The New Bezzle
John Kenneth Galbraith gave us the term “the bezzle” in his 1955 book The Great Crash, 1929. Galbraith saw that there was often a long time between a financial crime and its discovery. In the interim holders of the financial asset involved in the crime experiences “psychic wealth”, because they are unaware of the actual losses. Eventually, something changes, and they find out. The Bernie Madoff case is a good example. Until he was exposed after the Great Crash, his loser investors thought they had $57 billion in their accounts. Turns out they had net recoveries of about $10 billion on the $17 billion they invested. That puts the bezzle at $47 billion.
Here’s another example. In the Antebellum South, there were nearly 4 million slaves with a value estimated at between $3.1 and $3.6 billion. After the war, that value went to zero. What was the net worth of the slavers in the late 1850s? They thought they were rich enough to battle the Union on equal terms, but the value of slaves wasn’t nearly equal to the value of the steel mills and industry of the northern states.
The problem of identifying the value of capital interests is very difficult. In Capital in the Twenty-First Century Piketty acknowledges the problem, and selects a solution appropriate to his purposes: the market valuations of the many forms capital can take. Here’s an excellent essay discussing this choice and its critics. By using this definition, Piketty simply ignores the problem of the bezzle, which makes sense in the terms of his project. Using Galbraith’s definition I suspect it wouldn’t make make a difference.
But I think the term leads us to a broader definition. The Great Crash provides a good example of what that new definition should be. The current estimate is that the Great Crash resulted in the loss of nearly 30% of household net worth between 2007 and 2010. The average household lost nearly $50 thousand in net worth between 2007 and 2010 according to the GAO report. Page 27 in the .pdf. By 2013, when markets were functioning — let’s say normally — the GAO estimated total household paper wealth losses at $9.1 trillion. Report here.
A large part of this paper loss was the decline in financial assets which affected people directly and through their pensions and retirement plans. Another large part was the result of lower house prices, which left many people with mortgage debt higher than the new prices. Here’s a priceless sentence from the report:
Economists we spoke with noted that precrisis asset prices may have reflected unsustainably high (or “bubble”) valuations and it may not be appropriate to consider the full amount of the overall decline in net worth as a loss associated with the crisis.
I bet the millions of people who lost that money don’t really care what economists think now, because none of the economists who could have made this stick before the Great Crash said this when it would have mattered. Far from it: the economics tribe insisted that markets were all-knowing and perfect in their understanding, and spent their days explaining why this time was different.
This superficial description shows that these households are in the same position as Madoff investors and Southern slavers: they thought they had something they didn’t, and they changed their behavior based on it.
I can just hear Paul Krugman explaining that bubbles and bezzles are really hard to model, and that’s why no one studies them. That’s probably true. Also, so what? Here’s my clever idea: look for data and see what it tells us. It worked for Piketty, who found that the historical record showed that inequality increases when r > g. Piketty and Saez, and Gabriel Zucman who did the estimate on tax shelters, didn’t have a model. They did have dusty records and big computer skills, just like all their contemporaries.
I hope that somewhere in academia there are young economists who look at Piketty, Saez and Zucman and their colleagues and say “I could do that”. And it’s just not that hard. Here are some hints.
1. There’s a big pile of student loan debt that isn’t going to be repaid. How much of that is on the books of the US Treasury, and how much is private sector? How much in the latter category is delinquent? Who holds it and in what form? If it’s in trusts, there isn’t going to be any enforcement, and the losses will fall on the owners of the securities. If it’s in the hands of originators, what happens to their balance sheets as this stuff cascades into default?
2. Every month we see another big business crash and burn. Often they fail because they are held by private equity investment firms. The crashes mean that a lot of debt isn’t going to be repaid. How big is that likely to be, and who’s going to eat that loss?
3. For the past 8 years or so, investors have been chasing yield. There’s some Galbraith bezzle in this stuff. How much dreck is sitting in their portfolios?
4. What does the rest of the mortgage overhang and related RMBS look like?
5. How much money is there in organized crime? A big part of the profits filters into the economy in the form of some kind of investment. How much of it is in the stock market? What happens when or if that ever gets traced and seized?
6. In the same way, how much have oligarchs and politicians stolen from other nations and moved into world financial markets? What happens if we got serious about that?
7. Another form of points 5 and 6: Rich people have stashed as much as $32 trillion in overseas tax shelters. If people got serious about this, their governments could seize this money and/or impose huge taxes on it. Say half of it, $16 trillion, got sucked up by taxation and seizure, and was removed from the financial markets and banks where it sits. What would happen then?
So, economists, just how big is the bezzle?
You say about the reported losses in the market drop of the crisis “I bet the millions of people who lost that money….”
As you sort of say throughout however, they didn’t lose money. Their stocks lost ‘value’ from their marked to market ‘value’ at the peak of the market. (sorry for all the ironic quote marks but the layers and layers of unthinking assumptions on this stuff needs thinking about) What is needed is a proper definition of money. So for all possible practical purposes money is
Coins and currency
demand deposits in banks.
