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Comment by will_brown | Hacker News Reader

>Very few economists foresaw the great recession of 2008–2009

I just can't get past the very first sentence. First, it ignores the realities of both economists and financial insiders who made attempts to blow the lid off of the ARM/toxic loan schemes - not unlike pre-Snowden whistle blowers who were equally ignored and erased from history. Second, even as a 17 year old kid, in 2001, I wrote an economics paper about the impending housing collapse - only I was guessing 2005 not 2008 - based on ARM's; 103% financing with 0% down; and stated income.

The next thing will be people talking about how very few economists foresaw the issues with reverse home mortgages, or how no regulators foresaw the dangers of equity crowdfunding for non-accredited investors.

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> > Very few economists foresaw the great recession of 2008–2009

> First, it ignores the realities of both economists and financial insiders who made attempts to blow the lid off of the ARM/toxic loan schemes - not unlike pre-Snowden whistle blowers who were equally ignored and erased from history.

Yeah, whether it was tied specifically to those particular schemes or not, lots of economists were predicting an imminent severe recession -- including both notable Austrian-school economists and notable neo-Keynesians -- driven by a collapse in the housing market bubble.

It's probably more accurate to state that those economists who make policy didn't see it coming... the economists that matter.

http://www.forbes.com/2007/05/17/bernanke-subprime-speech-ma...

Of course, the economy nearly collapsed a year after that speech.

That's the great conceit of central banking, that a small committee of "learned professionals" can predict the future and claim to divine the actions of billions of market transactions.

Came here to say the same thing. The Austrian-school economists were screaming at the top of their lungs: https://wiki.mises.org/wiki/Austrian_predictions

Aren't they usually, though?

Given the century of economies dominated by Keynesians, Monetarists, Marxists, and other UFO abductees pretending to be economists, why wouldn't they?

> I just can't get past the very first sentence. First, it ignores the realities of both economists and financial insiders who made attempts to blow the lid off of the ARM/toxic loan schemes - not unlike pre-Snowden whistle blowers who were equally ignored and erased from history.

The fact they were effectively silenced and ignored is largely because they were few in number.

The vast majority didn't foresee the scale of the disaster.

> Second, even as a 17 year old kid, in 2001, I wrote an economics paper about the impending housing collapse - only I was guessing 2005 not 2008 - based on ARM's; 103% financing with 0% down; and stated income.

If you can demonstrate this for a significant number of recessions [e.g. 5+], its relevant.

I pulled my money out in May of 2007 because I was pretty sure something was going to happen and threw it back in to basically double it...doesn't mean I believe it was abundantly obvious to everyone. The mere fact I could do that demonstrates it wasn't obvious.

The simple fact is, whenever there is a crisis, there is going to be a minority of Doomsayers who predicted correctly. However, the fact the majority was oblivious implies it was non-obvious and possibly chance that a specific Doomsayer was, ultimately, correct in his/her prediction for reasons beyond random chance.

> The fact they were effectively silenced and ignored is largely because they were few in number.

No, they weren't particularly few in number -- it was lots of economists (they were few in number compared to the whole population, but the universe at issue was economists, not the whole population.)

They were ignored because there was substantial financial interests among the powerful interests resting on the perception that things were going to continue going well, and because the top-line economic indicators (which aren't particularly good leading indicators, in any case) that the mainstream media likes to look to were strong, so there was a PR effort that was in line with what the media was naturally inclined to follow; the warnings from various different directions were an inconvenience for the interests of the powerful and the comfortable narrative of the media.

> I pulled my money out in May of 2007 because I was pretty sure something was going to happen and threw it back in to basically double it...doesn't mean I believe it was abundantly obvious to everyone. The mere fact I could do that demonstrates it wasn't obvious.

Sure, it proves that it the particular impacts and timing of the impending collapse weren't widely expected by market participants. That's not inconsistent with a significant number -- not very few -- predicting an imminent and significant downturn to be driven by the collapse of the housing bubble.

> No, they weren't particularly few in number -- it was lots of economists (they were few in number compared to the whole population, but the universe at issue was economists, not the whole population.)

http://www.nytimes.com/2009/09/06/magazine/06Economic-t.html...

> Paul Krugman

> Few economists saw our current crisis coming, but this predictive failure was the least of the field’s problems. More important was the profession’s blindness to the very possibility of catastrophic failures in a market economy. During the golden years, financial economists came to believe that markets were inherently stable — indeed, that stocks and other assets were always priced just right.

So, I mean, you can argue a Nobel Laureate is so ignorant of his field that you are correct if you want. However, you need to provide a great deal of evidence to convince me of that which so far none of you have.

