Tuesday, September 01, 2009

Things Never Change

From the NYTimes: Some Analysts See an End to Market Rally.

Really? Some do. Some don't. I guess there's always sufficient noobs to make such a headline interesting.

There are many clichés extant as to why times are tough: greed, inequality, hubris. In general, these are bad things, and they always exist they remain perenial causes of bad things. As if Gilian Tett's ridiculous Fool's Gold, which also blames the drive for perpetual innovation--really blew the lid on greed and hubris. Arnold Kling mentions this book as one of the 10 he would use in an economics course, probably because it highlights securitization as a key driver. I'd put that up there with sunspots and El Nino, because the home ownership craze was multifaceted, with hardly any bottlenecks singularly affecting it. CDO's were an enabler, but investors would have put money into homes other ways too, especially with the GSE's guaranteeing so much of it. After that great bit of investigative journalism, we should decide as a society to identify all self-interesting, overconfident people put them on an ice-flow and send them to a watery grave (excepting the good guys who know the good and true, e.g., authors). Good riddance.

I am reading an interesting book on the Roman Empire, and it's really depressing. All the dysfunctional diagnoses and remedies, leading to decline. You get the feeling society's optimal sphere of military control was greater than its optimal governance size, making most of its last 5 centuries a disequilibria of waxing and waning coalitions and dynasties. I don't think our politics is much better. Certainly, the best of the Romans are better than most modern politicians, but bit by bit they misunderstood what was sustainable, how to balance authority with sustainable power. Eventually it was no longer Holy, Roman, or an Empire.

What was most interesting was the part on how Romans needed to raise money, but had to resort to debasing the currency by decreasing the amount of silver in their money, which really took off in the third century AD. As prices rose they were totally flummoxed as to the cause, and blamed this on 'greed', a common enough political response in the twentieth century to excessive money growth. But fundamentally, there was no solution because the size of the Empire was larger than could be sustained, and monetizing the debt was a symptom of this problem. No politician gets power saying we should do less, the assumption is always that a state can achieve whatever it wants if it tries really really hard. Blaming symptoms we don't like, such as greed and hubris, is a constant refrain. Some things never change.


Barry W. Ickes said...

You seem to mistake the subtitle of Tett's book for the substance. The subtitle talks about Wall Street greed, but the book is much better than that. It is very much about how innovations spread, and how the innovators at JP Morgan could not understand how their innovation was applied to CDO's of mortgages given the positive correlation of housing prices. It is also about the incentives to take risks at financial institutions, which are necessarily large. Of course you only want to blame the GSE's for everything, so you have to say things like this. But insight is actually better than ideology.

Eric Falkenstein said...

Given there are about 8 independent hypotheses for the crisis (Fed, securitization, greed, etc.), it's probable that those who disagree with you aren't ideologues. They merely think some other factor was more important than the one you think is key.

Barry W. Ickes said...

If there are 8 independent hypotheses for the crisis, it is likely that all contributed somewhat. If I try to discern the relative importance of all of them by looking at evidence I would not be an ideologue. If always refer to only one explanation over all others, even though the evidence for that one is weak at best, then I would be an ideologue. You always bring everything back to GSE's for reasons that cannot be evidential, since that is too weak. Seems very much at odds with the rest of your postings on your blog.

Eric Falkenstein said...

In the context of the government's involvement, I would say GSEs are one among several equals, as their was the CRA, leaning on firms to develop minority lending programs with vague threats (eg, CountryWide), legal action against banks that did not lend sufficiently to disadvantaged areas, and the concomitant weakening of underwriting criteria that was consistent with this ('outdated' criteria). I don't think I ever argued GSEs were the primary mover, merely one symptom of government's flawed views about home ownership and mortgage lending discrimination.

But even within this, there is the larger issue that I think was shared by everyone, from Robert Shiller, investors, homebuilders, regulators, academics, legislators, bankers, etc. That is that home lending was basically riskless because there were no large year-over-year declines in any diversified index of home prices in the US. That was the necessary and sufficient condition. It was an error waiting to be exposed.

Barry W. Ickes said...

Well your second paragraph is right on. But that has nothing to do with GSE's or CRA. That was an incorrect perception, or an incorrect model of the economy.
I think you underestimate how much GSE's and CRA creep into your posts, and how much it diverts from the rest of your points.