Everything else can be exchanged for money and so has a ‘value’ that can be calculated by the current transaction price of similar things. When it comes to financial assets, the topic here, which now can usually be sold in an instant, that ability to be able to convert them to money, a bank deposit (so to speak as in a brokerage account) gives them what I call (HT Doug Noland) moneyness. The instant convertibility , usually, of a stock into a bank deposit gives the illusion that stocks are money. As long as they are trading easily and actively, the market is liquid, they have the properties of money. ie. moneyness.
(I was going to point to the Wiki article on Money Supply but it contains the huge and common mistake of the ‘money multiplier’ theory of how money is created in it’s M1 discussion.) Instead I will point here, to the Bank of England
https://www.youtube.com/watch?v=ziTE32hiWdk
https://www.youtube.com/watch?v=CvRAqR2pAgw
Anyway back to the point. Assets, financial or real, are not money. The more easily they are sold for money is the degree to which they have the property of money which I call Moneyness. Stock prices can crash, to zero. Stock markets can close. Banks can close for that matter but no need to go there now.
Perhaps go watch or rewatch The Big Short. All those CDO’s and CDO’s squared had the quality of moneyness, till they didn’t.
I hope I don’t sound like a condescending jerk here, even if I am one.
What you are describing was eloquently described (and subsequently forgotten by modern economists) in 1926- One of the greatest books on “wealth” ever written:
Fredderick Soddy, Wealth, Virtual Wealth, and Debt- the Solution of the Economic Paradox.
Huge shout out for posting the BoE videos. It’s pretty crazy how we have one of the most credible banking institutions in the world plainly describing how the modern money system works, and yet most Econ 101 descriptions plainly describe money and money creation in ways that are patently false.
One of the facts of the economics of slavery that doesn’t get enough discussion is that slave owners knew that the selling prices of the people they owned were artificial. They knew that the market would crash the instant that the government stopped the expansion of slave markets by not opening more areas to slavery. The assumption of increasing future demand was baked into prices, far exceeding any value a captive person could add to a plantation or farm.
Which meant that slave owners were willing to go to every extreme to prop up laws which expanded slavery in order to perpetuate the notion of future demand. And you will see a nasty parallel to laws in areas such as debt collection and student loans – owners are desperate to fight laws which will trigger an explicit understanding that values are artificial. Owners know that the full value will never be collected, but it is essential for them to ensure that new laws never make reality explicit.
That explains a world where customers fighting corporations have to go through endless hoops, and the craziness of mortgage settlements post 2008. Corporations prefer a world where they pay 3% of their income to collect an additional 2% of revenue from debtors, instead of just writing it off. They need to prop up the illusion of worth, and will go to abusive extremes to maintain it.
https://www.telegraph.co.uk/finance/newsbysector/banksandfinance/11427501/Barings-the-collapse-that-erased-232-years-of-history.html
The story of Barings, which was Britain’s oldest merchant bank, is a classic example of how hubris, weak oversight, and a lack of internal checks and balances can bring a company down. In just a few weeks, the Singapore-based trader Nick Leeson racked up hundreds of millions of pounds in losses, disguised them as profits, and fled authorities.
The venerable institution fell into administration just days after management discovered the full scale of the losses, and was sold to the Dutch bank ING for just £1. In the aftermath of the collapse, the Bank of England was roundly criticised, and later stripped of certain powers to create the new Financial Services Authority, whose lack of oversight many believe amplified the effects of the 2008 financial crisis.
…
Barings was founded on Christmas Day 1762 by John, Francis and Charles Baring, the sons of John Baring, a German wool trader who had arrived in Britain some 45 years earlier. It began life as a merchant house, but soon developed into financing other merchants, becoming a fully-fledged bank. It was its role in Britain’s war efforts, first against the American revolution and then Napoleon’s France, that really made its name, however.
In 1803, the bank financed the Louisiana Purchase, America’s $15m acquisition of land from France that doubled the size of the USA. Three years later it moved to the Bishopsgate office, where it remained until its collapse.
As capitalism swept across Britain, Barings moved from a merchant bank to commercial activities. In 1886, it floated the Guinness brewery, and after a Bank of England-led rescue of the bank in 1890, following Barings’ near collapse when Argentina appeared close to defaulting on its debt, its commercial arm expanded.
…
Things came to a head, however, on January 17, 1995. The devastating Kobe earthquake caused $100bn in damage, or 2.5pc of Japan’s GDP, and shook its bond and stock markets.
…
Ernst & Young were brought in as administrators on Sunday February 26. [1995]
“Those who cannot remember the past are condemned to repeat it.”
(Dodd-Frank *cough* reform *cough*)
https://www.google.com/amp/s/www.marketwatch.com/amp/story/guid/BE7C1680-27DB-11E8-B849-1F206CEB17F4?espv=1
The “small bank” deregulation in this bill includes provisions to make it easier for sub-$10 billion banks to do deals with hedge funds that use the banks’ own capital.
