Guest Post: Regulators and Industry Insiders KNEW We Were in a Housing Bubble

Washington’s Blog

Greenspan and many other bankers, regulators and industry insiders say that “no one could have known” that we were in a housing bubble.

For example, Greenspan:

Stood by his conviction that little could be done to identify a bubble before it burst, much less to pop it.

And he claimed that:

We didn’t and couldn’t have known about the problem until Fannie and Freddie figures were released in December 2009.

But leading housing price analyst Robert Shiller has charted real (i.e. inflation-adjusted) housing prices back to 1890. Here’s how it looked as of August 2006:

(click for larger image).

Here’s how it ended up:

Joe Sixpack didn’t have access to real housing price data.  But by 2004 or 2005, the Fed, Fannie, Freddie, the big banks and everyone else who had an economist on hand should have known that we were in an unprecedented bubble.

In addition, the Bank for International Settlements warned the Fed about the housing bubble many years ago, but the Fed ignored the warnings.

Moreover, Donald L. Kohn, member of the Board of Governors of the Federal Reserve System, gave a speech in February of 2003 asking whether there was a housing bubble. In 2004, Kohn said:

Warnings about a possible “bubble” in house prices have been sounded for a number of years now. About a year ago, I examined this issue in some detail and concluded that, while one could never be very confident about such a judgment, house prices were not obviously too high and the housing stock was not clearly too large. Since then, however, prices have climbed further, and by more than the rise in rents–a proxy for the return on houses. Consequently, the odds have risen that these prices could be out of line with fundamentals.

Goldman’s top economist – Jan Hatzius – was publicly warning of a housing bubble in 2005.

There were many other warnings as well. Paul Farrell provides a chronology:

2000: Fed governor warns Greenspan. Former Federal Reserve governor Ed Gramlich served 1997-2005. He was warning Alan Greenspan as early as 2000 about the coming subprime crisis. See his book “Subprime Mortgages: America’s Latest Boom & Bust.”

June 2005: The Economist. Cover story two years before collapse: “The worldwide rise in house prices is the biggest bubble in history. … Rising property prices helped to prop up the world economy after the stock market bubble burst in 2000.” Values increased 75% worldwide in five short years. “Never before have real house prices risen so fast, for so long, in so many countries … This is the biggest bubble in history.”

February 2006: Faber’s Market Newsletter. “Correction Time is Here!” was Faber’s headline: “If we combine the overbought condition of the stock market, investors’ sentiment high optimism, equity mutual funds’ low cash positions, and also heavy foreign buying, we have all the ingredients for a stock market correction in the US getting underway very shortly.”

March 2006: Forbes. Economist Gary Shilling wrote: “The current housing weakness will develop into a full-scale rout … It’s clearly a bubble and is nationwide … The house-price collapse will induce a painful recession that will send U.S. stocks into a tailspin … China will suffer a hard landing … and weakness in the U.S. and China will spread worldwide.”

March 2006: “Sell Now.” Former Goldman Sachs investment banker John Talbott’s book: “Sell Now! The End of the Housing Bubble.” His statistics covered America’s top 130 metropolitan areas. The top 40 were facing an average 47.2% decline.

May 2006: Harper’s magazine. Michael Hudson wrote an article, “Guide to the Coming Real Estate Collapse,” analyzing 20 trends: “Taken together, these factors will further shrink the ‘real’ economy, drive down those already declining real wages, and push our debt-ridden economy into Japan-style stagflation or worse.”

August 2006: Wall Street Journal. Countrywide’s CEO Angelo Mozilo: “I’ve never seen a ‘soft-landing’ in 53 years, so we have a ways to go before this levels out. I have to prepare the company for the worst that can happen.”

November 2006: Fortune. Cover story asks: “Can the Economy Survive the Housing Bust?” They said “the correlation between current builder confidence and future stock market returns over the past 10 years is downright unnerving.” The NAHB confidence index is a leading indicator because the stock market inevitably follows in lockstep a year later. The index had “plummeted 54%.”

June 2007: Shilling’s Insight Newsletter. “Just as the U.S. housing bubble is bursting, speculation elsewhere will come to a violent end if history is any guide. … Richard Bookstaber, who designed various derivative-laden strategies over the years, now fears that financial derivatives and hedge funds, focal points of today’s huge leverage, will trigger a financial meltdown.”

And in 2008, the Wall Street Journal pointed out:

You might have noticed that there’s been a lot of gnashing of teeth lately along the lines of, “Why oh why didn’t we recognize the housing bubble?”

***

Let’s go to the record.

***

A Factiva search of the top 50 newspapers in the U.S. returns 268 stories referring to a housing or real-estate bubble in 2003. In 2004 that number increases to 369 and in 2005 it swells to 1,608. Going month by month in 2005, there’s a steady increase in “bubble” stories in the first part of the year, coming to a peak in June.

