FOMC 2006 Transcripts: The 1% Solution

[georgephillip]

As to why Baker and Krugman and Paul didn't profit from the housing bubble, maybe they're not as fucking greedy as you are.

or maybe they didn't want to take the risk. You may know there is a bubble but this is different from knowing when it will pop and betting on it!.

Bubbles usually aren't in the habit of existing for very long. Either way it doesn't matter. Because the profit is riskless. Instead of everybody buying 20-30 year treasury bonds you'd get significantly more return shorting housing assets. And remember that once a bubble is identified it'll pop almost immediately. If you've got a 20 year mortgage on a house that's definitely going to be underwater you'll try and sell it, lowering the price of housing.

What's your point?

There was no housing bubble?

 

[DSGE]

or maybe they didn't want to take the risk. You may know there is a bubble but this is different from knowing when it will pop and betting on it!.

Bubbles usually aren't in the habit of existing for very long. Either way it doesn't matter. Because the profit is riskless. Instead of everybody buying 20-30 year treasury bonds you'd get significantly more return shorting housing assets. And remember that once a bubble is identified it'll pop almost immediately. If you've got a 20 year mortgage on a house that's definitely going to be underwater you'll try and sell it, lowering the price of housing.

What's your point?

There was no housing bubble?

My point is that there is no risk (that's the point of arbitrage) and you don't have to know when it'll pop because you'll still make tons of profit. People who claimed to know there was a bubble were just guessing. The fact that it turns out there was one ex post doesn't vindicate their claim. If I claim that the next coin flip will be heads, and when you flip it it turns out to be a head, doesn't mean I have amazing foresight. My question is: if these people knew there was a bubble and were able to prove it to people, why did the market not arbitrage away the bubble, causing it to deflate much earlier?

 

[EdwardBaiamonte]

Bubbles usually aren't in the habit of existing for very long.

always dumb especially when housing bubble lasted for many years!!!

 

[DSGE]

Bubbles usually aren't in the habit of existing for very long.

always dumb especially when housing bubble lasted for many years!!!

You've got an upper bound, don't you. Do bubbles last for 30 years? 20? This one was pretty long and it was less than 10.

 

[georgephillip]

Bubbles usually aren't in the habit of existing for very long. Either way it doesn't matter. Because the profit is riskless. Instead of everybody buying 20-30 year treasury bonds you'd get significantly more return shorting housing assets. And remember that once a bubble is identified it'll pop almost immediately. If you've got a 20 year mortgage on a house that's definitely going to be underwater you'll try and sell it, lowering the price of housing.

What's your point?

There was no housing bubble?

My point is that there is no risk (that's the point of arbitrage) and you don't have to know when it'll pop because you'll still make tons of profit. People who claimed to know there was a bubble were just guessing. The fact that it turns out there was one ex post doesn't vindicate their claim. If I claim that the next coin flip will be heads, and when you flip it it turns out to be a head, doesn't mean I have amazing foresight. My question is: if these people knew there was a bubble and were able to prove it to people, why did the market not arbitrage away the bubble, causing it to deflate much earlier?

Not all the people who claimed there was a housing bubble were guessing.
Some were using simple arithmetic to prove its existence.

The following is taken from a column written in November of 2004 laying out the argument that part of the housing bubble's expansion was explained by the enormous wealth of the stock market spilling over into real estate after the stock market crash of the late 1990s.

Dean Baker looked at housing prices since 1995 and found they increased nationally by more than 35 percentage points beyond the overall rate of inflation. He compared that increase to numbers from 1951 - 1995 during which housing prices increased at the same rate of inflation.

By 2004 a large divergence between home prices and rental prices provided additional confirmation of a housing bubble that was coming close to popping.

I can't explain why the market didn't arbitrage away the housing bubble.
It would seem preferable to losing over $8 trillion when the bubble burst.

The Sequel to the Stock Market Bubble: the Housing Bubble | Op-Eds & Columns

 

[DSGE]

What's your point?

There was no housing bubble?

My point is that there is no risk (that's the point of arbitrage) and you don't have to know when it'll pop because you'll still make tons of profit. People who claimed to know there was a bubble were just guessing. The fact that it turns out there was one ex post doesn't vindicate their claim. If I claim that the next coin flip will be heads, and when you flip it it turns out to be a head, doesn't mean I have amazing foresight. My question is: if these people knew there was a bubble and were able to prove it to people, why did the market not arbitrage away the bubble, causing it to deflate much earlier?

Not all the people who claimed there was a housing bubble were guessing.
Some were using simple arithmetic to prove its existence.

