Four years ago, I took the unprecedented step of writing a letter to the Federal Reserve to stop pumping the bubble.

Of course, they are liars.

RRubin is the worst.

I have an idea, about the education of our young, the ivy league and the loss of our country.

Some where along the line, the Ivy league became the executive recruiting destination of choice. And that is the real problem.

Look at the pathetic resume of GW, How would this guy ever sell tires, let alone be the prez.

Dean,

I really respect you for calling the housing bubble in advance and (IIRC) the late 1990s bubble. Grateful, too---I mostly got out of the late 1990s stock market (fairly close to the top---although yes, calling the top of a bubble is well-neigh impossible).

But to what extent did you predict this particular consequence of the housing bubble---viz, the current banking crisis?

Liberal,

I didn't write out a line by line description of the banking crisis, but I did tell people that banks would fail and that Fannie and Freddie would be threatened.

The basic point is very simple. If you lose $8 trillion in housing wealth, an awful lot of mortgages are going to go bad. Banks hold many of these mortgages or securities that are directly or indirectly based on them. They assume very low default rates. When the default rates go up by a factor of 10 (likely), then they lose big time money.

I will defer to Warren Buffet's great line that when the tide goes out, we find who is swimming naked. I didn't know exactly who, but I did know that many people were swimming naked.

Rubin's comments were similar to those made by Paulson yesterday, in which he stated (slightly paraphrased) that it is almost impossible to predict these financial crises. Of course both these people have their reputations to think of, and besides this sort of prattle works, as both are still held in "high esteem" in the financial industry.

Reminds me of the Administration's comments before and after the start of the Iraq war. 'Everyone knows (or believed) that Hussein has WMD'. Well yes, everyone that the administration listened to, but of course they only listened to those who agreed with their view in the first place.

What a world!

Very well said. Rubin was at the helm when the bubble began. He thought that a sound economy could be built on confidence. Alas, having too much confidence can bring down an economy just as much as too little confidence (especially since the one leads to the other).

Is this the same Robert Rubin that was whoring for Enron not so long ago?

With regards to my above post, I thought I'd provide a link. The link is to a posting from our host from 11/2007.

http://www.prospect.org/csnc/blogs/beat_the_press_archive?month=11&year=2007&base_name=robert_rubin_and_enron

As far as I can see, absolutely no one saw the problems with CDOs etc. until it was too late. This does not excuse policy-makers, as the housing bubble should have been a clue. But when the financial system is so complicated that no one knows what is going on (speaking strictly about the credit manipulations, not the housing bubble, which Dean and others saw), it is an indication that there is something fundamentally wrong, not just bad judgement on the part of a few or many individuals.

Dear Skeptonomist,

Apparently, you need an introduction to Tanta.

Just because you didn't see the CDO problem coming doesn't mean that no one did. CR, Tanta, SoCalMtgGuy, Ben Jones, and many others saw this mess coming--not just the bubble in housing prices but the resulting failure in the securities based on the junk.

Rubin is a fool if not a scumbag. I've been writing about this for years, and there were plenty of people a lot more sophisticated than I am doing the same.

Or perhaps Rubin is such an imbecillic empiricist that he does not really understand economic laws and can only understand recorded data from the past.

Frankly, I'm not at all surprised that Rubin et al. missed the bubble. Middle class people have no real contact with the vast majority, and so don't know that a goodly number of people were getting themselves into mortgages that they weren't going to be able to pay for. Not mortgages that would require a second or third job, but mortgages that required more income than they could possibly obtain.

And when they ask why anyone would do such a thing, I suggest that they check out the landlord-tenant laws in most areas of the country. Low and moderate income tenants are precarious from month to month, and I know people who took out these mortgages just because they wouldn't be subject to the whims of some investor.

In the macroeconomic world, it's incomprehensible, but the obliviousness of the middle class is well-known to the rest of us.