This isn’t to say that reporters somehow “got” the bubble when nobody else did. Reporters’ main job is to report, and if they’re writing more stories about a housing bubble, it’s probably because more people are saying that there is one. Indeed, 81% of respondents in an online WSJ.com poll in May 2005 said they thought the U.S. housing market was in a bubble. Most of the people who responded “yes” thought the bubble would keep growing.

Given the above, can there be any doubt that the bankers, regulators and industry insiders knew there was a bubble?

Note: Everyone knows that Greenspan was largely responsible for blowing the bubble by holding rates too low for too long. But most people forget that he was also one of the main cheerleaders for adjustable rate mortgages and subprime loans (and see this). The Fed under Greenspan also refused to enforce laws protecting borrowers from abusive lending practices, despite repeated urging by consumer advocates across the country and even by other government agencies, even though the Fed was the only agency with the power to do so.

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About George Washington

George Washington is the head writer at Washington’s Blog. A busy professional and former adjunct professor, George’s insatiable curiousity causes him to write on a wide variety of topics, including economics, finance, the environment and politics. For further details, ask Keith Alexander… http://www.washingtonsblog.com

38 comments

  1. Paul Vigna

    All you had to know, in “real time” as it were, in order to know housing was in a bubble, was that home prices had doubled in something like five years, and salaries were flat. And if you knew that, you also knew the situation was unsustainable and a reckoning was coming. There was no two ways around it. You didn’t need an economist. You didn’t need to understand derivatives. You didn’t need to run a central bank.

    It was kind of like in the ’90s, when these tech darlings are all posting losses, and the stocks are rising, and the explanation is “earnings don’t matter anymore.” I swear to God some people actually offered that up as an explanation.

    These things are easy to spot. You just need to keep your eyes open and think clearly. Don’t let anybody tell your differently.

  2. mitchw

    Worse, an IRS employee told me in 05 that they knew many mortgages were fraudulent. I asked why nothing was being done about it, and his reply was, ‘because the economy depends on housing.’

    How ’bout them apples Yves?

    1. Glen

      This, I think, really gets to the heart of the matter. They had to blow the bubble because the real economy was (and still is) in the tank. No real economic growth, no job growth, wages dead, and real inflation (gas, food, energy) on the rise.

      Greenspan more than anything is a political animal. He changed his tune when the WH switched from Clinton to Bush. He went from concerns about deficits and “irrational exuberance” to tax cuts during two wars.

      Let’s face it, the economy under Bush II sucked big time. Inflating the bubble and cooking up the markets was the only action to keep the suckers (the non-rich, the little people) happy and dumb.

      From Greenspan’s point of view “extend and pretend” as economic policy is the ONLY game in town. He’s been playing it for all it’s worth since at least the late 90’s.

      Did they know what they were doing – heck yes. In fact, they’re trying to do it again with the ten trillion spent bailing out Wall St bailout:

      http://www.sitemason.com/files/foZeWA/bailouttallymar2010.pdf

      1. kezza

        Greenspan more than anything is a political animal. He changed his tune when the WH switched from Clinton to Bush. He went from concerns about deficits and “irrational exuberance” to tax cuts during two wars.

        Sorry to disappoint you but it just doesn’t add up. Greenspan had warned about deficit in the Bush years too — for example:

        (1) Greenspan before the Committee on Financial Services, US House of Representatives, February 11, 2004:

        “The imbalance in the federal budgetary situation, unless addressed soon, will pose serious longer-term fiscal difficulties. Our demographics–especially the retirement of the baby-boom generation beginning in just a few years–mean that the ratio of workers to retirees will fall substantially. Without corrective action, this development will put substantial pressure on our ability in coming years to provide even minimal government services while maintaining entitlement benefits at their current level, without debilitating increases in tax rates. The longer we wait before addressing these imbalances, the more wrenching the fiscal adjustment ultimately will be.”

        (2) in early May 2004 he warned that ballooning federal and trade deficits may be the biggest threats to the long-term economic stability of the U.S. He suggested that the twin deficits could begin to slow down economic growth as interest rates begin to rise and as fewer benefits can be gained from global trade and investment due to the devalued dollar.

        It is just that the US of A, as a whole, ignores those warnings.

        From Greenspan’s point of view “extend and pretend” as economic policy is the ONLY game in town. He’s been playing it for all it’s worth since at least the late 90’s.

        No! His entire philosophy, from his background as traders/consultants/whatever-you-choose-to-call-it, has been blowing bubbles to clean up burst bubbles. He would control when the bubbles should burst (so that it is not too big – think dot-com, for example), and he did a pretty good job at it. However, Bernanke, academic in neoclassical economics, doesn’t believe bubbles exist at all. That is why in reality he allowed the bubble to continue growing when Greenspan would have burst it.