The following is taken from a column written in November of 2004 laying out the argument that part of the housing bubble's expansion was explained by the enormous wealth of the stock market spilling over into real estate after the stock market crash of the late 1990s.

Dean Baker looked at housing prices since 1995 and found they increased nationally by more than 35 percentage points beyond the overall rate of inflation. He compared that increase to numbers from 1951 - 1995 during which housing prices increased at the same rate of inflation.

By 2004 a large divergence between home prices and rental prices provided additional confirmation of a housing bubble that was coming close to popping.

That doesn't at all prove a bubble. Prices rising quickly doesn't make a bubble. It's when prices rise quickly and greatly depart from fundamental values. But fundamental values are hard to asses. For all Dean Baker knew it could very well have been a permanent increase in the demand for housing driving the price rises.

I can't explain why the market didn't arbitrage away the housing bubble.
It would seem preferable to losing over $8 trillion when the bubble burst.

That's something you need to be able to explain if you want to try and say it was obvious there was a bubble.

 

[georgephillip]

My point is that there is no risk (that's the point of arbitrage) and you don't have to know when it'll pop because you'll still make tons of profit. People who claimed to know there was a bubble were just guessing. The fact that it turns out there was one ex post doesn't vindicate their claim. If I claim that the next coin flip will be heads, and when you flip it it turns out to be a head, doesn't mean I have amazing foresight. My question is: if these people knew there was a bubble and were able to prove it to people, why did the market not arbitrage away the bubble, causing it to deflate much earlier?

Not all the people who claimed there was a housing bubble were guessing.
Some were using simple arithmetic to prove its existence.

The following is taken from a column written in November of 2004 laying out the argument that part of the housing bubble's expansion was explained by the enormous wealth of the stock market spilling over into real estate after the stock market crash of the late 1990s.

Dean Baker looked at housing prices since 1995 and found they increased nationally by more than 35 percentage points beyond the overall rate of inflation. He compared that increase to numbers from 1951 - 1995 during which housing prices increased at the same rate of inflation.

By 2004 a large divergence between home prices and rental prices provided additional confirmation of a housing bubble that was coming close to popping.

That doesn't at all prove a bubble. Prices rising quickly doesn't make a bubble. It's when prices rise quickly and greatly depart from fundamental values. But fundamental values are hard to asses. For all Dean Baker knew it could very well have been a permanent increase in the demand for housing driving the price rises.

I can't explain why the market didn't arbitrage away the housing bubble.
It would seem preferable to losing over $8 trillion when the bubble burst.

That's something you need to be able to explain if you want to try and say it was obvious there was a bubble.

A price rise of 35% beyond the overall rate of inflation during the period of 1995 to 2004 compared to a 45 year period where home prices increased at the same rate as inflation qualifies as a rapid rise in prices that departs from fundamental values.

Can you suggest any plausible agent for "a permanent increase in the demand for housing" between 1995 and 2004?

 

[DSGE]

Not all the people who claimed there was a housing bubble were guessing.
Some were using simple arithmetic to prove its existence.

The following is taken from a column written in November of 2004 laying out the argument that part of the housing bubble's expansion was explained by the enormous wealth of the stock market spilling over into real estate after the stock market crash of the late 1990s.

Dean Baker looked at housing prices since 1995 and found they increased nationally by more than 35 percentage points beyond the overall rate of inflation. He compared that increase to numbers from 1951 - 1995 during which housing prices increased at the same rate of inflation.

By 2004 a large divergence between home prices and rental prices provided additional confirmation of a housing bubble that was coming close to popping.

That doesn't at all prove a bubble. Prices rising quickly doesn't make a bubble. It's when prices rise quickly and greatly depart from fundamental values. But fundamental values are hard to asses. For all Dean Baker knew it could very well have been a permanent increase in the demand for housing driving the price rises.

I can't explain why the market didn't arbitrage away the housing bubble.
It would seem preferable to losing over $8 trillion when the bubble burst.

That's something you need to be able to explain if you want to try and say it was obvious there was a bubble.

A price rise of 35% beyond the overall rate of inflation during the period of 1995 to 2004 compared to a 45 year period where home prices increased at the same rate as inflation qualifies as a rapid rise in prices that departs from fundamental values.

It doesn't because it's hard to tell what fundamental values actually are at any given time. We identify bubbles after the fact, after prices have run up and then crashed. It's very hard to tell ex ante what fundamentals are, and so it's hard to tell if the run up in prices is a departure from them.

Can you suggest any plausible agent for "a permanent increase in the demand for housing" between 1995 and 2004?

First, I don't have to. If you see a large price rise it's fallacious to say "I can't think of any other reason it would happen, therefore it's a bubble".