[What it will do at minimum is allow smaller banks to be squeezed out by bigger players]
We need a reinstatement of the the Glass-Steagall Act to separate commercial banking from investment banking.
Just Google “The Graham-Leach-Bliley Act” and you will see that even Liberal commentary will refuse to admit that this legislation caused the 2008 housing crisis.
Of, course it did. It allowed all mortgages held in local community banks to be sold off and split up into the monster that was “Mortgage Backed Securities.” This was because this huge pool of money that represented American home ownership was allowed to be sucked into the Wall St. stock market and gambled with.
Today, we are in no safer a position than 2008. Another housing bubble/crash is inevitable (unless Elizabeth Warren is elected president).
Thinking about slavery and the value of human lives reminded me of yesterday’s brilliant PR move by the Parkland Kids – each one with a tag carrying their “price” to Rubio (via the $$$ he takes from the NRA). The price was $1.05 per kid! (Based on the # of students in Fla schools and the $30 million NRA “bribes” to Rubio)
Those “price tags” will likely be copied and put to other uses. I can see this in terms of how much each of us owes – so the wealthy and corporations get unnecessary tax breaks. Or the “price” of tariffs on consumers of goods containing steel and aluminum. The price for each us – rising all the time – to pay for Trump vacations (and his profits therefrom!).
Those indebted for education have price tags on them. Those whose houses became underwater. Senior citizens have prices for Medicare and Social Security that the GOP doesn’t want to pay. The homeless are paying high prices to live outdoors, because Subsidized housing is too high a price for the GOP legislators.
I hope I’m not too offbase here from the post. But clever ways of making these prices known are easier for the rubes to get – and might even work!
Marco Rubio abundantly deserves the criticism. He is arguing that it is more important that civilian access to guns remains unrestricted than it is to reduce the number of children murdered and maimed by those guns.
Rubio is parroting a standard NRA-gun manufacturers’ talking point. But he deserves to lose his public employment in Congress just the same. His is a priority that no sane parent, neighbor, teacher, professional, citizen or politician should support.
And let’s not forget his negligence of his 4 children! Worth $1.05 each!
He should resign from the Senate!
Also, how much is he taking from his wealthy “godfather” – for his godforsaken policies?
Can you name any restriction of rights that wasn’t predicated on “But The Children”?
Yes, troll, almost none of them have been. Take, for instance the slippery slope the 4th Amendment fell down. That was predicated on the war on drugs, not children. But thanks for your standard trollery.
I can remember the “save the children” line from the right. It’s usually trotted out as an excuse to impose internet censorship and surveillance – beware the paedophile. Not that sexual predation online is anything to sneeze at, but the proposed cure was sometimes unrelated to the nominal problem, and it was always worse than the problem.
It’s also a standard attack line. When a political opponent becomes too powerful, accuse them of drugs or sex with kids. If that doesn’t work, paid sex. Whether true or relevant, nobody listens to them after that.
I can’t remember too many save the children lines the right liked when used against them. They didn’t much like LBJ’s 1964 Daisy Girl advert. Aired once, never forgotten. A little hypocritical from the guy who bombed SE Asia back to the Stone Age. But compared to the hard right backing Goldwater, which thought Curtis LeMay a little restrained (like Bolton and Pompeo), a fair trade off.
Two other attributes of slavery contributed significantly to the perceived wealth of southern aristocrats, apart from slaves themselves. One was the crops they raised, such as cotton, which had significant value. (Its cultivation also produced negative value through its depletion of arable land.) The other was that the availability of slave labor and the value of crops it could produce significantly elevated land values.
All three declined in value when slave labor was no longer available. One of the motivations for the negotiated end to Reconstruction was to recover that value. Northern elites looked the other way as slavery in fact was reinstituted via the criminal law and Jim Crow policies.
The forced labor of convicted criminals was available to the state for little or no compensation. The law simply defined it as “not slavery”. Differential enforcement of criminal laws quickly followed Reconstruction. African Americans were incarcerated at much higher rates than whites, which created the necessary low-cost labor force. States leased that labor for a pittance to southern land owners. Under Jim Crow, any African American who objected was likely to find themselves providing that convict labor, or swinging from a tree.
Another of Jim Crow’s intended outcomes – apart from restoring the South’s ante-bellum social arrangements and its low-cost labor force – was to restrict African Americans’ newly acquired voting and other civil rights. Righting that wrong took a lot of social organization, a lot of lives, and well over another hundred years. Attempts to limit it continue.