        1. Glen

          I suppose Krugman may not be considered a non-biased judge but here’s a snippet:

          Any doubts that Greenspan holds George Bush to different standards than he held Bill Clinton were dispelled in the years that followed. He didn’t call for a reconsideration of the 2001 tax cut when the budget surplus evaporated. He didn’t even offer strong objections to a second major round of tax cuts in 2003, when the budget was already deep in deficit.

          Full article here:
          http://www.nytimes.com/2004/06/06/magazine/the-maestro-slips-out-of-tune.html?pagewanted=all

          And on Fed rates:

          Do you know how many months Fed rates were below 3% while Clinton was in office? NEVER Below 3%? Two months

          Do you know how many months Fed rates were below 3% while Bush II was in office? THIRTY FIVE months Between 2% and 3%? Seven months

          Clinton had TWO months with rates below three percent, Bush II had FORTY TWO months with rates below three percent and THIRTY FIVE of those with rates below two percent.

          Greenspan/Bernanke had the Fed running FULL BORE to pump up the Bush economy.

          Rates here:
          http://www.federalreserve.gov/fomc/fundsrate.htm
          http://www.harpfinancial.com/InterestRateHistory/FederalFundsRate.htm

          1. Glen

            OPPS! EDITED TO FIX!!

            And on Fed rates:

            Do you know how many months Fed rates were below 2% while Clinton was in office? NEVER Below 3%? Two months

            Do you know how many months Fed rates were below 2% while Bush II was in office? THIRTY FIVE months Between 2% and 3%? Seven months

            Clinton had TWO months with rates below three percent, Bush II had FORTY TWO months with rates below three percent and THIRTY FIVE of those with rates below two percent.

            Greenspan/Bernanke had the Fed running FULL BORE to pump up the Bush economy.

            Rates here:
            http://www.federalreserve.gov/fomc/fundsrate.htm
            http://www.harpfinancial.com/InterestRateHistory/FederalFundsRate.htm

            Still, I have to admit, Greenspan was speaking out about the Bush tax cuts by the articles you found. Krugman seemed to have a differing take on it – I’m not sure why.

  3. ShinjukuBaby

    I recall an interview with one of the Toll brothers around 2006, in which he claimed that both prices and demand for houses would never fall. In fact, they would keep rising. But not to worry! People would simply start taking out 60 year mortgages, which their children would pay off. If I recall correctly, I think he even used Japan as an example.

  4. Tom

    Back in 2003-2206 the Fed, and Greenspan in particular, argued that rates could remain low because inflation was low. In order to reach this conclusion, they had to ignore the rapidly rising price of real estate. The mechanism that allowed them to ignore housing prices was the calculation called owner’s equivalent rent (OER), which actually registered a decline in 2004 and 2005. I recall people openly mocking the Fed reports that would come out and indicate low inflation readings during this period – anyone buying or renting a house, or eating at a restaurant or going on a vacation, could see and feel prices going up.

    Likewise, some people today believe that OER is responsible for the FED reports understating deflation – since they missed the impact of home prices and easy money on the upside it is not surprising they would miss it on the downside.

  5. LenJ

    Look, anyone who’s read Greenscams pre-political
    days stuff knows he’s far too intelligent to not have
    known exactly what he was doing, and to be running
    around now spouting the utterly moronic nonsense he is
    is.
    It’s time to stop being amazed at his supposed
    stupidity and start to think about what his real agenda
    was.
    If you wanted to blow up the world financially, you
    couldn’t conceive a more effective plan than that he
    implemented, so maybe that’s what he did. Question
    is….why?

    1. Vespasian

      LenJ wrote: “If you wanted to blow up the world financially, you couldn’t conceive a more effective plan than that he implemented, so maybe that’s what he did. Question is…why?”

      I agree fully that Greenspan is too smart and world-wise not to recognize what was going on, so his actions were very likely by design, a smokescreen to cover a larger goal. I think he knows that the central banks will eventually allow a hyperinflation which’ll ruin the worldwide economy, and then those who share his Randian ideals & philosophies and who’ve protected themselves wisely (ahem: Got Gold?) will emerge as the Top Dogs afterward, and will shape the gov’ts & economies going forward along Randian / Objectivist lines.

      By Objectivist standards, pursuing such an outcome is entirely moral; it would serve as a Historic Lesson to all democracies, compliments of Alan Greenspan. I’m sure Ayn Rand’s fictitious Galt’s Gulch is an inspiration — if you don’t agree with the system, undermine it! I bet he even claims it as his Legacy in a post-death new release.

    2. LeeAnne

      We’re at the end game of the privatization enterprise.

      The Reagan/Thatcher team followed by Greenspan are straw men. Reagan/Thatcher were both mean enough to be encouraged to turn up their noses at unionists; Greenspan is an egomaniac who found companionship for his foolish radical ideas in the Ayn Rand cult. His backers didn’t have to care about his ideas. They were useful for their purposes.