Second, your idea that it was obviously a bubble still has the gaping hole in regards to why it wasn't extremely well known and arbitraged away.

But it's not that hard to come up with a reason. One would be something like: there was a cultural shift from renting houses to 'every American a homeowner'.

 

[likeabird03]

Oh yeah - as if everything we've experienced the last few years was concocted in November 2006. It built up much longer than that. By 2006 it wouldn't matter what action they had taken even if they foresaw this - they could have moved heaven and earth and we still would have watched out economy implode.

 

[likeabird03]

Let me tell you what the problem is.

The fed looked at coincidence indicators and totally ignored long tested economic fundamentals in 2006. The simple fact that housing appreciated to the point it did didn't even register with them as being an issue. They also totally ignored how intertwined housing had become with the financial sector and how it could very easily pull the entire economy down with it.

Every 10 or 15 years or so we tend to drink this Kool-aid fed to us by the Paul Krugman types that all of a sudden we are in a "new economy" and that economic models all of a sudden do not matter anymore. They're trying to do it again by convincing us that public debt is simply not a problem, and will never be a problem because yields are so low. They're idiots. It's almost as though they're wrecking this country on purpose because to believe they're simply unable to do their jobs is too much of a stretch.

 

[DSGE]

They also totally ignored how intertwined housing had become with the financial sector and how it could very easily pull the entire economy down with it.

So did everybody.

Every 10 or 15 years or so we tend to drink this Kool-aid fed to us by the Paul Krugman types that all of a sudden we are in a "new economy" and that economic models all of a sudden do not matter anymore. They're trying to do it again by convincing us that public debt is simply not a problem, and will never be a problem because yields are so low. They're idiots. It's almost as though they're wrecking this country on purpose because to believe they're simply unable to do their jobs is too much of a stretch.

Nobody says we are in a "new economy" where any amount of debt isn't a problem. What people like Krugman are saying is that the most pressing issue right now is jobs and economic growth. Somehow the debt has managed to take centre stage in both the media and political discussion despite the fact that it's not the most urgent problem right now. The most urgent problem is not having an economy trapped the same way Japan's has been for the past 20 years ending up with very little growth and debt that's 200% of GDP. The point about interest rates is that the economic malaise isn't caused by fear of huge debt, as some people would have you believe.

 

[DSGE]

Oh yeah - as if everything we've experienced the last few years was concocted in November 2006. It built up much longer than that. By 2006 it wouldn't matter what action they had taken even if they foresaw this - they could have moved heaven and earth and we still would have watched out economy implode.

There's no reason the economy should have imploded due to the housing bubble. In fact following the crash of the housing bubble, the economy didn't implode. It only imploded once the Federal Reserve allowed inflation and NGDP expectations to collapse.

 

[georgephillip]

In the 1990s Congressman Henry Gonzalez forced the Fed to release its FOMC transcripts after catching Alan Greenspan's lie that such transcripts didn't exist. Greenspan agreed to release said transcripts with a five year delay. Shortly thereafter Maestro called his fellow FOMC members to inform them every word they ever uttered at his secret meetings had been secretly taped.

"The gasps are still audible after all these years. But forget all that, let us turn to mortgage fraud in the 2000s.

"Many of those involved in promoting the fraud have claimed that 'no one could have seen it coming'—meaning the collapse. This is, of course, implausible. The FBI had warned of 'an epidemic of fraud' back in 2004—long before the worst abuses became normal bank practice.

"And from the Fed’s transcripts, there is no doubt at all that the Fed 'saw it coming'. Let’s look at a particular report from December 12, 2006. Don’t take my word for it. Read this: http://www.federalreserve.gov/monetarypolicy/files/FOMC20061212meeting.pdf

"Here is a relevant portion of the transcript, with a bit of added bold..."

EconoMonitor : Great Leap Forward » MORTGAGE FRAUD REVISITED: Why Did the Fed Pump and Dump US Real Estate Markets?

 

[editec]

I've known it was a bubble for years.

When the median home pricing started climbing much faster than the median incomes of family the bubble started.

And that situation lasted for at least the last twenty years, folks.

But remember the old investors' saying about being RIGHT too soon?

The market can stay wrong longer than you can stay solvent.

​

 

[georgephillip]

I've known it was a bubble for years.

When the median home pricing started climbing much faster than the median incomes of family the bubble started.

And that situation lasted for at least the last twenty years, folks.

But remember the old investors' saying about being RIGHT too soon?

The market can stay wrong longer than you can stay solvent.

​

Markets are not naturally occurring phenomena; they are man made, and for thousands of years the greediest of men have made the rules governing how markets function.

