rather than that much more of the same old bomb. Although irresponsible mortgage lending continues, it has diminished.

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