      If Greenspan’s “I made a mistake” sounds a bit hollow, try this instead from The tendency to privatize by Alan G. Nasser | March, 2003 here

      I contend that the neoliberal mania to privatize is a tendency rather than a policy, and this means that the temptation to see neoliberal privatization as something significantly new should be dispelled.

      “…While the contestants often agree on the badness of a given course of action, they disagree as to whether the misbehavior was a mere blunder on the part of otherwise well-meaning policymakers or yet another instance of a structurally-based imperative, the structure, of course, being capitalism.

      A classic example was the proper analysis of the war in Indochina. Liberal critics of the war were inclined to see it as an aberration, a case in which a benign and idealistic leadership bumbled into a situation that was far more complex than they had imagined, and then found themselves in a quagmire from which extrication was very difficult. Radicals replied that this alleged blunder was, in fact, an extension of the historical syndrome of colonialist and neo-imperialist intervention characteristic of capitalist development. And imperialism, we reminded our liberal friends, is a system, not a policy. It was not as if policymakers had simply made a regrettable idiosyncratic choice in Indochina, but rather that this repetition of a centuries-old pattern of attempted domination and exploitation in the global periphery was one defining dimension of capitalism as an international system. The possibility of doing away with this pattern, we argued, was inseparable from the project of building a popular movement to do away with capitalism itself.

      The mania for privatization characteristic of neoliberal globalization is similar to the Indochina War in this same respect. It can be seen either as a policy, standing in no structural relation to long-term patterns of capitalist evolution, or as a tendency of capitalist development, a structure-driven dynamic evident in one form or another in the historic unfolding of capitalist social relations from the very beginning.

      … Privatization is a critical feature of neoliberalism. Despite the claims of many analysts, neither privatization nor neoliberalism is really new. Neoliberalism is, in fact, an attempt to turn back the clock to capitalism in its pre-Keynesian form. in capitalism’s new incarnation, market forces have once again been freed from government regulation of business activity, public ownership of certain enterprises, and the services and income supplements that constituted, in effect, a social wage. The so-called Golden Age (roughly from the late 1940s to the mid-1970s), when a significant portion of the working class was offered some measure of protection from the unbridled dynamics of the system, has been dismantled and succeeded by a return to the bad old days when workers were almost entirely dependent on the vagaries of the market and the demands of capital.

      from The Rage
      “The final stage is when the political will of the electorate to no longer fund bailouts. Turn out the lights, the party is over. Greenspans deflationary chums then profit massively. The bankers STILL laughing in our face as they profit from deflation and we see a genocide on a scale that would make Mao’s great leap foward famine seem small. I suspect US nominal GDP will fall to 2-3 trillion once all the credit created economy contracts out. Nothing left.

      This is the same scam by the international bankers that they pulled in the mid-19 century before passing the coinage of 73 act (also called the crime of 73). The same crime will happen again as the American idiots get lulled into the wrong path. Many of them will die in poverty stricken concentration camps while the rich live decadently.”

      The stage is set. Listen to the war mongering.

      1. Skippy

        Thanks LeeAnn,

        To my deepest sorrow, I feel many think this is an accounting fraud problem and not one of social dynamic.

        Skippy…league of miscreants hiding in shadows…nay…just, like minded criminals me thinks, whom do works together when it suits their pleasure.

        1. LeeAnne

          But Skippy, isn’t that why he was called ‘meastro’–as in leading the band, orchestrating the music, setting the beat?

  6. BaliRand

    Just to back up MrMoney…..if anyone in the U.S. wants to watch the movie again….just look north of the 49th parallel. Federal politicians, the central bank governor and real estate industry leaders all deny a bubble, despite the fact that Canadian housing prices in the 4-5 major metropolitan areas (where most of the population lives) are at levels beyond those reached in all but the most overpriced U.S. cities at peak (mainly in California, housing prices measured against median household income).

    During the past two years, the CMHC (Canada Mortgage and Housing Corp, the guarantor of the vast majority of mortgages where the owner does not put down 25%, ramped up its portfolio buy several hundred billion dollars (the equivalent in the U.S. would mean FHA taking on trillions in mortgage guarantees). I’m not sure whether the latest data on government guaranteed mortgages held by CMHC are out, but last I checked they were on track to have a $500 billion dollar portfolio of mortgages they had guaranteed through the end of 2010, which would represent an increase of $360 billion. During this same period, financial institutions in Canada have not grown their mortgage portfolios at all. So indeed, and essentially, the federal government up here has been goosing the housing market with hundreds of billions in indirect lending to buyers. The $500 billion portfolio represents 33% of Canadian GDP!