Well, prior to the collapse they decided to reassign some of the Office of the Comptroller of the Currency (OCC) to an independent arm of the unelected Federal Reserve system. That was the CFPB. It’s mandate is:
The primary functions of the CFPB are to: (1) conduct financial education programs; (2) collect, investigate, and respond to consumer complaints; (3) collect, research, monitor, and publish “information relevant to the functioning of markets for consumer financial products and services to identify risks to consumers and the proper functioning of such markets”; (4) supervise “covered persons for compliance with Federal consumer financial law” and take “appropriate enforcement action to address violations of Federal consumer financial law”; (5) issue rules, orders, and guidance “implementing Federal consumer financial law”; and (6) perform “such support activities as may be necessary or useful to facilitate the other functions of the Bureau.”[6]
My experience with it is far less than ideal. It seems another way for the rich as represented by the Fed to snag more wealth from the bottom 90%.
I had paid my home and auto insurance premium in September of 2008 but the insurance company which shall remain nameless but rhymes with Mall Steak, sent my premium through twice. I had checking with WaMu then, and my mortgage with Chase. I did not know the double charge had happened, one was authorized and the other unauthorized, it was a clerical error by the insurance company. I had left to go camping after paying my bill. I returned to find that my bank was closed, you could not even access your online bankster. There was a notice at the website saying SORRY FOR THE INCONVENIENCE we will return in a few days as CHASE!
I had no reason to suspect my account was overdrawn, but when they reopened I was minus nearly $1,000. I went ballistic of course, went to my branch and tried to get this fixed with my money replaced, all of the arrears were in Chase fees and fees upon fees and god knows what since I had never even been a Chase customer and would not have been had I any choice in the matter. The normally friendly WaMu people who knew me by name now would not even talk to me. Chase was going to cut many positions and replace many others with Chase employees. Nobody wanted to be “that guy” who gave bank funds back to a customer even when the customer was screwed.
The bank could see it was an error, one payment was an ACH, and the very same moment another identical payment sent through by the insurance company as an EFT. And an error that was not my doing.
So, I told them that they hold my mortgage and they will do right by me or they will never get another house payment. They got my house.
I had complained to the OCC but never got an answer. A couple years went by and I looked into it, I was told that I had to refer to the CFPB, they never heard of me. I refiled my complaint with them, and their idea of investigating a consumer complaint was to refer it back to Chase to investigate itself, and of course they found no wrongdoing on their part which would justify a refund.
I lost everything, it took years to reestablish credit. So, if you ever find yourself in such a position I recommend meditation to get over the anger because NOBODY in government is going to help you unless you have the financial ability to spend $250 per billable hour for the rest of your life fighting these phukers.
All this means to me is that there is no economy, it is made up, it is a system not dissimilar to the plantation system, and we are the slaves. We are owned by the one percent, and the next nine percent are the overseers. They keep us in line, empty promises are just part of the game, sure we will take care of you, sure you will be protected from the nasty old banksters. Am I bitter? Of course I am, I now really do not give a rat’s puckered exhaust holes what happens to America in spite of being a disabled vet who served with pride. In fact I can’t wait to leave.
Always, always use a local community bank or credit union… for personal banking small business loans, and your mortgage!
One can only imagine. The Fed won’t allow a proper audit, just like Trump won’t release his taxes. Trump is likely hiding the fact he’s not worth what he says, and that he’s been bailed out by Deutsche Bank and money laundering. The Fed may also be hiding risky bailouts, but on the other side of the relationship.
Student loans will have to be addressed for the health of the economy. What started in good faith to provide students with financial aid has been taken advantage of by bad actors. Educations have been turned into a commodity, the price of education is out of control, and kids are promised opportunities that are becoming harder to get. Some for profit schools are outright fraudulent. Corporations have benefited by not having to invest in their employees, they come already trained. Too many young people are wasting time and money chasing dreams when they could be helping to produce, and invest.
Does anybody understand derivatives? How to they benefit the economy? I know Warren Buffet called them financial WMDs and they’ve grown exponentially since then. In sports it makes sense betting on winners and losers, but betting that something will lose value doesn’t seem right to me.
Its called “quantitative easing.” And, wasn’t it nice that the Fed bought up all those “toxic” securities in 2008.
I understand derivatives- it is mathematical game play for complex risk management- unique gambling options that have nothing if anything to do with true “investment.”
Stock markets, since the time of the East India Company have always been about the Principal Investor assuming a better position in the gamble- If my ship sinks I only loose half my money. In the stock market of today many “financial products” have nothing to do with actual investment or production of actual products. Its all about who has information first and who can be the first to manipulate the rest to get stuck holding the proverbial “bag.”
And, in this giant gambling casino is the “surplus value” that has been created by the true wealth creators- working class people the world over that clock in and perform service or labor for a living.
So you’re dealing with future value, but you know what the value is because it’s in the contract. Doesn’t that mean someone in control of the variables can easily manipulate it? For example, say the Cambridge Analytica whistle traded on Facebook stock knowing it would take a dive when the interview comes out? Selling high on insider trading is one thing, you’re ripping off another investor but at least your profits were already earned. Facebook stock would need to bounce back for him to profit, which is a pretty safe bet.
