This page has been archived and commenting is disabled.
Regulators and Industry Insiders KNEW We Were in a Housing Bubble
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.
- advertisements -
A storybook tale, told by one human family who figured it out...I am sure there are many more...
One Sunday morning in the early Spring of 2004, in a typical housing development somewhere in Southern CA, I stood in front of our cheaply built faux Spanish style stucco plastered, red tile roofed, Smurf Village abode crammed into a postage stamp lot with hundreds of identicle mini-mansions with high ceilings and thought to my self...my oh my this place really sucks.
You see, this lovely and highly desirable place we then called home (but actually loathed with great passion) to our continuing astonishment had dutifully tracked the median home price madness of the time and had hit close to $600K, almost double what we paid for it in 2000. Houses that came on the market were greeted with instant bid ups and sold in days, even though the median family income in our area was about $75K and new development of more than 3000 more McMansions which were to be priced at twice the current median had just broken ground less than a mile from us... again I thought, my oh my how can this be?
At the time, we had no idea about sub-prime or Alt A or any of that. This was our 5th house owned since 1973 and we had always financed the "normal" way, which was the only way we knew about. At this delusional price level we were at about 75% equity. So I went back in the house and proposed an idea to my wife of several decades. "Honey we have to get out of here now, let's pack it in and move back East where we can have a real life together". My dear wife looked at me as if I were mad and said...my oh my...
Well in spite of the scorn of our friends and coworkers at the very idea of bailing out of paradise, we sold the house to a walk up buyer before we even listed it. The deal was completed in about 1 week for full appraised value. We called the mover, packed our stuff and got the hell out. We learned later that the buyer had used one of those zero down, interest only loans and had even tacked on an additional $50K for "needed upgrades", new furniture, etc. This house is now valued at a little more than half what we sold it for. My wife and I now sit on our (really ours) porch with our dogs, staring at the wonders of nature. Sometimes we just look at each other and say...my oh my
Not mention congress changing bankruptcy laws before TSHTF.
I remember that Economist cover and I read the article at the time. Thus the housing crash was far from a surprise for me. If a layman like me could see it just from reading a magazine on the edge of financial/political press, the argument about "no one could have seen this coming" is criminally absurd. One word sums it up: lying. That anyone at all might buy these lies is a pathetic commentary on our current level of education and civic awareness.
They're pulling the same crap in Canada right now. Pretending there is no bubble while the single family home in Vancouver (usually a former crack shack) hit's the million dollar mark.
House prices there and in Toronto are now even more out of whack vs incomes than California or Florida or Las Vegas at their bubble heights.
Greaterfool.ca if anything, underestimates the pop when it does happen (soon - it's starting to pop NOW).
http://www.greaterfool.ca/2010/04/12/dork/
I don't believe they're that stupid or incompetent. Which leaves, really one option: they're corrupt.
smells like a 9-11 kind of event.....
Can we replace Joe Sixpack with Joe Foreclosed??
well, if he's repudiated on his mortgage, he at least graduates to Joe Twelvepack
Thanks. Very useful post.
Funny how people stick to their illusions.
So once again, I repeat the same stuff as usual.
The housing bubble was good for the US. It is nothing new for the US, a country accustomed to create bubbles, crash them and keep the non moveable items by the bubble.
Do you have any data on the number of houses, flats etc... this bubble allowed to add to the US territory?
What would have happened without this bubble?
You know that houses built for $120 000 are sold $40,000. You cant build a house of this standard for that price in the US. You can in other areas of the world, not in the US. Wont ever cover the labour cost in the US.
This mean one house that should not have been built in the US. As millions of others.
The US population is kept appeased by providing the life project of buying a house as the final reward.
Do you know what is expected to happen to this project when the oil extraction rate is inflecting, with a direct consequence on construction capabilities?
In a near future, construction of houses will not be that easy.
And there will be countries with a high number of houses to provide their population with, a high pc of houses owners to inherit and the others. countries for whom the prospect of increasing their house pool is decreasing day after day.
Somehow, people in power seem to think that in this new configuration, the first type of countries will be stabler than the other.