    Here’s a great report on the Canadian housing market that covers prices, debt, lending and guarantees. By Alexandre Pestov, “The Elusive Canadian Housing Bubble”:

    http://www.zerohedge.com/sites/default/files/Canadian-Housing-Bubble.pdf

    1. robj

      Greenspan’s speeches in 2005 extolling adjusted rate mortgages and subprime at exactly the point when 30 year mortgage rates were nearing 40 year lows clued me–an English professor–that something was very, very rotten in Denmark. I’ve often wondered just exactly how corrupt Greenspan was, after he advised millions of Americans to do exactly the wrong thing. Could he be that malevolent? Or had he literally taken the Randian hallucinagenic that had convinced him, and apparently still has, that removing Glass-Steagall restrictions and keeping interest rates low had to be the right decision, and–by the way–in a “free market” bubbles could never be detected. Amazing. Never, ever underestimate the power of ideology to blind human beings absolutely to the reality going on under their nose.
      At exactly this point, my wife and I borrowed a fixed equity note to send our two boys to college beginning in 2006 and refused an adjustable HELOC for a 5.75 fixed loan, on the assumption adjustable rates would have to move up.

      I cannot believe that anyone listens to that fool and that his testimony is still requested. You couldn’t have destroyed the U.S. economy more if you had paid for dirty bombs and set them in four of our urban centers. Maestro, my ass. Burning in the innermost circle is what he deserves, either for ideological malevolence or idiocy or more likely a toxic combination of both. And he still won’t admit error, which is the most amazing. Over the last twenty years, we now find ourselves in a fascist corporate state where the Bank CEOs and Greenspans “deserve” 400x the average workers pay and are not held to account for steering the Exxon Valdez onto the rocks while blind drunk at the wheel. Head on a pike is more like it.

      1. VenusVictrix

        Nothing like an English Professor to eloquently express the collective loathing and outrage of a nation raped and enslaved via the financial coup lead by that narcissistic fiend, Alan Greenspan.

        I’d like to think that a unique new circle is already in preparation for him and his ilk. But perhaps when enough people wake up to the fraud this man perpetrated then he’ll get his due a little sooner.

      2. Doug Terpstra

        The dirty bombs metaphor fits this economic terrorism well—as terrifying, painful, and deadly it is for so many people.

        Still, it’s hard to imagine that level of deliberate venality in Greenspan. Having read a couple of Ayn Rand’s gospels on the absolute virtue of selfishness and knowing of his devotion to her extreme catechism, I rather suspect Greenspan was mostly blinded by a deeply delusional faith. This “free market” ideology reached the fervor of religious fanaticism, sincerely held by so many willfully blind, even when all the facts pointed to a grossly rigged game on a steeply-pitched field. Human beings have an amazing capacity for self-delusion.

        1. Doug Terpstra

          ‘”Atlas Shrugged” is a celebration of life and happiness. Justice is unrelenting. Creative individuals and undeviating purpose and rationality achieve joy and fulfillment. Parasites who persistently avoid either purpose or reason perish as they should.’
          Alan Greenspan

          Hmmm, I (sorta) understand the joy of seeing parasites perish, but who are they anyway. And that ‘justice is unrelenting’ bit hasn’t quite panned out yet; she needs our help.

  7. The Rage

    My theory on Greenspan is that he wanted to build the biggest bubble ever and make it unbailoutable. You see, since the Reagan consensus came into being in the 80’s, it was built upon consistantly tight money supply and free, endless supply of credit. Also during this time, the real economy has been gutted giving us a general deflation. The only thing that produces “inflation” is credit. Which isn’t “really” inflation. So what Greenspan was saying, was true, if you understand the rational.

    The final stage is when the political will of the electorate to no longer fund bailouts. Turn out the lights, the party is over. Greenspans deflationary chums then profit massively. The bankers STILL laughing in our face as they profit from deflation and we see a genocide on a scale that would make Mao’s great leap foward famine seem small. I suspect US nominal GDP will fall to 2-3 trillion once all the credit created economy contracts out. Nothing left.

    This is the same scam by the international bankers that they pulled in the mid-19 century before passing the coinage of 73 act(also called the crime of 73). The same crime will happen again as the American idiots get lulled into the wrong path. Many of them will die in poverty stricken concentration camps while the rich live decadently.

    1. VenusVictrix

      I suspect you’re correct about Greenspan’s objectives, and that’s probably why he was appointed Fed Chairman in the first place.

      Surely it wasn’t on account of his phony PhD – which was “honorary”, at best.

    2. Adam

      No, Greenspan never wanted to blow a bubble. His problem is that bubbles don’t exist in his framework of economic thinking. Neo-Classical economists believe markets are perfectly efficient and therefore price ALWAYS reflects true value of the asset. As long as consumer prices were stable, and government intervention in the markets was minimal then the markets would determine the perfect price for housing (and all other assets). Unfortunately for Greenspan (and the rest of us) he learned that he was wrong.

