Comments on: My best and worst calls of 2008: a credit crisis retrospective http://www.creditwritedowns.com/2008/12/my-best-and-worst-calls-of-2008-a-credit-crisis-retrospective.html a finance news and opinion site Sat, 20 Mar 2010 23:59:54 +0000 hourly 1 By: smoodyhttp://www.creditwritedowns.com/2008/12/my-best-and-worst-calls-of-2008-a-credit-crisis-retrospective.html#comment-2228 smoody Sun, 04 Jan 2009 07:16:50 +0000 http://www.creditwritedowns.com/?p=3075#comment-2228 Ed, please post Davidson's stuff. No one else is actively pursuing this argument. Ed, please post Davidson's stuff. No one else is actively pursuing this argument.

]]> By: Edward Harrisonhttp://www.creditwritedowns.com/2008/12/my-best-and-worst-calls-of-2008-a-credit-crisis-retrospective.html#comment-2196 Edward Harrison Sun, 04 Jan 2009 04:43:04 +0000 http://www.creditwritedowns.com/?p=3075#comment-2196 smoody, a smart guy by the name of Davidson, who is a professor of Economics at the New School has some good stuff on how to reform the so-called Bretton Woods II system that I need to post. The long-and-short of what he says is that you are correct, this is a systemic crisis and we need to reform the entire system. The post-1971 world is one where there are no checks and balances and this leads to excess and eventually crisis. We have seen this tme and again in a way that we never saw pre-1971. In my view, it is the lack of a currency anchor like gold that makes the system of fiat currencies rotten to the core and is the ultimate 'reason' for excess. So, I agree 00% that this goes beyond the Fed, in part because capital controls don't exist and this means someone's excess doesn't necessarily lead to a bubble only in their economy. Often times, excess spills out to other economies without inflating the domestic economy (Japan is a perfect example). If we had a check on this as we did pre-1971, things would never have developed the extreme that they did. smoody, a smart guy by the name of Davidson, who is a professor of Economics at the New School has some good stuff on how to reform the so-called Bretton Woods II system that I need to post. The long-and-short of what he says is that you are correct, this is a systemic crisis and we need to reform the entire system.

The post-1971 world is one where there are no checks and balances and this leads to excess and eventually crisis. We have seen this tme and again in a way that we never saw pre-1971. In my view, it is the lack of a currency anchor like gold that makes the system of fiat currencies rotten to the core and is the ultimate 'reason' for excess.

So, I agree 00% that this goes beyond the Fed, in part because capital controls don't exist and this means someone's excess doesn't necessarily lead to a bubble only in their economy. Often times, excess spills out to other economies without inflating the domestic economy (Japan is a perfect example). If we had a check on this as we did pre-1971, things would never have developed the extreme that they did.

]]> By: smoodyhttp://www.creditwritedowns.com/2008/12/my-best-and-worst-calls-of-2008-a-credit-crisis-retrospective.html#comment-2101 smoody Sat, 03 Jan 2009 03:16:39 +0000 http://www.creditwritedowns.com/?p=3075#comment-2101 Happy New Year! No argument. The Fed clearly aided and abetted development of the US Housing Bubble. Had the Fed's policy succeeded in 2004, there still would have been a bubble, though prices probably wouldn't have gone as high and the worst vintages of subprime and Alt-A mortgages might not have been written. But the current crisis goes beyond the US Housing Bubble. It's global. It's a globalization crisis because, globalized, the world economy is too big for the Fed to manage. This is a systemic crisis, not unlike the collapse of the Bretton Woods system in '71. The system doesn't work if foreign central banks can't buy Treasuries without disrupting the Fed's conduct of monetary policy. In 2004, FCB purchases of US Treasuries defeated Fed policy; globalization of liquidity pulled the plug on the Fed. Scary picture, don't think? The world's largest economy unable to conduct monetary policy. Actually, the worlds's two largest economies--the US and Japan--were without effective monetary policy from 2004 until October 2008. No wonder the world's financial markets ran amok. Happy New Year!
No argument. The Fed clearly aided and abetted development of the US Housing Bubble. Had the Fed's policy succeeded in 2004, there still would have been a bubble, though prices probably wouldn't have gone as high and the
worst vintages of subprime and Alt-A mortgages might not have been written. But the current crisis goes beyond the US Housing Bubble. It's global. It's a globalization crisis because, globalized, the world economy is too big for the Fed to manage. This is a systemic crisis, not unlike the collapse of the Bretton Woods system in '71. The system doesn't work if foreign central banks can't buy Treasuries without disrupting the Fed's conduct of monetary policy. In 2004, FCB purchases of US Treasuries defeated Fed policy; globalization of liquidity pulled the plug on the Fed.
Scary picture, don't think? The world's largest economy unable to conduct monetary policy. Actually, the worlds's two largest economies–the US and Japan–were without effective monetary policy from 2004 until October 2008. No wonder the world's financial markets ran amok.