Yes, that’s why all corporate execs. and large fund managers are all insiders. Not only do they have the important information first, but by “tanking” a company… or unveiling a new product or merger… they create the future that they’ve bet on in the market. Just like in the days of old the small stockholders make the least and loose the most. Another way wealth is transferred to the top.
I am sorry, but this is just plainly incorrect. The Federal Reserve is probably one of the more transparent institutions in the US, especially given its significance.
https://www.federalreserve.gov/faqs/about_12784.htm
I think there are some legitimate disagreements to be had about the timeliness (or lack thereof) in which the Fed is required to release certain information. But on balance, the Fed provides a huge amount of data to the public about what they do, and they also provide a tremendous public service from their research arm, that not only helps present data about the Fed, but collects, analyzes, and presents important economic data from all over the world and all throughout history.
A lot of this is a case of the Fed hiding in plain sight. They release a lot of information that, frankly, won’t mean a lot to you and I.
One thing I think is important to remember about the Fed is that it is not some secret, all-powerful lever of economic control. Before the “dual mandate” is even considered, the primary function of the Fed system is to maintain an effective, reliable, and trustworthy payments system.
Of course, any institution of its size and position is prone to corruption, and that must be guarded against. But the Fed gets its powers and mandates from the law, so I think a lot of this “END THE FED” stuff is terribly misguided attention. If one doesn’t like the Federal Reserve system, and doesn’t like the way banks are granted charters that allows them to create money, that is not a complaint to take up with the Fed, it is something to write a letter to your congressperson about.
The Fed sends a piece of paper for which there is no value to the Treasury… in return gets to control the money supply… and lend all the money back at interest to both the government and private individuals and business.
As far as transparency, interesting that the Fed no longer publishes M3.
If you want to understand whats wrong with the fed visit Monetary.org.
I have to disagree, maybe they are one of the best at feigning transparency, even that would be a stretch. Bernie Sanders managed to get them to open their books from the bailout with his Dodd-Frank amendment and found $3.3 trillion in secret loans (including a bailout of Qadaffi, of all people) in addition to TARP. The closest think he got for an answer why was basically “We could explain but you wouldn’t understand so just trust us. We’re the experts.” That’s insulting and unacceptable.
To be redundant (again) but it needs to be known.
Pre-y2k, the website for us federal reserve and website for us department of treasury…
WERE EXACTLY THE SAME WEB SERVER
Both domains resolved to the exact same ip address.
I am NOT making this up.
Pre-y2k, they were already trying to confuse.
Isn’t it great that Americans pay to have their own money made by the Treasury, then it is given to the (private) Federal Reserve in exchange for a worthless “bond.” Then, we borrow back the same money we paid to create at interest from the private banks!
If the US government only did one thing- take back control of money creation- and took those interest payments on all the borrowed money… there would be no need for imposing a income tax!
The Fed is a public-private partnership whose entire mandate and existence is controlled by the law.
Also, keep in mind that the *currency* being created by Treasury in any given time period is pretty small when compared to the overall amount of money creation that takes place by the generation of new loans by chartered, private banks.
Your last point is somewhat understandable… but to flesh that out a little bit, essentially what that would mean is that banking would be fully nationalized, there would be no private sector lending (or at least, it’s be heavily regulated and limited in its allowed scope).
We still need private banking- deciding who is credit worthy and for what private and public endeavors. And actually banking and modern finance work really, really well (when regulated from the Wall St gambling casino). The rub with the Fed is although it allows limited governmental oversight.. all the power as to what money is created for…and all the profits from interest payments (on newly created money) are controlled privately.
Back in olden days, the states minted their own coins.
Because metal was money.
And in a pinch, one could convert their metal money into bullets.
But after time, this bullshit happened:
https://en.m.wikipedia.org/wiki/Gold_Reserve_Act
And just like that, fiat money existed. Not that anyone would make gold bullets. Except 007.
One should read it all, but in particular the section
‘Roles of FRS and Treasury’
But, tossing out some snippets from another link, link at bottom.
‘… United States financial crisis that took place over a three-week period starting in mid-October, when the New York Stock Exchange fell almost 50% from its peak the previous year. Panic occurred, as this was during a time of economic recession, and there were numerous runs on banks and trust companies.”
“… panic eventually spread throughout the nation when many state and local banks and businesses entered bankruptcy. Primary causes of the run included a retraction of market liquidity by a number of New York City banks and a loss of confidence among depositors, exacerbated by unregulated side bets…”
“… When this bid failed, banks that had lent money to the cornering scheme suffered runs that later spread to affiliated banks and trusts…”
“, yet was unable to inject liquidity back into the market.”
“… had largely ended, only to be replaced by a further crisis. This was due to the heavy borrowing of a large brokerage firm that used the stock ”
Think you know when this happened?
Sound famiiar?
Pretty sure this rings a bell?
https://en.m.wikipedia.org/wiki/Panic_of_1907
Hey, back in “the olden days” we would have decent commenters that were erudite and informational. Instead of clucks that wandered in and thought they magically owned the joint.