  8. The Rage

    “But by 2004 or 2005, the Fed, Fannie, Freddie, the big banks and everyone else who had an economist on hand should have known that we were in an unprecedented bubble”

    Yeah, but it was way past the point by then. It is like Bryan talking about stopping the Gold pillagers in 1896…….a little to late.

    Rates were useless as well. Since the real economy was only growing at 1%, rates were going to stay low. Little or no inflation was being generated. Raising them higher would have gone against the market and even then, only modestly choked off credit.

  9. Paul Tioxon

    I remember the copies of Greenspan’s unsolicited testimonial for adjustable rate mortgages, being passed out by the mortgage brokers like hall passes in a Catholic HS. Here, see, we aren’t really the scum of the earth selling pic a pay World Savings loans to anyone with bucks worth of equity. And of course, with the nihil obstat imprimatur from the pope of capitalism, infallible in all matters fiscal, why wouldn’t a customer go ahead with the deal, it was one size fits all, adjustable when you want, amortizing when you don’t or just plain cheap when you are low on cash. Your kind of flexibility, after all, isn’t it about time we got the financial super weapons of the rich that made their lives so fabulous!
    The year to year increases in originations for the overall mortgage market were beyond comprehension, from under a trillion dollars to almost 4 trillion in five years? Did I mention the back end points allowed for 3 paid back to the broker and with another couple up front, now that’s a incentive driven sales program. Too bad I was told to stop selling the conventional 30 yr fixed rate programs, because I was losing money for the company by not putting people into the terrific 3/27 adjustable rate loan, step one of the 2 step “I churn, I mean, I’ll refinance you in 2 years when you choke on the higher payment or get your credit together to get into the conventional rate programs. No, wait, I’ll be fired if I sell them, they’re money losers.

  10. Gary Anderson

    The BIS was in on it! Basel 2 in 1998 allowed low capital requirements and off balance sheet banking. The BIS knew what was going to happen. These warnings from the outer core of the BIS makes it seem like they are the good guys. They are not. America would do well to take over the Tower of Basel, residence of the BIS and nationalize all central banks.

  11. a

    “The BIS was in on it! Basel 2 in 1998…”

    Basel 2 was forced on the world by American banks, who thought they had a competitive advantage with VAR.

  12. fresno dan

    Here in Maryland the state has a public website of all housing transactions (by county). A few years back I looked up the sale prices of the rather crappy townhouses in my neighborhood – one had sold for 350K (that was the top, a couple had sold for 300K). I KNEW this was ridiculous.
    So, a few days ago, with greath fear and trembling, I checked the website again (I am retiring in 2 years) – prices down to 190K, 170K, 150K, and one house at 125K. I bougth my place in ’93 for 120K.
    Well, incomes have been stagnant. There are rules of thumb for how much of your income to spend on a house. Reversion to the mean.
    O well, all that extra money I was dreaming about spending was never real – inaginary gains, imaginary losses. But for people who bought those houses at 300K…
    At least when I sell my house, the replacement house will be cheap.

  13. craazyman

    How Could they Not Have Known?

    We have recently completed an exaustive study of why the Fed did not see the housing bubble. Here are the top 10 reasons our research team uncovered. The complete report with extensive discussion and analysis can be purchased for $100 cash from:

    attn: Joe, Project Manager
    Institute for Contemporary Analysis
    PO Box 55
    Old Turnpike Road
    Prarie View, South Dakota

    #10
    They thought the few housing price charts they did happen to glance at were probably seismograph readings from the Department of the Interior.

    #9
    Houses were getting bigger, so it only stands to reason they should be getting more expensive too. Duh!

    #8
    Where will all the illegal immigrants live? Supply and demand, baby.

    #7
    The Washington Post Sports section rarely discussed housing prices.

    #6
    Last time America got bigger was when they added Hawaii over 50 years ago. Scarcity explains it all.

    #5
    With health insurance costs going up 30% per year, housing seemed cheap!!

    #4
    If there really was a bubble, then the Fed might have to raise interest rates. No way could that happen.

    #3
    Most folks are working two jobs nowadays to make ends meet, so why shouldn’t houses cost twice as much as they used to?

    #2
    Because you can always rent out a few bedrooms to make the mortgage payments if really need the cash flow . . .

    and reason #1 why the Fed didn’t see a housing bubble . . .

    Very few of the people who said there was a bubble had a PhD from a top-ranked Economics Department.

    Boooo wha ahahahahh ahahahahaha!

    All right, not that funny, but I need to procrastinate a bit more before the ditch digging starts today.