For instance the quality of evidence I generally see is on par with this comment:

https://news.ycombinator.com/item?id=10760402

Yes, one group of folks went out and found something they believed to be true but that doesn't represent the majority view simply by its existence. Signal to noise is a very real problem that requires a very large level of agreement to move the levers of policy for a reason.

> They were ignored because there was substantial financial interests among the powerful interests resting on the perception that things were going to continue going well, and because the top-line economic indicators (which aren't particularly good leading indicators, in any case) that the mainstream media likes to look to were strong, so there was a PR effort that was in line with what the media was naturally inclined to follow; the warnings from various different directions were an inconvenience for the interests of the powerful and the comfortable narrative of the media.

This is a comforting conspiracy theory but the fact economists, as a class of people, failed to capitalize on this for their own financial gain based on knowing that the public perception was in error ... well, that would imply they failed to predict it in sufficient numbers.

> Sure, it proves that it the particular impacts and timing of the impending collapse weren't widely expected by market participants. That's not inconsistent with a significant number -- not very few -- predicting an imminent and significant downturn to be driven by the collapse of the housing bubble.

If many economists predicted a recession on that scale, we would have many rich economists. Specifically, a minimum of doubling the value of their investments due to timing the market. Do we?

I mean, if you have a vast body of evidence you can present that proves this is the case by all means present it. I've never seen such evidence myself.

> So, I mean, you can argue a Nobel Laureate is so ignorant of his field that you are correct if you want.

I rather see Krugman's piece here as leveraging the media narrative on the issue to his own ends; his real issue in the piece is that policymakers are listening to the wrong voices. Accepting the dominant media narrative that "few economists" foresaw the collapse is a lot better for getting people to listen to his explanation of what was wrong with the approaches that were influencing policy than challenging that narrative.

> Yes, one group of folks went out and found something they believed to be true but that doesn't represent the majority view simply by its existence.

There's a big excluded middle between "few" and "majority". I would characterize the group that predicted a significant, housing-bubble-collapse triggered recession as a significant near term probability before it occurred as a significant (both in number and notability) minority, neither "few" nor a "majority".

> This is a comforting conspiracy theory but the fact economists, as a class of people, failed to capitalize on this for their own financial gain based on knowing that the public perception was in error ... well, that would imply they failed to predict it in sufficient numbers.

Or that successful economists tend to be fairly likely to be at the income level where increased income has (as studies have shown) minimal contribution to experienced utility -- and unusually likely to be aware of that fact. Or, well, a lot of other things.

> If many economists predicted a recession on that scale, we would have many rich economists.

If lots of economists actively invested based on such a prediction, sure; but that an economist makes a prediction does not mean that they actively invest based on it (or that they are actively investing at all).

>If many economists predicted a recession on that scale, we would have many rich economists.

Its kind of inflammatory. Using your logic: If many economists predicted a healthy economy and housing market, we would have many poor economists. I mean, if you have a vast body of evidence you can present that proves this is the case by all means present it.

Here is just one example:

US Federal Reserve Chairman, Alan Greenspan, has gone on record and said he knew of the impending housing bubble in 2005. I think even the most blind economists could have predicted a devaluation in average housing price at $x0,000/house (I really wish I knew that actual average price homes fell by), at 100M homes that is an evaporation of $x,000,000,000,000 of wealth, now from an economists point of view whether that suggest a imminent recession, I don't know, but to me that is unprecedented.

Another:

http://www.theguardian.com/business/2010/apr/16/goldman-sach...

Essentially, you had Goldman taking direct payments from a fund to sell the fund's toxic loans to Goldman clients.

Home loans are traditionally solid investments (very low default rate), so the fact they were being chopped up and sold the way they were is clue number 1 the sellers knew to get rid of the asset whereas historically these were coveted investments. Its a tiny fine but there was a fraud charge and $1B fine.

The catch is you can't simply flood the market, or the market will react. So the toxic loans were sold slowly and steadily for as long as possible. There was just so much bad debt that when the market did catch on the institutions were still holding a massive amount of bad debt...hence the bailouts. Its not like they didn't want to get rid of them sooner, but trying to get rid of it all at once would have been counterproductive.

> Its kind of inflammatory. Using your logic: If many economists predicted a healthy economy and housing market, we would have many poor economists. I mean, if you have a vast body of evidence you can present that proves this is the case by all means present it.

http://www.bls.gov/ooh/life-physical-and-social-science/econ...

1) The reverse doesn't hold true because the average income is $95,000 a year.

2) If one continued to hold assets, as a rational economist likely would, they would have recovered with the rest of the market by this point in time.

3) Extraordinary claims require extraordinary evidence. The claim it was widely predicted yet Nobel Laureates claim otherwise falls under that standard.

3b) Similarly, silencing such people required a certain degree of conspiracy yet there is no evidence of such a conspiracy. The reverse is not true.

