Austrians Predicted the Housing Bubble? – But so did Post Keynesians and Marxists
Wednesday, December 14, 2011 .. bits ..
Dean Baker (who seems to be associated with Post Keynesianism) clearly identified a housing bubble in August 2002
[...]
by 2004 onwards, we can also find Marxists identifying a housing bubble and coming economic crisis:
Nick Beams, “Greenspan Testimony Points to Deepening US Fiscal Crisis,” World Socialist Web Site, 16 February 2004.
Nick Beams, “Australia at the Forefront of Housing Bubble,” World Socialist Web Site, 27 September 2004.
César Uco, “Is the US housing boom turning toward bust?,” World Socialist Web Site, 6 August 2005
Nick Beams, “US Housing Crisis could Spark Serious Economic Downturn,” World Socialist Web Site, 3 September 2007.
Now does anyone seriously think that these correct identifications of an asset bubble in housing vindicates the Marxist theory?
[...]
Both Austrians and Marxists have economic theories that are fundamentally flawed, even though some of them correctly identified a housing bubble.
[...]
I. Alleged Austrian Predictions: 1999–2003
[ Paul gets a pat in 2001, a bit tarnished though according to this author .. ]
[...]
However, Ron Paul predicted that a “weak dollar will prompt dumping of GSE securities before treasuries”: he was wrong. It was the bursting of the real estate bubble and defaulting mortgages that prompted the crisis in mortgage backed securities: the financial crisis then occurred in the investment banking sector and spread to the commercial banking sector. No dumping of US treasuries occurred. These failed predictions have to be borne in mind, with Paul’s prediction of a housing market crash.
[ Ron Paul and Peter Schiff videos inside ]
[... ]
Peter Schiff does not predict or identify any housing bubble in this interview. The interviewer (not Schiff) refers briefly to “housing prices up” (in part 1), but that is all. Instead, Schiff predicts a bear market in US stocks from 2002 onwards (a false prediction); and a US dollar collapse that would send US interest rates through the roof (another false prediction). At 7.25 onwards (in part 1), Schiff refers to a “bubble” that already exists, but it is clear he is referring to stocks and shares, not housing. So much for Schiff’s predictive power.
The Crisis Summary & Book Reviews | FCIC Report | The Crisis
In the years since the Global Financial Crisis exploded on the scene, there have been a number of articles and initiatives documenting the individuals that publicly predicted the crisis and arguably deserve credit for having sounded the alarm. This page summarizes those efforts and links to those sources (and I expect to update it over time as more information and research becomes available). While plenty of foreign leaders and professional doomsayers have long predicted the collapse of the US economy, to the extent possible it should be useful to differentiate them from those that legitimately warned about a financial crisis or critical elements of it based on some logical analysis that appears to have merit after the fact. I believe a large percentage of investors and home buyers were exposed to at least some credible warnings about a housing bubble, but clearly many people chose to ignore those warnings or dismiss the predictions of a coming housing crash and/or crisis as unlikely to come true. Separately, I was interested in hearing what these individuals prescribe and 11 of the predictors/winners have participated in the crisis expert survey thus far.
[...]
Nouriel Roubini appears to be the most commonly recognized by (virtually all) the main sources I've seen. Yet, economists chose Australian Professor Steve Keen over Roubini for the Revere Award (outvoted by more than a 2 to 1 margin - details below) for publicly warning of the Global Financial Crisis.
[Dean Baker was third there]
[...]
The first major effort to identify those that publicly predicted the crisis was a paper titled "No One Saw This Coming": Understanding Financial Crisis Through Accounting Models by Dirk Bezemer. Bezemer identified 12 individuals (academics, government advisers, consultants, investors, stock market commentators and one graduate student) that between 2000 and 2006 warned specifically about a housing led recession within years. "Together they belie the notion that ’no one saw this coming’, or that those who did were either professional doomsayers or lucky guessers." The Bezemer 12 are
* Dean Baker * Wynne Godley * Fred Harrison (UK) * Michael Hudson * Eric Janszen * Steve Keen (Australia) * Jakob Madsen & Jens Kjaer Sørensen (Denmark) * Kurt Richebächer * Nouriel Roubini * Peter Schiff * Robert Shiller
[ok .. Schiff's on that list so we don't need any other videos]
[...]
Warren Buffett is an interesting case that highlights the importance of context in quotes related to what people did or didn't see coming prior to the crisis. In an interview with Charlie Rose Buffett stated "No one saw the tsunami coming fully" (or here). Yet Buffett was one of the cautionary voices in the years leading up to the crisis, both in terms of risks in derivatives and in real estate prices. For instance, the Berkshire 2002 Shareholder Letter includes "Charlie and I are of one mind in how we feel about derivatives and the trading activities that go with them: We view them as time bombs, both for the parties that deal in them and the economic system." See also Buffett warns on investment 'time bomb' (3/4/2003). In this 2006 interview titled Buffett: Real estate slowdown ahead with Jason Zweig, Buffett states "We've had a real bubble to some degree. I would be surprised if there aren't some significant downward adjustments." So Buffett clearly warned in advance of the potential problems, but he (and most people) perhaps just didn't expect the severity or sequence of events that played out.
