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    The Pre-Copernican Republic..., 2009-03-13 13:15:31 | Main | postulate..., 2009-03-16 19:07:55

    yet another way to demonstrate that your model of the universe is obsolete:

    Put on your best Jim Cramer pout - a straight face should be impossible, but nevertheless persists - and say words to the effect of:

    "On the one hand everybody missed the housing bubble/credit crisis/financial bust, on the other hand anybody who didn't miss the housing bubble/credit crisis/financial bust is a cassandra/chicken little/stopped watch."

    Here's one finely overwrought example among many.

    The demand seems to be that we can safely ignore anyone who made prescient empirical observations counter to the conventional wisdom if they:

    1. Can't time the market, hence they are a "stopped watch". This deserves special consideration, as it demonstrates that the ignorance or chicanery of the speaker surpasses even that of the neoclassical orthodoxy.
    2. Do not propose an alternative model in which we are expected to blithely reject or ignore uncertainty, and thus aren't up to the task of being as foolish as those who think their risk models are capable of encompassing all future outcomes.
    3. Had any hope they could raise the alarm sufficiently in advance so the damage might be contained. The given example of someone who should not be taken seriously because he hedged his warnings with uncertainty is Robert Schiller, here, when he says "significant further rises in these markets could lead, eventually, to even more significant declines". To "hedge" that "could", he explained:
      "I gave talks in 2005 at both the Office of the Comptroller of the Currency and at the Federal Deposit Insurance Corporation, in which I argued that we were in the middle of a dangerous housing bubble. I urged these mortgage regulators to impose suitability requirements on mortgage lenders, to assure that the loans were appropriate for the people taking them."

      To remove conditionalities from the statement would require not making any statement at all. Once it's made there is the chance of formulating a mitigating policy response.

    The argument then is that those who were prescient must propose a contrary model as idiotic as the models that were caught flat footed.

    Finally, I would like anybody to find an earlier and more prescient alarm than Dean Baker's August 2002 paper meticulously laying out the quantitative observation of a speculative bubble in real estate - a new observation, as unlike a stopped watch Baker hadn't published the same paper in 2001 and 2000 and 1994, and unlike chicken little did not insist that the sky was falling but rather that the sky would at some uncertain time fall - and raising alarms about the foreseeable consequences. Note the "must":

    [A] major factor driving housing sales is the expectation that housing prices will be higher in the future. While this process can sustain rising prices for a period of time, it must eventually come to an end. ...

    [The housing bubble] collapse will slow the economy both by derailing housing construction and by its impact on consumption through the wealth effect. In addition, millions of families are likely to face severe strains in their personal finances. The average ratio of equity to home values is already near record lows. This ratio will plunge precipitously if the housing bubble collapses, leaving many families with little or no equity in their homes. This situation is especially troublesome since the population is comparatively old, with much of the baby boom generation on the edge of retirement.

    The Japanese economy experienced simultaneous bubbles in its housing and stock markets in the late eighties. The collapse of these two bubbles has left Japanís economy nearly stagnant for more than a decade. The United States faces the same sorts of risk from the collapse of its stock market and housing bubbles. It was poor economic policy to allow these bubbles to develop in the first place, but if we follow the right policies in dealing with the fallout from the collapse of these bubbles, it should still be possible for the United States to escape Japanís fate.

    What about all those black boxes lurking in the shadows?

    some banks, at least in the seventh district, may have restrained their mortgage lending, it is unlikely that most banks across the country showed the same caution. Therefore, a sharp plunge in housing prices is likely to lead to a large rise in mortgage defaults, and place serious stress on a banking system that already is suffering as a result of several major corporate bankruptcies.

    Most of these stopped watches only started ticking in or after 2005 when the cracks started to show. I mean, where was "Dr. Doom"? And yet that's the guy who gets all the chicks.


:: posted by buermann @ 2009-03-14 15:45:40 CST | link





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