Hey SLF, this is NOT “your” personal playground to get your jollies on in the face of our history and current blog and post content.
Does THAT “ring a bell”?
Good point, SLF. That boom and bust cycle has been going on for a long time – every 7 to 10 years, and for the same reasons. Both Galbraith’s often site the 1907 panic. And, I’m sure future economists will site the 2008 crash… and wonder why inherent flaws in the system were not changed.
Keep your eyes on
Ladder Capital
uCampaign
Size of the beezle is: Greece
Extra Large Size is: 3 (Bezos, Gates, Buffet)
Slavery is not dead. It’s quite active in much of the world. It’s not past tense. People are bought and sold everyday. Some are on Zero Hours Contract.
ed walker writes –
“…I bet the millions of people who lost that money don’t really care what economists think now, because none of the economists who could have made this stick before the Great Crash said this when it would have mattered. Far from it: the economics tribe insisted that markets were all-knowing and perfect in their understanding, and spent their days explaining why this time was different…”
this is a silly paragraph that sounds ideologically inspired (“the economics tribe”) and thereby detracts seriously from an otherwise interesting essay.
nouriel roubini was a loud and frequently heard voice warning about an impending housing bubble. but roubini’s prescient warnings were ignored.
i don’t think the problem was a lack of economic insight or warning. in the housing frenzy, as in the preceeding stock market frenzy **, even a thousand economists warning in unison would have been ignored.
i think the problem is more usefully described as one in which all the actual actors – home mortgage lenders, home mortgage holders, speculating banks, congress and government regulators – were caught in a paralyzing web of their mutual creation where none could act (financially and legally powerless home mortgage holders) or would act (bribed/bought-off gov’t, maniacally busy lenders, gorging speculators).
** storm warnings are up now about an overvalued market. who among the actors is listening to that advice ?
You don’t quite seem to grasp the way the world works. Economists who disagreed with the consensus view of regulation and markets are shunned, and their voices are not heard in policy-making circles. Please reread this essay:https://www.emptywheel.net/2018/01/20/symbolic-violence-in-neoliberalism/ which discusses the construction and reproduction of the economics field.
The housing bubble was just one part of the Great Crash. Most of it was driven by fraud in the RMBS business, irresponsible lending and deregulation of financial markets. The housing bubble was just one sign of the actual failure of economists, who as a tribe agreed that markets would police themselves and therefore regulation was bad. That opened the door to the fraud and manipulation that brought on the financial crash.
ed walker writes
“… You don’t quite seem to grasp the way the world works. Economists who disagreed with the consensus view of regulation and markets are shunned, and their voices are not heard in policy-making circles…”
that’s the second silly comment you’ve written here – and condescending to boot.
i understand very well “how the world works”. in fact, i’d say i understand at least as well as a self-citing lawyer-ideologue like you. that is why i sketched out the idea of an entrapping web, rather than the one-dimensional notion of “it was the economists'”.
housing was the heart and soul of the crash, dear lawyer turned econom8cs critic.
do you know anything about roubini and his message pre-2007, or any other economists and their message? read up on your economic history, ed.
here’s a primer: http://www.investorhome.com/predicted.htm
“…Nouriel Roubini appears to be the most commonly recognized by (virtually all) the main sources I’ve seen. Yet, economists chose Australian Professor Steve Keen over Roubini for the Revere Award (outvoted by more than a 2 to 1 margin – details below) for publicly warning of the Global Financial Crisis. Among the first to warn about the bubble and recognized by most sources for accurately predicting the crisis was Dean Baker (who placed 3rd in the Revere Award voting). While there have been dozens of best selling books discussing the crisis after the fact, the first best seller that warned about the crisis in advance was from John Talbott. Suggestions that no one of high stature (or holding a track record for predicting major events of this sort) can be countered by the fact that respected and well known Professor Robert Shiller warned about both the dot.com bubble prior to its peak and warned very publicly about this pending crisis.
The first major effort to identify those that publicly predicted the crisis was a paper titled “No One Saw This Coming”: Understanding Financial Crisis Through Accounting Models by Dirk Bezemer. Bezemer identified 12 individuals (academics, government advisers, consultants, investors, stock market commentators and one graduate student) that between 2000 and 2006 warned specifically about a housing led recession within years. “Together they belie the notion that ’no one saw this coming’, or that those who did were either professional doomsayers or lucky guessers.” The Bezemer 12 are
Dean Baker
Wynne Godley
Fred Harrison (UK)
Michael Hudson
Eric Janszen
Steve Keen (Australia)
Jakob Madsen & Jens Kjaer Sørensen (Denmark)
Kurt Richebächer
Nouriel Roubini
Peter Schiff
Robert Shiller
Bezemer applied four selection criteria.
Some account on how they arrived at their conclusions.
Including an analytical account linking a real estate crisis to real-sector recessionary implications (eliminating John Talbott).