Encouraging something like resindential real estate to be massively mispriced will not help the economy. Sure someone benefits, but overall I buy the Austrian view on 'malinvestment', especially in this case.
Essentially, we gt back to the Bastiat broken window analogy. I do not question that someone profits from fixing the broken window, but I do question that overall the broken window adds to the townsfolk's well being and wealth. For example, instead of expending those resource on strawberry pickers' 3,000 square foot McMansions, we could have taken those resources and done something better (i.e., from an economic perspective).
Ummmm well, what do you mean about not helping the economy? Who's economy?
On the last decade, a finite number of built houses. What's not helping in capturing a bigger share of this number than if not producing a bubble?
Who is better in the end, the country that added most houses to its territory and can use them to appease its population or the country who has not added these houses and it left with nothing to offer to its population?
If you mean that some US citizens were caught in the fire, sucker way, mere tools to initiate a demand, that is a undeniable point. Reporting casualties does not mean a battle has been lost.
The result is still here: the US has more houses on its territory with this bubble than without this bubble.
Malinvestment: a concept relying on mass production.
Sooner than later, it will appear that building houses (or anything else) when it was easy to achieve even without a proper demand to support it was not the worst choice.
So it was all part of someone's grand plan. Interesting. They should have told us.
What grand plan? Who's that someone?
It might be called the great game but a plan?
Just browsing through the US history, the same pattern appears:
-the US calls for investment money from abroad, generally to build infrastructures
-the companies involved in the infrastructures building are made to crash
-Infrastructures are unmoveable and therefore left on the US soil.
Not a grand plan. Not someone behind the scenes. Simply a trick that works for ages. A part of the game. Not specific to the US but the US is specifically apt at this face of the game.
As to being aware, well...
and the same dumb cunts are still in charge....where's some lord of the flies when you need it?
It will get below Great Depression levels, if only just barely.
"Which brings us back to the $64,000 question... was this (A) corrupt negligence or (B) merely outrageous incompentence... "?
It was both. Many in the business actually believed, or desparately wanted to believe, the Greenspan line that: "you can only identify a bubble after it has burst, if at all." That is the ultimate textbook cover for doing almost anything. In addition, many didn't understand the impact of these types of mispricings on the economy and specifically that piece that their jobs related to. Then of course, there were those that suffered from both maladies. Finally, and as George illustrates, the information was there for those who could recognize it or even wanted to.
Prince, in one of his explinations during testimony said (approximately) "You have to keep dancing to the music."
http://www.marketwatch.com/story/prince-and-rubin-tackle-too-big-to-manage-2010-04-08
In other words, this is just the way the trend is. It isn't fraud. If I don't do it, they will get rid of me and get someone who will do it.
To get stability, the public must be educated somehow. When Greenspan's FED cut the discount rate to <1% in 2002, and internet loan services were advertising home interest rates at ~1.5% to 1.75% (ARMs) when inflation rates had been 5% and marginal "middle class" tax rates were 28% to 33%, anyone could theoretically make money by buying the biggest possible house they could swing.
However, dimwitted engineers, who may understand inflation but think in terms of hardware and services going in and value coming out, may be confused enough to wonder;
"Why is this government agency trying to give away money?". "Is there a storm brewing in the distance that I cannot see? In my case, that all happened at a convenient time since we were planning to sell the big house and move to a condo for perminant retirement reasons.
Today's adults were raised in a kinder, gentler time with, too often, busy parents using the boob tube for baby sitting.
IMO, this depression isn't going to physically hurt as much as the 30's depression did because medicine and the means of delivery for food are so much better. But psychological pain for folks accustomed to instant gratification, can be great.
People are people. On and off, there has been attempted theft as long as there have been concentrations of fungible goods. Ancient history; The word "Viking" was from an old Norse phrase "to go a viking" that meant to go out in search of profit by either trade or plunder with no distinction made. The building of the Union-Pacific railroad, a great achievement in its day, is another example of extreme graft funded by the government.
It may slow things down a little but IMO, something like Glass Seagall must be brought back. Let bankers be bankers and traders be traders with a firewall between.