]]> By: Edward Harrisonhttp://www.creditwritedowns.com/2008/12/my-best-and-worst-calls-of-2008-a-credit-crisis-retrospective.html#comment-2040 Edward Harrison Fri, 02 Jan 2009 06:15:32 +0000 http://www.creditwritedowns.com/?p=3075#comment-2040 Happy New Year, smoody. The Fed would agree with your argument, especially Alan Greenspan. However, I would say that the bubble took form while Greenspan was lowering rates. To my mind, this is a repeat of the Internet bubble policy action. If you recall, Greenspan made "Irrational Exuberance" speech in 1996, yet he lowered rates in 1998 after the LTCM blow-up and flooded the market with liquidity in 1999. These actions only increased the magnitude of the bubble. Fast forward to 2001 and it was much the same with Greenspan lowering rates even though house price appreciation had already outstripped inflation by a large amount over the preceding 6 years. You can see <a href="http://www.cepr.net/index.php/publications/reports/the-run-up-in-home-prices-is-it-real-or-is-it-another-bubble/" target="_blank">some Dean Baker analyses from 2002</a> for that. It was obvious that a bubble was building as far back as 2000-2001. My problem with Greenspan was that he lowered rates even in the face of this growing evidence. Your 2004 time frame came after it was too late and the bubble had already formed. Happy New Year, smoody. The Fed would agree with your argument, especially Alan Greenspan. However, I would say that the bubble took form while Greenspan was lowering rates. To my mind, this is a repeat of the Internet bubble policy action. If you recall, Greenspan made "Irrational Exuberance" speech in 1996, yet he lowered rates in 1998 after the LTCM blow-up and flooded the market with liquidity in 1999. These actions only increased the magnitude of the bubble.

Fast forward to 2001 and it was much the same with Greenspan lowering rates even though house price appreciation had already outstripped inflation by a large amount over the preceding 6 years. You can see some Dean Baker analyses from 2002 for that. It was obvious that a bubble was building as far back as 2000-2001. My problem with Greenspan was that he lowered rates even in the face of this growing evidence.

Your 2004 time frame came after it was too late and the bubble had already formed.

]]> By: smoodyhttp://www.creditwritedowns.com/2008/12/my-best-and-worst-calls-of-2008-a-credit-crisis-retrospective.html#comment-1981 smoody Thu, 01 Jan 2009 03:54:14 +0000 http://www.creditwritedowns.com/?p=3075#comment-1981 ". . .the Federal Reserve was a bubble blowing, easy money central bank. . ." The Fed actually began raising rates in 2004 in part, presumably, to deflate the housing bubble. Short rates rose some 400 basis points, but long rates drifted lower. Greenspan dilemma, remember? In a paper in Feb 2005, Brad Setser and Nouriel Roubini pointed out that foreign central banks (primarily China, of course) began buying long-dated Treasuries as early as 2003. Overall, between 2000 and 2007, foreign central bank reserves grew by some USD 4.4 trillion while US Treasury debt increased only 1.5 trillion. In his book, Greenspan says the Fed's 2004 monetary policy was defeated by "global forces," which I suppose translates to Chinese central bank purchases of Treasuries overall and long-dated Treasuries in particular. So I suggest that the cause of the current crisis is the defeat (or failure) of Federal Reserve monetary policy from 2004 on. ". . .the Federal Reserve was a bubble blowing, easy money central bank. . ."
The Fed actually began raising rates in 2004 in part, presumably, to deflate the housing bubble. Short rates rose some 400 basis points, but long rates drifted lower. Greenspan dilemma, remember?
In a paper in Feb 2005, Brad Setser and Nouriel Roubini pointed out that foreign central banks (primarily China, of course) began buying long-dated Treasuries as early as 2003. Overall, between 2000 and 2007, foreign central bank reserves grew by some USD 4.4 trillion while US Treasury debt increased only 1.5 trillion. In his book, Greenspan says the Fed's 2004 monetary policy was defeated by "global forces," which I suppose translates to Chinese central bank purchases of Treasuries overall and long-dated Treasuries in particular. So I suggest that the cause of the current crisis is the defeat (or failure) of Federal Reserve monetary policy from 2004 on.