Prediction in the public domain, and
The prediction had to have some timing attached to it…”
ed walker writes
“…Economists who disagreed with the consensus view of regulation and markets are shunned, and their voices are not heard in policy-making circles…”
in my view, economists never make policy, period.
policy is made by politicians occupying various positions, e.g., congressman, regulator, judge, plus the ubiquitous well-heeled lobbyist and the corporate titan who stands to benefit.
furthermore, economic facts and findings as well as economic theory, to the extent they are considered at all, often influence policy only to the extent they satisfy policy-makers’ preconceptions and political needs for justification. this certainly seems to have been the case in the political climate that lead to the crash of 2007.
federal reserve chairman alan greenspan’s “economic theory”? – i believed that corporate heads, including bankers, would care a great deal about their institution’s good name and not want to besmirch it with fraudulent behavior.
Absolutely. Filtering of views is constant. If a student’s views are too far left, as defined by the prevailing orthodoxy (which is well right of mid-court), she won’t get approval for her thesis or it won’t pass without censoring out the lefty bits. Bill Black, PhD in economics at the University of Michigan, recounts being warned about that. Make it out of a top econ program with views deemed to leftist, and teaching offers will never materialize, and later, tenure will be hard to come by. Those at top tier schools have to drop down a tier to get it.
The filtering is constant and well-policed. It is a cultural fight, not an academic one. Thankfully, a few outliers survive. Philip Mirowski is one, but Notre Dame is not Harvard or Chicago. Ha-Joon Chang at the University of Cambridge would have had a hard time obtaining a post, let alone tenure, at the school in the other Cambridge. The range of elite thought tolerated in America is quite narrow.
OrionATL: What’s with the heavy hand with Ed? He has some very thoughtful posts- hard to find insights on economics.
In regards to the “economics tribe” Ed is talking about establishment and policy economists. The ones that run hedge funds, chair MBA and economics departments at universities, write papers for think thanks, and are embedded in our government institutions. In other words… the mainstream.
I volunteered at a conference in 2006 and 2007 where Michael Hudson (from your list) was a keynote speaker- his talk, “the asset value bubble” (i.e. housing). From personal conversation I can tell you that he felt, just like Roubini, ignored. Why? because Hudson and the people on your list are fringe- not in the halls of power.
I will say, too that you are confusing the effect with the cause. The housing bubble was NOT the primary cause of the 2008 crash. The primary cause was deregulation of banking under Bill Clinton (The Graham-Leach-Bliley Act), and the subsequent commoditization of real estate in the form of Mortgage Backed Securities. As if this were not bad enough, those brilliant captains of Wall St. invented credit default swap derivatives and flat out lied about AAA ratings of mortgage securities- for which CFTC head, Brooksly Born warned and was silenced.
Finally, just as BMAZ should no longer be allowed to use the term “sock puppet,” I am going to put an unofficial ban on your use of the word “ideologue.”
(last line was in jest, gentle ribbing… not a serious insult)
matt –
is it forbidden here to argue strongly for a position? this is a debate, not a mr. nice guy/popularity contest.
go back and read my initial comment. then read ed walker’s condescending reply. having done so, you can read my second response to ed with greater understanding. note my initial concern was merely ed’s unqualified argument about “the economics tribe”.
as for housing not being the cause of the 2007 recession. the housing bubble in 2007 played the same key role that stock market bubbles played a few years earlier – when whatever bubble of the time breaks, the economy collapses.
as for trying to dump responsibility onto president clinton for an event that occurred well after he left office, the responsibility lies with fed reserve chair alan greenspan. greenspan had more than ample time and authority to slowly deflate the bubble. check out the after–the-fact congressional interrogation of greenspan.
responsibility also lies with an army of clever, hidden politician-policy makers, for example, those who manipulated the rules for fannie may and freddie mac. you’ll never get anywhere trying to understand what happens in these situations,e.g., in 2007, by picking on a socially authorized target like clinton.
as for the deregulation of banks and graham-leech-bliley act there’s a long history:
from miss wiki
“…The banking industry had been seeking the repeal of the 1933 Glass–Steagall Act since the 1980s, if not earlier.[5][6] In 1987 the Congressional Research Service prepared a report that explored the cases for and against preserving the Glass–Steagall act.[7]
Sen. Phil Gramm (R, Texas), Rep. Jim Leach (R, Iowa), and Rep. Thomas J. Bliley, Jr. (R, Virginia), the co-sponsors of the Gramm–Leach–Bliley Act.
Respective versions of the Financial Services Act were introduced in the U.S. Senate by Phil Gramm (Republican of Texas) and in the U.S. House of Representatives by Jim Leach (R-Iowa). The third lawmaker associated with the bill was Rep. Thomas J. Bliley, Jr. (R-Virginia), Chairman of the House Commerce Committee from 1995 to 2001.
During debate in the House of Representatives, Rep. John Dingell (Democrat of Michigan) argued that the bill would result in banks becoming “too big to fail.” Dingell further argued that this would necessarily result in a bailout by the Federal Government…”
ideologues are everywhere; their arguments have a certain feel .