Professor Martin Feldstein is another Ivy Leaguer of note in this thread. His research blamed Social Security for cutting personal savings and harming the U.S. economy. Later, fact-checkers found flaws in Feldstein’s research. Yet he stayed tight with the White House and remained a Harvard professor, "teaching" policy makers and corporate execs.

Beginning in the late '60s, hundreds of thousands of Westerners descended upon India, disciples of a cultural revolution that proclaimed that the magic and mystery missing from their lives was to be found in the East. An Indian writer who has also lived in England and the United States, Gita Mehta was ideally placed to observe the spectacle of European and American "pilgrims" interacting with their hosts. When she finally recorded her razor sharp observations in Karma Cola, the book became an instant classic for describing, in merciless detail, what happens when the traditions of an ancient and longlived society are turned into commodities and sold to those who don't understand them.

In the dazzling prose that has become her trademark, Mehta skewers the entire Spectrum of seekers: The Beatles, homeless students, Hollywood rich kids in detox, British guilt-trippers, and more. In doing so, she also reveals the devastating byproducts that the Westerners brought to the villages of rural lndia -- high anxiety and drug addiction among them.

Wow. That was a really odd computer glitch. That wasn't what I just finished typing.

My question was to Dean:

Did the various regulators, policymakers, and advisers see what was likely coming and ignore it, or continue on the policies they preferred to have for the moment and then let others in the future deal with whatever situation later arose?

This is not an empirical question, but a judgment question.

I mean, if there are never, ever, ever any personal consequence for negligence in public office, what on Earth would prevent those at the top from doing whatever the hell they wished?

Do you have a list of people that predicted this. I can think of you, Krugman, and lots of bloggers, including Tanta and CR, but what other economists predicted this? I don't doubt they exist, I'd just like a list for responding to those defense wreckless lenders and lax regulators.

"Denial in support of confidence is counterproductive" - Larry Summers

Add Peter Schiff to the list. He also called the massive decline of the USD this decade.

Okeedoke. We have a fairly good grasp now of what has happened. 1,3,5,10 years from now, where will we be?
Bread lines in Beverly Hills? Transient camps stretched across america?

Nouriel Roubini and Robert Shiller both warned of the crash.

As far as the regulators, I think they went the path of least resistance, which was to act as though everything is just fine. The few who did try to tighten regulations were beaten back by the financial and real estate industry. I doubt that anyone will lose their job as a result of their failure.

As I've said before, I think that Alan Greenspan is villain #1 in a situation where there are very many villains in both industry and government.

Oh the irony. Robert Rubin was the guy (along with Al Greenspan & Sandy Weill) who helped to finalize the 'financial modernization' (deregualtion) acts passed in 1999 with the repeal of Glass Steagall.

While then Treasury Secretary Rubin was negotiating the banking deregulation, he was also negotiating his position at newly formed Citigroup, which was created as a result of the repeal of Glass.

If/when Citi goes down, Rubin will be hiding out with Dick Cheney until after November.

Who could have known that less transparency would lead to this debacle?

Re: I mean, if there are never, ever, ever any personal consequence for negligence in public office, what on Earth would prevent those at the top from doing whatever the hell they wished?

Posted by: El Cid | March 15, 2008 1:50 PM

Consult the current administration, where negligence is rewarded and competence punished.

Robert Rubin:
26 years at Goldman Sachs
2 years in the White House
4 years as Treasury Secretary
8 years at Citigroup

Rubin received $17.3 Miliion from Citigroup in 2006 alone.

In the past 8 years Rubin has received over $150 Million in compensation from Citi.

When taxpayers finally bail Citigroup out, that $150 Million will have been money well spent.
Free markets!