In the real world, if you buy goods at a retail store and they are not as represented, what do you do? Return them! And what does the merchant do? He somehow makes you whole.
Emphasize the use of misrepresentation in monitary exchange as "FRAUD". IMO, the WaMu management before a Senate subcomittee this week is one of the better shows on the tube. Tuesday's session was lead by Levin, with meaningful questions and comment by Kennedy. The committee first elicited testimony from the three top officers. then after the recess, Levin began submitting e-mails and Memos written by CEO, Kerry Killinger, and the COO, Stephen Rotella.
It certainly sounded to me like those two had perjuried themselves. Don't want to joke around with Congressional Testimony.
The sessions will resume on Friday; the question of submission to the justice department is being considered. Friday's session just might be the best show on the tube.
http://www.forbes.com/feeds/ap/2010/04/13/general-financials-us-washington-mutual-investigation_7508331.html?boxes=Homepagetopnews
One thing that doesn't get discussed much about the post WWII era was the seriousness of the War. A two front war, with countries that were prepared when we were getting prepared was no joke. It was not Korea (bad enough), it was not Vietnam, it was total war. The seriousness of mood prevailed for a few years until the baby boomers rebelled in the 60's. IMO, that seriousness of mood carried over into the economic productivity.
Let's not forget the FBI in 2004, warned of fraud in mortgages, ignored.
Someone "got to them", because they have been shockingly and conspicuously silent / absent since then.
of course they knew. I knew, the whole block of houses double their value within 3 years time. the income data and the price of the houses are completely detached. How the fuck those people don't know anything about that? it's all over the media.
they are either lying out of their asses due to the guilt and really don't want to see their ugly guilty face in the mirror, or they are just pathologic liars.
Pathological? Hell Yes. Here's the thing: if Greenscum ever admits he "knew", he'd be liable, and the Fed would be exposed as the incompetents they are. Overthrowing the Fed is as simple as overthrowing the silly notion that there is a group of people who are smart enough to make correct economic decisions for 300 million souls. Of course, there is no such group. So instead they make economic decisions that suit the banks, with whom they are quite familiar. It really is that simple.
From what I understand, GS did a 180 on their housing related portfolio back in 2006. They started treating it as overpriced. Don't tell me "no one knew". Only the most connected company on earth knew... and if they did, Washington did.
Come on people, everyone wanted to believe.
-politicians of all stripes wanted to believe that boosting home ownership rates was finally going to be the silver bullet that would build wealth for certain groups of people where all manner of urban renewal, Great Society and welfare programs had previously failed.
-Wall St. wanted to believe that through the alchemy of finance they could turn shit into shine and that even a significant market hit wouldn't penetrate through more than a couple layers (tranches) of CDO armor.
-banks wanted to believe that they were playing happy ball with Washington (look at all these mortgages we're writing! No more red-lining! 300,000 more American dreams this quarter!) and that would leave them free to play no-holds-barred who's-is-biggest with competitors.
-way too many investors wanted to believe in the government-protected oligopoly ratings agencies and the halo of FRE/FNM.
-and most of us wanted to believe that we were missing something even though: idiots were making a fortune (often without even trying) in residential real estate, semi-literate loan originators were living like movie stars and our pets were getting pre-approved loan applications in the mail (at least mine did...should have hit that!).
It took balls aplenty to bet against that tape as a professional investor (cocooned away from the maddening crowds) - as the handful of triumph stories show. Expecting politicians and political appointees to have fought that tape publicly is pretty unrealistic.
ballsaplenty.com the new website for the contrarian investor. And if it folds, you can always sell the address to the porn industry. Oh wait, is there a difference these days?
+1000000. You took the words right out of my mouth!
Nice post.
Many tried to warn Fed Chairman Greenspan of the coming housing bubble disaster. Dr. Edward M. Gramlich a Federal Reserve Governor from 1997-2005 warned the Fed Chairman directly starting in 2002 about the subprime lending problem and the coming housing bubble but was ignored. Gramlich published a book in June, 2007 entitled, “Subprime Mortgages: America’s Latest Boom and Bust.” Donald L. Kohn, member of the Board of Governors of the Federal Reserve System, gave a speech in February of 2003 pointing to an economic bubble in housing prices. Greenspan has amnesia.