No disrespect intended… I honestly appreciate your level of intellectual integrity… I live amongst conservative small town farmers and anarchistic hippie back-to-the-landers. Somehow both missing depth and breath in deeper level political discourse. You have both, and its refreshing to banter to and fro.
I’m only going to argue one point- no Financial Services Modernization Act… no 2008 financial crisis.
Those bad boy bankers knew exactly what they were after- commoditization of “equity.” The same game Mit Romney and countless others played in the 80’s and 90’s to cash out America’s manufacturing infrastructure, ruining the engines of our economy and hundreds of thousands of good jobs.
The weird idea that “business” is an endeavor where you make a product or provide a service has been lost. The best business in America (most profitable) has been gutting and downsizing companies after buyout/takeover. You can bet that those “private equity” moguls were drooling at the prospect of cashing out on the Holy Grail of equity- home ownership. Wall St. was drooling too… what? we can pull billions of untapped wealth into the stock market? Yes! These players premeditated and planned the scam, the first move being repeal of Glass-Steagall, fundamentally the smartest financial regulation (for those that want economic stability) in all of modern civilization.
“…The weird idea that “business” is an endeavor where you make a product or provide a service has been lost. The best business in America (most profitable) has been gutting and downsizing companies after buyout/takeover. You can bet that those “private equity” moguls were drooling …”
i don’t know about housing, but i am an angry, implacable enemy of private equity in general as a destroyer of corporate diversity and competition as well as jobs; destruction that then damages the communities the taken-over businesses inhabit. the private equity corporations are like a pack of hyenas on a dying zebra to many relatively small/medium businesses in the u.s. businesses caught up in the aftermath of boom-then-bust have proved particularly vulnerable.
once private equity takes over a busineess and canabalizes thru selloffs whichever assets are most easily turned into cash or equivalent, then the private equity entity begins the process of cheapening in quality while simultaneously increasing in price whatever products are left for the surviving business to produce. in my personal experience – with tools especially as well as other consumer goods, the old business name remains, but pride in a quality product has obviously dissappeared.
most recently we have become aware of this process in the pharmaceuticals business with egregiously profiteering price increases, e.g., the epipen manufacturer mylan (whose ceo happens to be the daughter of w.v. senator joe manuchin).
o.k., now that i got that off my chest, back to the subject at hand :).
it turns out you and i are talking about the issue of greatest interest to many regarding the 2007 economic collapse, who to hold responsible, a,.k.a. who to blame, the graham-leech-bliley act or the inactivity of regulators like the federal reserve board in 2002-2006.
– the 2007 was world-wide. the financial services modernization act (graham-leech-bliley) applied to the u.s. only.
– the commodity futures modernization act of 2000 is considered of equal impact to graham-leech-bliley. both bills were the result of texas senator phil graham’s anti-regulatory economic “philosophy” and intense and persistent lobbying from banks.
– from a media viewpoint rather than the viewpoint of economic science, time magazine picked the 25 people most blameworthy :). this was probably about as valid as u.s. news & world report’s ranking of colleges, etc.
see time magazine – “25 people to blame for the financial crisis” (class. Value is 0,28804,1877351_1877).
– huffington post had a critique of the time article by banker/lawyer david
5-19-2009 – Time Rewrote History With “25 People to Blame for the Financial Crisis”
the latter article is valuable regardless of what one thinks of fiderer’s ranking because it has a multitude of relevant details spelled out.
proper citations:
– http://content.time.com/time/specials/packages/article/0,28804,1877351_1877350,00.html
– https://www.huffingtonpost.com/david-fiderer/emtimeem-rewrote-history_b_168503.html
comment on causes of the crash of 2007 from an economist actually writing in 2007, robert kuttner:
– http://prospect.org/article/bubble-economy
this matter of what caused the 2007, in the u.s. and worldwide, crash is a lot more complicated than bill clinton signing a congressional act.
Yes, there were a lot of factors… which were premeditated as a grand scheme to divest homeowners of the small holdings of collective middle class wealth- it did hinge on the FSMA- after which Wall St. built their financial instrument Frankenstein.
(reply in comment not working… does EW need to upgrade hosting/CDN?)
orionATL: you are the consummate 2008 financial crash historian. Looks like we’ve both studied this dark chapter in economics/American history. Thank you for knowing what the fuck you are talking about… because most people don’t have the intellectual fortitude to understand what actually happened.
Thank you.
matt –
thank you for the kind words, but the truth is i am not an expert in anything. all i do is read a lot of magazines and newspapers due to a lifelong (from my teens) fascination with politics, economics, and what i suppose one could call, loosely :), political philosophy. i may have been one of the few 16 yr olds in the country with a subscription to both the new republic and “the reporter”. the admirable elizabeth drew, remarkable for her intellectual integrity, was my favorite reporter from those early days.
I’ll have to check out Elizabeth Drew…