4) It is a good effort to try to require me to meet the reverse logic except I'm not the one who made the initial claim that was extraordinary, unusual, and not backed by the opinion of a Nobel Laureate economist among others. Similarly, the reverse case simply isn't valid since you can't be "poor" on $95,000/year unless you are completely incompetent in managing your finances which is a different problem.

> US Federal Reserve Chairman, Alan Greenspan, has gone on record and said he knew of the impending housing bubble in 2005. I think even the most blind economists could have predicted a devaluation in average housing price at $x0,000/house (I really wish I knew that actual average price homes fell by), at 100M homes that is an evaporation of $x,000,000,000,000 of wealth, now from an economists point of view whether that suggest a imminent recession, I don't know, but to me that is unprecedented.

http://www.nytimes.com/2008/10/24/business/economy/24panel.h...

> Mr. Greenspan said that he had publicly warned about the “underpricing of risk” in 2005 but that he had never expected the crisis that began to sweep the entire financial system in 2007.

He specifically stated he hadn't expected the crisis but rather an underpricing of risk which was one of the causal factors.

> Mr. Greenspan, along with most other banking regulators in Washington, also resisted calls for tighter regulation of subprime mortgages and other high-risk exotic mortgages that allowed people to borrow far more than they could afford.

Btw, he actively resisted and successfully fought to allow suprime mortgages.

> By 2004, a growing number of economists were warning that a speculative bubble in home prices and home construction was under way, which posed the risk of a housing bust.

Your best defense wasn't Greespan btw, but his opposition in 2004 who were warning his actions would lead to a speculative bubble. However, they were relatively few in number and there is no evidence they were silenced as the original post I was replying to implied.

http://www.theguardian.com/business/2010/apr/16/goldman-sach...

Yeah, that isn't evidence of a large scale market prediction by economists so isn't in the domain of the argument I was making.

>However, they were relatively few in number and there is no evidence they were silenced as the original post I was replying to implied.

Yeah I think there is a little miscommunication, you are limiting the silence to economists and not extending it to people in finance which is what I did in OP. It was more the finance people with evidence were silenced, in the whistle-blower sense of the word, and economists who did acknowledge what was occurring were ignored.

As OP, I never qualified my statement as "large scale", I simply stated the article ignored the reality that economists and financial insiders did make attempts blow the whistle. Now since neither of us knows the exact numbers, I'm not going to bicker over qualifications I never invoked such as "large scale", what ever "large scale" means to you subjectively.

Scale aside, silencing happened all the same, just look at the whistle blower lawsuits against the big banks: BOA; JP Morgan Chase; Countrywide; etc...

All of them had employees/investigators who discovered fraud and they were subsequently fired for blowing the whistle. Perhaps these examples fall more under the financial insiders I noted rather than economists, though I assume more economists would have got it right had the whistle blowers not been silenced.

http://www.publicintegrity.org/2011/09/22/6687/countrywide-p...

>the investigators were able to uncover what they believed was evidence that branch employees had used scissors, tape and Wite-Out to create fake bank statements, inflated property appraisals and other phony paperwork. Inside the heaps of paper, for example, they found mock-ups that indicated to investigators that workers had, as a matter of routine, literally cut and pasted the address for one home onto an appraisal for a completely different piece of property.

>http://www.rollingstone.com/politics/news/the-9-billion-witn...

>A few months into her tenure, Fleischmann would later testify in a DOJ deposition, the bank hired a new manager for diligence, the group in charge of reviewing and clearing loans. Fleischmann quickly ran into a problem with this manager, technically one of her superiors. She says he told her and other employees to stop sending him e-mails. The department, it seemed, was wary of putting anything in writing when it came to its mortgage deals.

I completely agree. Here is an article from the economist in 2005 and it states: "The worldwide rise in house prices is the biggest bubble in history. Prepare for the economic pain when it pops"

http://www.economist.com/node/4079027

You should try to read past the first sentence.

The simple fact is that few economists predicted a recession of that magnitude. Predicting a crash is very different than predicting a recession. And predicting a recession is very different than predicting the magnitude of that recession.

Nuance matters.

I'm glad you were able to foresee it, but there's always outsiders who foresee a collapse, so that data point just isn't terribly relevant.

Though many didn't see the seriously toxic credit default swaps going on and what exactly was going on with derivatives.

Many didn't know we had over leveraged the value of the entire world economy several times over.

> The next thing will be people talking about how very few economists foresaw the issues with reverse home mortgages, or how no regulators foresaw the dangers of equity crowdfunding for non-accredited investors.

And some of the people writing those articles will inevitably be business journalists who spent the previous five years complaining about the regulations that remained and shilling for the crowdfunding companies...

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