Gary Shilling had also warned about it many years before. The not-so good Mr. Greenspan has amnesia spelled H-U-B-R-I-S. Thank you for your post. Perhaps we can pitch in together and buy him a clown's red nose to wear before his next speech.
"Basically, a group that is fundamentally opposed to corruption, tyranny and slavery to unelected bankers has been successfully portrayed by our media as "racist" villains who "hate the poor.""
you mean "basically, a group who hasn't thought about human rights and how they apply to them and the people around them".
Understand that they have succeeded. Criminal take-over of government is complete and irreversible. "The people" think that the Fed is on their side and are ready - gleeful - to see "rich people" taken to the woodshed.
If you want to see something truly terrifying, stop looking at charts and take a look at the comments of NEW YORK TIMES readers, in response to a story about the "Tea Party" movement in the US:
http://community.nytimes.com/comments/www.nytimes.com/2010/04/15/us/poli...
Basically, a group that is fundamentally opposed to corruption, tyranny and slavery to unelected bankers has been successfully portrayed by our media as "racist" villains who "hate the poor."
It is done. I see no way democratic rule of law can return. Not when angry mobs are cheering their own demise.
If you want a glimpse into the future, watch Mike Judges' film Idiocracy. This movie was hilarious 4 years ago. Not anymore.
The Tea Party movement would have a lot more credibility if it had begun complaining about runaway govt spending, govt surveillance, etc under the PREVIOUS President, and if it didn't insist on gathering in public places (paid for with taxes) to complain about taxes.
Oh, and complain that extra public transport wasn't put on to get them all to their event.
And shouldn't they be doing this in a govt-approved free-speech-zone away form prying media eyes?
Oh, wait...
The Tea Party movement would have a lot more credibility if it had begun complaining about runaway govt spending, govt surveillance, etc under the PREVIOUS President, and if it didn't insist on gathering in public places (paid for with taxes) to complain about taxes.
Are you yelling at us from the outside, keyboard-commando style, or are you on the inside trying to make a difference? If it's the first, get off your dead ass and do something. If it's the second, we are happy to have your help, you need to know that a lot of us WERE complaining about it, it's just that no one paid any attention to us. NONE. TARP gave birth to the Tea Party movement IMO.
MC,
According to a Rusmussen Presidential poll (and an insightful essay by Gary North), Ron Paul is in a virtual tie with Obama at 42% each. This has never happened before. And it is only 2010. As the economic situation becomes worse, the more Paul will increase his voter appeal.
I knew ignoring Greenspam and Burnbankey was a good idea. However, expecting the exact opposite of whatever was said would have been a good idea too.
Read Michael Lewis's book THE BIG SHORT if you want to know how many other investors realized there was a large bubble and made huge amounts of money shorting it.
Sure Joesixpack had housing price data. He knew that his $200,000 house was worth $750,000 now. That is why he went down and borrowed $600,000 on it, even though he would not be able to make the payments.
And the BIS (of which there were Fed members) was warning of the same thing since 2003...
Which brings us back to the $64,000 question... was this corrupt negligence or merely outrageous incompentence... either way these clowns should be thrown out...
We are currently in the part of the crisis I like to call "rewriting history to preserve your legacy" phase...
Or was it planned destruction, as Bob Chapman thinks?
Make that criminal negligence.
It was purposeful.
criminal negligence (in criminal law) is merely negligence that has a criminal sanction. Youre talking about criminal intent. (and I agree with you or at least criminal recklessness - a knowing disregard of a substantial risk). Hard to believe government regulators looked the other way....
This goes right along with the corruption theme that has been airing out over the last 18 months or so. Not to say that it has not been going on much longer than that.
One word folks...PREMEDITATED.
"Joe Sixpack didn't have access to real housing price data..."
"You watchin' that financial stuff again bigkahuna?"
"Hand me one of those beers will ya? Turn it back to the ballgame. Hey, I got my unemployment check today... wanna order a pizza?"