Early defaults on mortgage payments began to spike in late 2006 when it became obvious increasing numbers of homebuyers were defaulting on their very first mortgage payment. Wouldn't you expect regulators at the Fed to know that "if a buyer defaults on the first payment there is no doubt whatsoever the loan was fraudulent"?

Rousseau was right:

"The first man who, having enclosed a piece of ground, bethought himself of saying 'This is mine,' and found people simple enough to believe him, was the real founder of civil society.

"From how many crimes, wars, and murders, from how many horrors and misfortunes might not any one have saved mankind, by pulling up the stakes, or filling up the ditch, and crying to his fellows: Beware of listening to this imposter; you are undone if you once forget that the fruits of the earth belong to us all, and the earth itself to nobody."

EconoMonitor : Great Leap Forward » MORTGAGE FRAUD REVISITED: Why Did the Fed Pump and Dump US Real Estate Markets?

 

[editec]

What other BUBBLES do I see on the horizon?

Despite the inelasticity of health care?

I see that as a growing bubble that is going to POP!

Likewise I suspect that the cost of higher education is a BUBBLE and that's going to POP, too.

Why?

Again, look at the median incomes of the people who buy this stuff.

We can invent stratageies (like student loans or socialized HC payment systems in medicine)to keep us going FOR A WHILE but sooner or later the numbers just will not WORK!

Now I can think of no way to capitalize on this obvious fact because why?

Because the market can be wrong longer than I can remain solvent.

But mark my words those two markets are highly overpriced in comparison to the median incomes of their clients.

That can't last forever.

 

[georgephillip]

What other BUBBLES do I see on the horizon?

Despite the inelasticity of health care?

I see that as a growing bubble that is going to POP!

Likewise I suspect that the cost of higher education is a BUBBLE and that's going to POP, too.

Why?

Again, look at the median incomes of the people who buy this stuff.

We can invent stratageies (like student loans or socialized HC payment systems in medicine)to keep us going FOR A WHILE but sooner or later the numbers just will not WORK!

Now I can think of no way to capitalize on this obvious fact because why?

Because the market can be wrong longer than I can remain solvent.

But mark my words those two markets are highly overpriced in comparison to the median incomes of their clients.

That can't last forever.

In 2000 total student loan debt was about $200 billion.
Today it weighs in at $960 billion.
That 380% increase in student debt occurred while average household income has actually fallen.

"The players in the student debt market are largely connected to the big financial institutions and the government is willing to grease these juicy wheels just like it did for the mortgage debt crisis. The integration between government and the big banks is like a marriage made in graft heaven."

Graft heaven may explain why market error can outlive investor solvency.

A College Siren Call – Going to a for-profit college today is like purchasing a home with a subprime loan at the peak of the housing market

 

[EdwardBaiamonte]

Markets are not naturally occurring phenomena; they are man made, and for thousands of years the greediest of men have made the rules governing how markets function.

China just switched to free capitalist markets after 1000's of years and instantly transformed 15 million human beings from starving to death to rich enough to buy cars. Its one of many very obvious examples.

Now we can see how truly brain dead liberalism is.

 

[georgephillip]

Markets are not naturally occurring phenomena; they are man made, and for thousands of years the greediest of men have made the rules governing how markets function.

China just switched to free capitalist markets after 1000's of years and instantly transformed 15 million human beings from starving to death to rich enough to buy cars. Its one of many very obvious examples.

Now we can see how truly brain dead liberalism is.

About as dead as human rights in China.

"In a statement today at a press conference in Washington, D.C., Yu Jie (余&#26480, dissident writer and former vice president of the Independent Chinese PEN Center who left China a week ago, recounts his torture by state security police after he was kidnapped on December 9, 2010, the day before the award ceremony for Liu Xiaobo’s Nobel Peace Prize.

Yu’s press statement, 'Exposing CPC Tyranny and Running to the Free World: My Statement on Leaving China,' has been translated and released by Human Rights in China at Yu’s request."

Human Rights in China

Why do conservatives think freedom comes from obedience?

 

[EdwardBaiamonte]

Markets are not naturally occurring phenomena; they are man made, and for thousands of years the greediest of men have made the rules governing how markets function.

China just switched to free capitalist markets after 1000's of years and instantly transformed 15 million human beings from starving to death to rich enough to buy cars. Its one of many very obvious examples.

Now we can see how truly brain dead liberalism is.

About as dead as human rights in China.

the liberal lost the debate so is trying to switch the subject to human rights from capitalist free markets. Do you think it was not obvious??

Also, the first human right is to have free markets so millions and millions don't slowly starve to death under liberal regulation.