Ok, so you want to assert that India has been negatively affected by many people and entities. College kids, etc. Not so the Beatles.
I recall the Maharishi, who invited the Beatles to India, visiting Harvard Law School in 1967 or 1968 and giving a talk on enlightenment. After the talk a law student asked him,
"I appreciate what you said Mr. Maharishi, but honestly, how is this going to help to end world hunger.?" "Well, " the Maharishi said, "You can be hungry happy, or hungry sad." And that was that

Jim: That blip was apparently something to do with some browser glitch which came from this thread of discussion on the Guardian, and they weren't my words but a review of a book by the Indian author Gita Mehta.

http://www.guardian.co.uk/commentisfree/2008/mar/15/india

Again, my apologies for whatever lead to it appearing on this thread instead of what I originally typed.

mjc: I personally am not surprised by the potential that powerful figures are more than willing to let our economy run into a ditch or ravine, or even to pull out the cotter pins keeping the wheels on, so that they or those they care about make more money before it all comes down. Or to simply not care if their decisions waste millions of livelihoods.

I guess I am more frustrated that the news coverage always favors the incompetent or negligent deregulators as somehow taken by surprise or doing their best or whatnot while those of us who watched their attack on the U.S. financial system roll out over the last 30 years.

And I know that that is how it always happens, but it's still frustrating, no matter how thoroughly you can anticipate it, even given the U.S. public's exposure to the administration's negligence, incompetence, or malevolence with respect to Iraq, Katrina, and nearly anything else they've applied their anti-Midas touch to.

Obviously no one was paying attention to the folks in the trenches, either. I was at a seminar on CDO modeling 2 years ago where the presenters said that CDO valuation models are incredibly sensitive to correlations, and no one really knew what correlations were right. The idea that anyone could have rated this stuff AAA boggles the proverbial mind. The people building the models certainly knew the risks.

Just fyi, Robert Rubin almost certainly did know all about this possibility, and years ago. I have that on good authority. Let's just call it a 'revealed preference'.

mort_fin: it helps when you know the answer before you formulate the question...

As they like to say on CalculatedRisk, "whocouldanode?"

I think one of the problems is that economists are uninterested in history.

I am a no-name historian at a second-tier institution and even I could see this coming. This is from an e-mail I wrote to a friend just over a year ago:

"When I was giving my lecture on the 1929 stock market crash I was very struck by the parallels with stocks then and housing today. Easy credit, lax regulations on loans, people leveraging themselves to the hilt to buy with expectations of quick profit, massive inflation of prices, people thinking prices can only go up, spillover into the rest of the economy, etc. etc. Back then it was the U.S. loaning money to Europe so they could buy cheap American exports (cars, consumer goods, and so forth); today it is China loaning money to the U.S. so it can buy cheap Chinese exports. It seems to me that right now we are in early October 1929. Question then, as now, is: What happens when the margin calls come in?"

This is not based on any sophisticated market analysis or economic knowledge -- for the simple reason that I have none. It is merely based on a sensitivity to history sadly lacking among economists and policymakers.

The thing that most made me believe we were on the cusp of disaster is the hubris I heard over and over again when I would peddle my gloom and doom views: that things were different back then and we today have such sophisticated institutions, our knowledge is so much greater than it was in the 1920s, that the rules of history no longer apply to us.

For me that was the clincher: for precisely the same thing was said over and over again in the 1920s.

FF:
Having bounced around the various academic tears for almost two decades, I think I prefer the insight of a "no-name historian... second tier institution" Why, because it always struck me that the guys with "names" at "first-tier insitutes always seem to give the kind of advice that gets us into the kinds of messes.

BTW, this has been a very interesting thread with some well thought opinions. Thank you.

FF: Several years ago, after a gap of 40 years, I returned to coin collecting (an activity perfectly suited to immature male adolescents and immature middle aged men). There is an interesting area of US numismatics called "Hard Times Tokens". These privately minted coins circulated as pennies after the collapse of 1837 and subsequent disappearance of hard money from circulation.

I have collected some of these bizarre items and they have inspired me to do a little reading about the Panic of 1837 and the resulting depression (believed by many to be the worst in US history).

Let there be no doubt - everything happening today happened then. People are saying and doing exactly what they did then. For the same reasons.