]]> By: Edward Harrisonhttp://www.creditwritedowns.com/2008/12/my-best-and-worst-calls-of-2008-a-credit-crisis-retrospective.html#comment-1827 Edward Harrison Tue, 30 Dec 2008 02:25:54 +0000 http://www.creditwritedowns.com/?p=3075#comment-1827 Glen, many of us are suspicious about the reform bona fides of Obama's economic team. Geithner at Treasury is very much involved in the Lehman debacle I just wrote about. Summers was originally a Reagan administration operative whose historical perspective was not exactly pro-New Deal. These men will need to show that they want true change. Right now, it is looking like more of the same with a Democratic varnish on it. I am still hopeful. Glen, many of us are suspicious about the reform bona fides of Obama's economic team. Geithner at Treasury is very much involved in the Lehman debacle I just wrote about. Summers was originally a Reagan administration operative whose historical perspective was not exactly pro-New Deal. These men will need to show that they want true change. Right now, it is looking like more of the same with a Democratic varnish on it. I am still hopeful.

]]> By: Glenhttp://www.creditwritedowns.com/2008/12/my-best-and-worst-calls-of-2008-a-credit-crisis-retrospective.html#comment-1810 Glen Tue, 30 Dec 2008 02:19:36 +0000 http://www.creditwritedowns.com/?p=3075#comment-1810 Some good calls here. The biggest challenge going forward is reform but those in charge are the ones who have benefited the most in the past so real reform is not likely and will be opaque at best. It's intersting that on other sites, bloggers have argued that regulations should be lifted! Hell, if this is the mess they can do while regulated, imagine what could be done when no one is watching! Unfortunately I don't believe that the next president will make much of a difference. $750 b and 3 million new jobs - that's $250k per job, not really economical is it. I honestly don't think that there is anyone in any position of authority who has the ability or independence to tackle what needs to be done. There's just too much money and too many recalcitrant people in powerful positions to make the right decisions - one just has to look at BB, HP and their links to Wall Street. While Rome burns, Nero sits on the roof. My predictions for 09; much bumbling by politicians and central bankers will only exacerbate any recovery while China will come clean by mid year about it's true state of affairs and it won't be pretty. Recovery for end 09 - forget it. Try 2011. Some good calls here. The biggest challenge going forward is reform but those in charge are the ones who have benefited the most in the past so real reform is not likely and will be opaque at best. It's intersting that on other sites, bloggers have argued that regulations should be lifted! Hell, if this is the mess they can do while regulated, imagine what could be done when no one is watching! Unfortunately I don't believe that the next president will make much of a difference. $750 b and 3 million new jobs – that's $250k per job, not really economical is it. I honestly don't think that there is anyone in any position of authority who has the ability or independence to tackle what needs to be done. There's just too much money and too many recalcitrant people in powerful positions to make the right decisions – one just has to look at BB, HP and their links to Wall Street. While Rome burns, Nero sits on the roof. My predictions for 09; much bumbling by politicians and central bankers will only exacerbate any recovery while China will come clean by mid year about it's true state of affairs and it won't be pretty. Recovery for end 09 – forget it. Try 2011.

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