Hacker News Reader

Comment by Apocryphon | Hacker News Reader

Here's a question - people often refer to the 2008 recession as a once in a lifetime event. On what basis do they make that statement- because mortgages can't possibly pop as massively twice? What's to prevent another industry (in recent years often rumored to be student loans) from doing the same? Who's to say not another sector is as rotten as real estate was?

View on HN

Mostly on the basis that it is the only way they can justify to clients/viewers/etc to "not have seen it." One would very reasonably conclude that the failure of banks/regulators/analysts to see any of this would likely be a good sign that they prob. don't really know what they are talking about, and predicting the market is actually kinda impossible, and consequently the value they add to their clients is minimal/none. So, in order to not give that impression, it is much easier to say that your models are in fact correct, but it just so happens that the financial crises was a "once in a lifetime" event.

I think it goes like this. The memory of a crisis fades over time - especially the emotional memory of how it felt to wonder if the world was ending. So the longer time since the last crisis, the less cautious people are.

You can think of this as a system with gain. As time passes, people are willing to take more risks, which corresponds to the gain going up. That's fine... until the gain exceeds unity. Then there's a catastrophe. Then everyone gets very averse to risk, so the gain goes way down. But as time passes, it creeps up again...

It's reasonable to call 2008 a "once in a lifetime" event, because there hasn't been anything like it since the Great Depression. This gives some idea of the time constants involved. (One of the virtues of our regulatory regime is that they have managed to increase the time constants. Before the Great Depression, we used to have events like this every decade or two.)

Well, not so sure this is a virtue of the regulatory system -- mind you at the time there were a ton of regulations contributing to system instability (like laws preventing interstate banking). Can also be said about this crisis: Had regulators not been so thoroughly captured, there's an argument to be made that banks would be a lot more alert to these sorts of systemic risks.

Everyone is waiting for a dramatic bubble to pop. I think it will be a slow decline followed by generations of stagnation. You can't discharge student loans, so young people can't buy new cars, houses, things to put in houses, etc. At the same time the value of such degrees are going down as more and more rush to get them. Health care costs are eating up the income/savings of everyone else.

The companies that will do well in the future are those that cater to a low-income demographic. I hear Dollar General is doing very well.

It's usually referred to as an "x sigma event". A paper I really like on this is "How Unlucky is 25-Sigma?" https://arxiv.org/abs/1103.5672.

The basis of that statement, in my opinion, is human bias. Experts protect their reputation to the external and internal (psychological) world by saying that nobody could have predict the specifics that led to that event.

Nicholas Nassim Taleb, as much as people here seem to dislike his personal style, has written extensively on these types of events. He calls them Black Swans, and says while we may not have predicted the 2008 crash, we would be wise to assume there exist unforeseeable/non-modeled events that would have non-linear impact on the system.

I think of it this way: future events* will occur that will invalidate our models and have outsized/nonlinear impact on the KPI we care about. Our blindness is because there are so many baked-in assumptions and possible futures we can't mentally model for them. Any single "Black Swan" event has a vanishingly small probability of coming true, but the sum of the Black Swan probabilities is the important metric, not any given one.

Taleb's thinking is filled with judgement of his peers, and his egotistical writing style is bombastic. His themes, however, from his trilogy of books, marries human psychology with rare outcome events to form an interesting contrarian take on the world.

* 1987 crash, dot-com crash, the Great Recession, etc.

>Who's to say not another sector is as rotten as real estate was?

Sometimes I suspect it's all rotten.

I haven't heard that claim too often.

In fact I've heard a hell of a lot of "CDOs are back and as interwoven as ever!" things. Though in theory we've learned a lot, who knows what will happen

From my understanding, American student loans can't be defaulted upon? They might be a bit too particular to hit the issues that happened with mortgages

It was certainly a once-in-a-lifetime event looking back: the greatest economic shock since the Great Depression [0].

As to why it is different now, this article [1] contains some answers (anyone can decide whether they agree or not).

[0] https://en.wikipedia.org/wiki/Comparisons_between_the_Great_...

[1] http://cepr.net/blogs/beat-the-press/it-actually-doesn-t-fee...

Reply on news.ycombinator.com