The wide circulation of these HTTokens (because of the disappearance of hard money due to hoarding) presages what is about to happen as our paper money becomes worthless.

It's gonna get vivid.

As a third rate math teacher at a second tier institution, I salute you.

I think one reason that the housing market was not subjected to conventional financial rigor was that it would deny many minorities and recent immigrants the ability to own their own home. This was so unthinkable, especially to liberal rich folk, that it was necessary to let the bubble run. Remember the incessant articles about discrimination against minorities in lending ... they are redlined.

Leodegar, are you saying that the various bloggers you name realized before the housing bubble became apparent that relaxed lending standards combined with CDO's etc. would lead to a chain-reaction collapse? I am talking about the early period in the 1991 recession when Greenspan was boosting ARM's and "creative financing" in general. It should not be considered remarkable that Greenspan would try to boost housing, as it was one way (and as it turned out the main way) in which the Fed's rate cuts would be effective.

Once a boom gets going it is generally seen as beneficial, and those in positions of responsibility cannot take action to kill it. If a few voices in the wilderness did foresee exactly what would happen (and again I am referring to the credit problems, not the housing bubble), good for them, but they would not be the ones who would take the blame for cutting off what is perceived as a beneficial boom.

We need to get away from the assumption that some "Maestro" at the head of the Federal Reserve will always be able to bail out the economy after financial markets have destroyed themselves.

Yes Mr. Hume, that's a fine observation. The brown people have done us in. And the rich liberals. Again!

If only the mortgage originators, the appraisers, the investment banks, the rating agencies, the hedge funds and the Fed could have been allowed to perform their due diligence, we wouldn't be having this problem. Their hands were tied, really.

Rich liberals & brown people are very dangerous for Free Markets!

Rob,

I think it's a question of fact not of bias.

I went to a New America Foundation about three years ago on making mortgages available to minorities. It was made quite clear by those in charge of the Federal regulation of banks that there was no Federal reason that illegal immigrants could not get a mortgage. And that those who felt otherwise, including bankers, were bigots.

But of course any banker thinking rationally would have to assume that illegals are bad credit risks.

Mr. Hume,
If you honestly believe that the housing bubble was fueled by the availability of cheap mortgages to brown people (as opposed to cheap, no doc mortgages for everyone), please show me some data.
I did a search thru New America Foundations web archives, and I didn't come up with anything that supports your 'facts'. If you've got something, show it.

I wouldn't want anyone to get the wrong impression about bigots or bias.

Time Travel, to the New York Times of 1988 (cue spooky music):

Modernizing a Bank Law
NYT Editorial. November 23, 1996.

The chief regulator of about one-third of the nation's banks announced this week that he would allow the banks under his control, on a case-by-case basis, to more easily enter securities and insurance markets. Eugene Ludwig, Comptroller of the Currency, has thereby outflanked an antiquated law passed during the financial turmoil of the Depression that serves no modern purpose.

Consumers will reap the benefit of added competition in the market for insurance and investment products. Taxpayers should also applaud. By permitting banks to diversify investments out of local real estate, Mr. Ludwig has made it all the more unlikely that a regional downturn will trigger big bank failures like those that struck the savings and loan industry in the 1980's, forcing taxpayers to put up hundreds of billions to bail out depositors.

The outmoded Glass-Steagall Act of 1933 separated the securities and banking industries. At the time, some in Congress presumed that the wave of bank failures at the dawn of the Depression had been triggered in part by speculative investments that banks made in stocks and other securities. As Prof. George Benston of Emory University has convincingly shown, the presumption was wrong. Few banks that owned stocks failed. But myths die hard, and besides, after 60 years, the securities and insurance industries have built up a huge interest in preserving Glass-Steagall.

Mr. Ludwig has exploited a statutory loophole to approve the new banking activities. That is not an ideal way to correct the nation's banking laws. But he has proceeded with exemplary caution. Banks would be required to set up separately funded subsidiaries, providing solid protection against a financially plagued subsidiary going after the parent bank's insured deposits...

http://tinyurl.com/3yuf7n

Make that 1996. And I meant to add that although it wasn't directly connected, it's the same attitude.