Real-World Economics Review is an economics journal that in 2010 polled their readers and asked them to vote for "the three economists who first and most clearly anticipated and gave public warning of the Global Financial Collapse and whose work is most likely to prevent another GFC in the future." Revere Award for Economics winners and details are here and documentation of the predictions by the finalists are included in Foresight and Fait Accompli: Two Timelines for the Global Financial Collapse. The Revere finalists in voting order below included four not previously identified (in italics below) by Bezemer.
1. Steve Keen 2. Nouriel Roubini 3. Dean Baker 4. Joseph Stiglitz 5. Ann Pettifor 6. Robert Shiller 7. Paul Krugman 8 Michael Hudson 9. Wynne Godley 10. George Soros 11. Kurt Richebächer 12. Jakob Brøchner Madsen
but that 'tiny' may be inaccessible now for any without a digital subscription to FT. Like me.] ~~~~~~
“The tsunami of money directed by a US Congress, worried about growing income inequality, towards expanding low income housing, joined with the flood of foreign capital inflows to remove any discipline on home loans.”
That’s a claim that has been refuted over and over again. But what happens, I believe, is that in Chicago they don’t listen at all to what the unbelievers say and write; and so the fact that those libruls in Congress caused the bubble is just part of what everyone knows, even though it’s not true.
Just to repeat the basic facts here:
1. The Community Reinvestment Act of 1977 was irrelevant to the subprime boom, which was overwhelmingly driven by loan originators not subject to the Act.
2. The housing bubble reached its point of maximum inflation in the middle years of the naughties: [graph omitted]
3. During those same years, Fannie and Freddie were sidelined by Congressional pressure, and saw a sharp drop in their share of securitization:
while securitization by private players surged.
Of course, I imagine that this post, like everything else, will fail to penetrate the cone of silence. It’s convenient to believe that somehow, this is all Barney Frank’s fault; and so that belief will continue.
Rajan’s response
I reproduce Paul Krugman’s “econometric” claim above that Fannie and Freddie did not help cause the crisis above (I do not claim the Community Reinvestment Act was a big factor). I respond only because I have received hate mail from his followers. Paul is, of course, a great theoretical Nobel-prize-winning economist, so his attacks must be taken seriously (and I did take his trade theory classes at MIT, in the interest of full disclosure). Unfortunately, much of the “Fannie and Freddie did not contribute to the crisis” battalion makes arguments that have serious holes. Since these arguments are so prevalent they need to be rebutted again and again (the claimed unwillingness to listen to argument can be played on both sides).
The key graph in Paul’s argument is Figure 4. He claims that restrictions on Fannie and Freddie starting in 2004 kept their share of originations of total residential mortgage originations down, even while housing prices inflated. But this is irrelevant to the question. What we care about though is the amount of Fannie and Freddie’s originations in the sub-prime residential mortgages. And from every source I have seen, these took off precisely in 2004. Indeed, as I argue in my book Fault Lines, in the period 2004-2006 these two giants purchased $ 434 billion in sub-prime mortgage-backed securities. A measure of the size of these purchases is that in 2004, they accounted for 44 percent of the market for these securities. Calomiris and Wallison (2008, http://www.aei.org/outlook/28704) argue that Fannie and Freddie’s arms were twisted into doing more of this kind of lending starting in 2004 precisely because Congress had them in a vice because of the scandal.
Readers interested in the relevant data on originations by Fannie and Freddie may also want to see the work of Edward Pinto, a former Chief Credit Officer of Fannie Mae. He offers a detailed analysis of Freddie and Fannie’s lending , and their responsibility for the crisis. His testimony to Congress is at http://www.aei.org/docLib/20090116_kd4.pdf. His analysis of the data can be found on the AEI website.
====== Paul Krugman comments on Rajan's use of Edward Pinto there ..
May 21, 2011, 2:41 pm 70 Comments
Origins of the Crisis, Fake and Real
I don’t spend too much time these days talking about the origins of the financial crisis [my bold] — right now the burning question is what comes next. Still, history is a battlefield, and the usual suspects are trying hard to rewrite that history in their interests.
In fact, for a lot of people that has already happened: it’s orthodoxy on the right that Fannie and Freddie caused the housing bubble and bust. It was all the government’s fault!
And where does that idea come from? Well, a lot of it turns out to rest on publications by Edward Pinto at AEI, who claims that Fannie and Freddie held a large proportion of “subprime and other high-risk mortgages” — an assertion often transformed in casual discussion into the claim that F&F held a large fraction of subprime mortgages.
The paper from which this figure is taken, by David Min .. http://www.americanprogress.org/issues/2011/02/min_pinto.html , makes it clear that Fannie-Freddie loans were much less risky than those originated in the private sector — and in particular that “private-label” mortgage-backed securities, which were essentially unregulated, were vastly riskier than anything the government was promoting.
The whole “the government did it” claim is, in short, based on deeply misleading numbers — and it’s hard to read this story without believing that these numbers were deliberately constructed to mislead.
Agree .. enough on these origins .. just wanted to include Krugman's comment on Rajan's use of AEI's Edward Pinto and "the government did it" claim..."
News 
Market Data 
Discover 