  14. Mark Alexander

    I remember reading articles about the coming housing bubble in the Economist back in 2003. Living in the hyper-inflated housing market of the San Francisco Bay Area, the bubble was obvious even without the Economist articles. There was a tremendous hysteria in the air, as people lined up to offer sellers more than asking price, or flipped houses every year to make a killing. I had a well-meaning friend tell me about the power of leveraging, meaning I should borrow lots of money to buy an overpriced house.

    Needless to say, all of this alarmed me greatly, and I got out of the California housing market and became debt-free just as the bubble was bursting.

  15. Kevin

    Man this makes my blood boil. I don’t have a PHD, or a masters degree, and my undergrad degree was in engineering from a state school. I have an interest in economics which makes me a bit unusual, but otherwise I would probably qualify as “Joe Six Pack.” It was clear to me in 2004 that we had a bubble. I was a few years out of college, making a nice salary for my age, at the median level of the households in the town where I grew up and wanted to move back to. Yet the median house price was somewhere around 7x the median salary in my town. I just didn’t get how people were buying houses. It drove me nuts, I thought I was doing something wrong and people around me were all massive secret savers and getting amazing returns on their investments. I started doing some research, and reading blogs like Calculated Risk (I found NC much later) and looking at historical trends, and it was very clear to me that things were not normal, and unsustainable. It infuriates me that economists whose entire job is to look at economic trends just completely missed this.

    I think Greenspan’s best defense at this point is to just claim senility. As for his younger counterparts, put them in jobs in a factory (send them to China if necessary) where they can’t do any more harm- its one thing to ask for forgiveness, but it takes a big deceptive pair of balls to say that it was impossible to see this bubble bursting.

    1. dsawy

      I’m in much the same profile group – engineer with an interest in economics (and took micro-econ as my minor in college).

      The central point that should be harped on in your comment is this:

      “Yet the median house price was somewhere around 7x the median salary in my town.”

      Right there, you’ve nailed down the way to recognize this bubble, stripping away all this economics/financial BS spouted by economists and their ilk. The long-term trendline for housing prices in the US is about 2.6 to 3.0X the median household income in that area. In some places in California, the median home price was up to 9X the median household income. Clearly, these home purchases required a level of leverage that the homeowners simply could not sustain.

      There was no need for fancy economic theories, no need for tortured mathematics of modern economics, no need for complicated market metrics. Just sit down and look at the long term home price trendline vs. the trendlines of household incomes in the ’00’s and we see that home prices were climbing like a homesick angel while incomes were only modestly higher to flat. Simply put, mortgage debt was growing much, much faster than the ability to service said debt. Sooner or later, someone was going to default, and in a recession, a whole lot of people were set to default.

      I thought economics was mathematical hokum in college, simply because these chuckleheads put their independent variable on the wrong axis of their graphs. Now I know they’re frauds because their models have no predictive skill, and they haven’t the common sense to recognize very simple things that the rest of us with a little money sense can see right in front of our faces.

  16. AK

    I personally believe in Conspiracy Theory WRT Greenspan. Something on the level of Herostratus.

    Wikipedia:
    “Herostratus was a young man who set fire to the Temple of Artemis at Ephesus (in what is now western Turkey) in his quest for fame on about July 20, 356 BC. The temple was constructed of marble and considered the most beautiful of some thirty shrines built by the Greeks to honour their goddess of the hunt, the wild and childbirth. Four hundred and twenty-five feet long, and supported by columns sixty feet high, it was one of the Seven Wonders of the Ancient World.

    Far from attempting to evade responsibility for his act of arson, Herostratus proudly claimed credit in an attempt to immortalise his name in history. To dissuade similar-minded fame-seekers, the Ephesean authorities not only executed him, but also condemned him to a legacy of obscurity by forbidding mention of his name under penalty of death. This did not stop Herostratus from achieving his goal, however, as the ancient historian Theopompus recorded the event and its perpetrator in his Hellenics.”

  17. Glenn Condell

    ‘Given the above, can there be any doubt that the bankers, regulators and industry insiders knew there was a bubble?’

    This ‘were they knaves or were they fools’ dichotomy amongst us plebs has replaced ‘will it be inflation or will be deflation’ as the debate du jour. What’s left of my money is on knavery. It was instructive to see two of my preferred commentators Dean Baker and Max Keiser disagree on this on Max’s show the other day. Max of course was for knavery (‘financial terrorism’ even) but Baker averred it was a catastrophic series of mistakes. Someone criticised Kwak and Johnson the other day for not taking the final step toward condemnation of crimes, seeing this refusal in the light of prospects for future employment in future administrations. Baker too? There are certain lines you can’t cross if that’s what you’re after.

    ‘Note: Everyone knows that Greenspan was largely responsible for blowing the bubble by holding rates too low for too long. But most people forget that he was also one of the main cheerleaders for adjustable rate mortgages and subprime loans (and see this). The Fed under Greenspan also refused to enforce laws protecting borrowers from abusive lending practices, despite repeated urging by consumer advocates across the country and even by other government agencies, even though the Fed was the only agency with the power to do so.’