The final nail was put into the coffin of Glass Steagall in 1999, but it had been under steady pressure from Wall St. for 30 years. You weren't far off in your '88 call though:

"In the spring of 1987, the Federal Reserve Board votes 3-2 in favor of easing regulations under Glass-Steagall Act, overriding the opposition of Chairman Paul Volcker. The vote comes after the Fed Board hears proposals from Citicorp, J.P. Morgan and Bankers Trust advocating the loosening of Glass-Steagall restrictions to allow banks to handle several underwriting businesses, including commercial paper, municipal revenue bonds, and mortgage-backed securities. Thomas Theobald, then vice chairman of Citicorp, argues that three "outside checks" on corporate misbehavior had emerged since 1933: "a very effective" SEC; knowledgeable investors, and "very sophisticated" rating agencies.

Volcker is unconvinced, and expresses his fear that lenders will recklessly lower loan standards in pursuit of lucrative securities offerings and market bad loans to the public. For many critics, it boiled down to the issue of two different cultures - a culture of risk which was the securities business, and a culture of protection of deposits which was the culture of banking.

http://www.pbs.org/wgbh/pages/frontline/shows/wallstreet/weill/demise.html

Someone should really ask Rubin what he thinks of the other elephant in the room.
http://acropolisreview.com/2008/03/three-trillion-dollar-iraq-war-stiglitz.html

Rob,

I don't believe that the total cost of mortgages to illegals created the bubble. I believe that reducing standards to illegals and minorities made it necessary to lower the standards for everyone, which lead to these excesses.

I'll go back through my computer files to see if I can come up with the New America Foundation reference. "Mortgages for Illegals" was not, of course, the title of the lecture.

Rob,

I couldn't find a trace to the meeting I went to several years ago ... but here, even in 2007 are clear traces of what I am talking about, ... on the newamerica website:

http://www.newamerica.net/publications/articles/2007/outside_the_sub_prime_loan_box_5025

As I say, this was being pushed years ago by US Federal Bank regulators.

"Imagine you’re a mortgage lender, and somebody comes to you with a marginal credit record, work experience that includes as many employers as Liz Taylor has had husbands and no Social Security number. Would you hand him a bunch of money to buy a house?

I’m guessing that you wouldn’t, especially not this week, what with the ongoing meltdown among sub-prime lenders -- those that specialize in making loans to people with shaky credit or erratic incomes.

But Leo Simpser well might. He’s managing director of the Hispanic National Mortgage Assn. in San Diego.

...

the company’s aim is to provide home loans -- at rates much closer to prime than sub-prime -- to a range of immigrants and others historically locked out of the market.

There’s "a huge business opportunity" in lending to folks who "fall out of the typical box," Simpser says. What HNMA has done is create "a new box that fits these borrowers."

HNMA isn’t alone in trying to get beyond a standard credit score to evaluate people’s ability to pay their mortgage on time. According to some estimates, more than 50 million consumers don’t even have a score because their credit files, as compiled primarily by three big data-collection companies, are short on information or altogether nonexistent.

In such cases, mortgage giant Fannie Mae has issued guidelines that call for examining how faithfully a person has paid the rent and the phone bill over the previous 12 months. And Fair Isaac Corp., whose credit scores are used by most mortgage lenders, and other outfits have been experimenting with alternative ratings derived from a would-be homeowner’s checking and savings accounts, utility payments and other factors.

A number of community banks, meanwhile, have also begun to master the nuances of lending to those without long credit histories. They’ve learned to treat non-cash income (such as government meal vouchers) as a positive and to not necessarily consider a peripatetic employment pattern as a negative. They see regular payments sent to family members in Mexico or Central America as a sign of financial stability. And they appreciate that it may take multiple members of a household to meet a loan obligation.

While using similar criteria, HNMA claims to have gone even further: The company says it has devised an unorthodox mortgage underwriting system that’s more comprehensive and culturally sensitive than anything out there -- and, in an important leap, to have automated the whole shebang. Its goal is to give financial institutions an efficient way to turn out a high volume of good, solid loans to non-traditional borrowers.

Just how effective all this is remains to be seen. HNMA has been in the market for only about six months, backing roughly $200 million in mortgages for 1,650 customers thus far.

But the company is advised by an impressive group, including former federal Housing and Urban Development secretaries Henry Cisneros and Jack Kemp. And it has established joint ventures with Deutsche Bank and Wells Fargo & Co.

Mr. Hume,
If you actually do believe this:

"I believe that reducing standards to illegals and minorities made it necessary to lower the standards for everyone, which lead to these excesses.......
there isn't too much that I can tell you.
The scale of this credit bubble is so much bigger than anything we've ever seen, that to somehow lay it at the feet of illegals/minorities is laughable.
As I mentioned upthread, the mortgage originators, appraisers, rating agencies, investment banks and hedge funds were all taking their piece. The housing bubble extended from coast to coast in rich areas and poor areas. Bear Stearns just cratered. Lehman, Morgan Stanley and Citi are right behind them as trillions of dollars of leveraged debt unwinds, and you point to a program that lowered borrowing requirements for brown people as the culprit?
Save it. And I'm being polite

Yeah, instead of blaming bankers and investors, let's blame teenage immigrant welfare mothers on drugs. Those are the people who control our economy.

While the racism of Robert Hume's claim is contemptible, he really does have a valid point (if you strip out the racist part).

Not that I think this is the most important part---IMHO the most important parts were (1) the unwillingness of Greenspan et al. to countenance regulation of the derivatives market, (2) general worship of the "free market," leading to things like repeal of Glass-Steagel, (3) incentives in the mortgage and housing markets (for mortgage brokers and realtors) that invite what is essentially fraud. (In particular, why in the world should mortgage brokers not have a fiduciary responsibility to avoid putting someone into a loan they can't repay, let alone a loan which is not appropriate for them?)

But...

I think Congressional support for Fannie and Freddie is still a negative factor in all this, if not the most important one. Prominent Democrats, including liberals like Barney Frank, are big supporters of the GSEs.

Why?

AFAICT, there are basically two possibilities. One is the usual, cynical one: like many politicians on many issues, they're on the take (if indirectly) from the GSEs.

The other is that their fondness for the GSEs is the consequence of a naive desire to push home ownership as widely as possible. (I say "naive," because it seems likely to me that such a push is just going to drive up land values, and thus not benefit the intended beneficiaries at all, but rather current landowners.)

Oh, and Robert Rubin---wasn't he a big proponent of a "strong dollar" policy in the 1990s? Yeah, that was exactly what the American economy needed. After all, manufacturing is oh-so 19th century.

I have also warned of a crash for a long time, starting on maxspeak. But then I am not as well known as Roubini, Shiller, or Baker. Oh well.

Let me make the point again. We have not had a housing bubble since 1890 until 2005, according to Robert Schiller.

Why not? Certainly there were plenty of greedy people, including in 1929.

But no one thought it important to allow folks with no income and no capital to buy a home.

Why now? Because it was now politically correct.

Once those with no income and no capital could buy a home, the way was open for all, including rich whites to speculate with with their own home. Professionals took advantage to take transaction profits.

We have the results before us.

I think there is a very plausible case. As to evidence; the bubble is peaked where immigration is a maximum; LA, NY, Las Vegas. It is at a minimum where immigration and minorities are a minimum ... North Dakota. A county by county analysis by economists would seem to be in order.

Agroup of people who saw the bubble coming are called 'Short Sellers'. If you are not in the circle of GS cronies you're an outcast and heretic and therefore they do not count your opinion. Bob Rubin's opinion that nobody saw it coming, applies only to his ignorant cronies.