    He did everything in his considerable power to enable this massive transfer of wealth. One of the above three factoids might be considered an error, two gross incompetence, but three? Evidence of intent for mine.

    ‘Look, anyone who’s read Greenscams pre-political
    days stuff knows he’s far too intelligent to not have
    known exactly what he was doing, and to be running
    around now spouting the utterly moronic nonsense he is
    is. It’s time to stop being amazed at his supposed
    stupidity and start to think about what his real agenda
    was.’

    My sentiments exactly. The man was/is a fan of the power-loving and sociopathic Ayn Rand. I sometimes wonder whether a search of the attics or basements of the Bernankes and Paulsons and Rubins and Summers of this world might turn up a few secret shrines to Ayn. People like this are interested only in the welfare of people like this. They wear a plausible dress of noble lies to obscure their extremism.

    ‘If you wanted to blow up the world financially, you
    couldn’t conceive a more effective plan than that he
    implemented, so maybe that’s what he did. Question
    is….why?’

    Because they recognised long ago that the path we were on was unsustainable. Something had to give big time and when that day came, they had a plan to ensure the not just the survival but the dominance of their species. They have played their roles to perfection and the rest of us off a break.

    ‘Worse, an IRS employee told me in 05 that they knew many mortgages were fraudulent. I asked why nothing was being done about it, and his reply was, ‘because the economy depends on housing.’

    I thought it was ‘consumerism’. Chalmers Johnson makes a persuasive case that it’s the Mil/Sec/Intel/Contracting complex. Whatever it is it’s not a real economy.

    And it wasn’t just the IRS that knew. The FBI went public about mortgage fraud in 04 or 05. One of the things that bothers me is that there has been no ‘smoking gun’ evidence of skulduggery produced by any of the unknown thousands of spooks in the FBI, CIA, NSA, you name it, the whole secret shebang that appears to have busied itself wiretapping PETA people and arresting Amy Goodman over the last few years. There was a story recently that the CIA had given the green light to their staff moonlighting for hedge funds and other denizens of Wall St. Given Kyle Foggo and sundry other scandalous revelations of grift and graft, have these guys decided to join rather than beat them?

    ‘he knows that the central banks will eventually allow a hyperinflation which’ll ruin the worldwide economy, and then those who share his Randian ideals & philosophies and who’ve protected themselves wisely (ahem: Got Gold?) will emerge as the Top Dogs afterward, and will shape the gov’ts & economies going forward along Randian / Objectivist lines.
    By Objectivist standards, pursuing such an outcome is entirely moral; it would serve as a Historic Lesson to all democracies, compliments of Alan Greenspan.’

    That’s pretty much my take as well. It is an elaborate system set up to make avarice respectable. It’s like the stories empires tell themselves to justify and enable violent robbery of other peoples. Boil it down and what you get is greed and contempt.

    Thing is, one person’s parasite is another’s ‘creative individual’. And both may wield an ‘unrelenting’ justice. Right now the government protects these people with the skin of it’s teeth, but there are always more little people than there are Atlases, and the next few years might see them decide not to go gentle into that not so good night.

    Said more with hope than expectation, but you gotta hope. I hope Rahm-gate is the tinder which lights that fire but that would be Wish #859, for this year alone!

  18. rob

    they knew. greenspan even warned about fannie/freddie becoming too big….so how did he think it was going to end? oh, i forgt. self-regulation. best part is how they (see st louis fed pres today) extol their proficiency at 20/20 hinsight by showing a housing chart and then saying- oh yes it was a bubble but everyone bought becasue everyone wanted to get rich. as a buyer who bought becasue for a 10% per annum raise cold not s not enough to keep up with home prices, i just wanted my new family to have a backyard before we couldnt afford it

  19. Pops

    Oh yea, they knew.

    Crap, I knew and I’m nobody. I posted this story on a website back then – 1 month after we sold our house in CA and paid cash for a farm in the midwest…

    11/4/05
    “Executives and directors at many of the nation’s largest development companies sold stock at a record pace this summer. Insiders at the 10 largest home builders by market value, including D. R. Horton, KB Home, Toll Brothers and M.D.C. Holdings, have sold nearly 11 million shares, worth $952 million, so far this year. That is a huge jump from the 6.8 million shares, worth $658 million, that insiders sold during all of last year, according to data compiled by Thomson Financial.”

    http://www.nytimes.com/2005/10/04/business/04builders.html

  20. Jay Banks

    I agree with the opinion that they misunderstood the very nature of economics. They thought of the market as some kind of self-conscious being, that is able to take care of itself, but all these self-regulation, free market based economical theories have one great flaw – they expect people to act rationally, which almost never happens. Sometimes it’s very hard to admit that you’re wrong, even when you can’t deny the facts.

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