Macroprudential...that is like double-condom with hooker when you are 99?

In hindsight, bubbles are easy to see. At the time of the bubble, its a little harder to separate out that they are occurring.

"Well, the task is impossible; people will always disagree at the time,"

It's worse than that because everyone likes bubbles while they're inflating, and our economic regulator - the Fed - has been captured by the political process.

Does a lion complain when there are too many zebra to eat?

Why should anyone expect bought and paid for economists, who even if they had morals, take such a narrow view as to not to be able to see the forest for the trees anyway.

Snow wasn't "wrong" as much as "lying" I think.

For the Treasury Secretary to say there is a bubble is to prompt its deflation.

I disagree, Nemo...the technical task is not at all impossible.

But this isn't a technical problem, it's a political problem. CR rightly says that "during every bubble there are always people in position of authority arguing everything is fine."

That's why they're in positions of authority.

Following up on the Romer discussion - this is from today's David Rosenberg newsletter
So wages and salaries are down 1.1% from a year ago. Interest income is down 5.2%. Dividend income has fallen 12.4%. Proprietary income is off 4%. The only income source in the green column are government transfers (food stamps, welfare, unemployment insurance) which is a booming industry at over 12% YoY growth. In fact, the share of personal income coming in the form of government handouts of one sort or another rose a full percentage point in May to a record 18%, and has jumped two percentage points in just the last three months, which is without precedence. Imagine that in the mid-1960s when the ‘Great Society’ was signed, sealed and delivered, that ratio of Uncle Sam support was barely more than 7%!
...
Most pundits who crow about green shoots and about an inventory restocking in the third quarter giving way towards some sustainable economic expansion live in the old paradigm. They don’t realize, for whatever reason, that the deflationary aftershocks that follow a post-bubble credit collapse typically last for 5 to 10 years. Businesses understand better than the typical Wall Street or Bay Street economist and strategist that everything from order books, to output, to staffing have to now be restructured to adequately reflect a permanently lower level of leverage in the economy.

I guess it is the lack of booming optimism that prevents people like David from getting a job in the White House (and his Canadian citizenship, too )

Because dictatorial control of the money supply is not enough power?

Dictatorial control of the money supply? The Fed voluntarily abdicated when they effectively abandoned leverage requirements on the banks.

Nemo wrote on Mon, 6/29/2009 - 9:55 am

So the question is, on which side do you want to err?

I agree it is impossible, for many reasons, including that collecting/analyzing data would be impeded in every way possible - and that the objects to be studied will vary from condition to condition.

The ONLY way I see for macro-oversight of systemic risk is to put huge institutions in rather severe limits on leverage (and hedging) just because they are huge. Allow no significant risks to be financed. If this results in huge institutions being non-competitive, so be it.

"I think we need to clearly understand how we identify - in real time - these macroeconomic and systemic risks."

That's the nub of it. You cannot do so and even if you could you would fight against unbeatable economic and political pressure. All you can do is identify when things are deviating from norms that are know to be safe - like household debt ratios, home-price-to-earnings multiples, own-vs-rent costs. The presumption should be that 'normal' capital ratios are fine if you are making 'normal' loans... but they are not if you are not.

Still the problem is, as others post above, that everybody jumped on the bubble bandwagon and the naysayers simple got shoved aside and that will happen again, just as soon as memory fades a bit.

Yalt (profile) wrote (in reply to...) on Mon, 6/29/2009 - 5:08 pm
Dictatorial control of the money supply? The Fed voluntarily abdicated when they effectively abandoned leverage requirements on the banks.

I do not recall the Fed renouncing its authority over leverage requirements.

"Within limits specified by law, the Board of Governors has sole authority over changes in reserve requirements. "

FRB: Monetary Policy, Reserve Requirements

I do recall the Fed using its authority to set requirements too low as a matter of policy.

At the time of the bubble, its a little harder to separate out that they are occurring.

Oh, I think in the case of Nasdaq, Fall/Winter 1999, it was quite clear that we were in a bubble. When you had CNBC hosting Nasdaq 5000 parties, INTC/MSFT added to Dow, an index PE nearly 200, it was clear it wasn't a sustainable state of affairs.

Housing bubble was a bit more anecdotal. People had been calling it a bubble since 2001, so it climbed a wall of worry. But summer 2005 was the Magazine Cover indicator. Also, you started seeing photos every day of flippers camped out to put in above-market advance bids on unbuilt condos.

I guess my moment was, fall 2005, one of my friends had just retired. He got a refi from Countrywide without anyone ever asking him whether he had a job or not.

I think it was clear there was a bubble, it just wasn't clear when you needed to get off in order to survive with your account intact. I treat the problem like how you sell a climax run... think it's a little better to wait till past the top.

Last I checked, ratings agencies are supposed to look forward. Funny how no one ever seems to mention them anymore.

"By focusing on reserves in the manner defined by accounting rules, examiners are looking at history"

Wrong Rosengren. Even a half-wit bean counter knows that one (starting in paragraph 9)

Calculated Risk: UberNerd GuestNerd

It was the short cuts taken; the assumptions calculated with numbers from teh [sic] phone book.

sm_landlord,

Great article. Shows why the Administration's plans aren't going to accomplish very much.

I sent it to CR with a note saying Tanta would be going ballistic over the servicers' actions if she were still with us.

Here's the thing...if you just put together 1+1....

1) price earnings or price rent ratios veer way away from their means....

Note for the record, record it, track it...report on it. To congress. Have someone then look into how this is happening.

Look at the debt. Look how loans are being made. Report on it.

My glod, there was so much info there already, and we just failed to look at it. over and over.

2) Examine the forecasts under which the earnings are being projected. The fundamentals. The vacancy and rental rates. Look at what is driving them up. Look where the income came from. Look at the jobs...funny, they are all in RE lending and construction.

Seriously folks, its not that hard. But trust me, if you report it to people who dont want to hear it, as i did in 2004, you will be banished.

re-post from last thread:

Comrade Scott (profile) wrote on Mon, 6/29/2009 - 9:21 am
@rich, which do you recommend? El Pais?

• for Honduras, try this:

Honduras Weekly

-for all things latin american:

Latin American Network Information Center - LANIC
:

I think we need to clearly understand how we identify - in real time - these macroeconomic and systemic risks.
Actually, I thought we had regulations to try to minimize the problems (like Glass-Steagall) because we could see that the markets move too fast to try to react</b. to, but we gutted them. Or we decided CDS wasn't insurance. You notice neither of these things had to be implemented in real time, there were clear warnings ahead of time. So this is like saying we need to wait to hear the chickens squawking so we can go and try to shoot the fox, instead of building a safe chicken coop.

Congress likes to party and there's just no way, after the next party gets going, that Congress is going to let the appointed Czar punchbowl-taker-upper take the punch bowl away!

Darn, the comment got cut. Suffice it to say the rest was witty and insightful. Anyway, the upshot is, we're better able formulate rational policy before the problems, than reacting as they arise. But we don't follow our own wiser choices.

MrM, thanks for excerpting the Rosenberg letter.

lama,

Just to clarify. The big 4 never left those consulting areas. They just "couldn't" be on both sides of the deal, auditing and consulting for the same client. With Anderson going under, they all got a big fat juciy piece of the pie, including the creamy consulting middle.

--bh

Banks in 2007 began increasing the interbank lending rates because of the bubble's market risk.

It was the systemic regulator (Fed) who STOPPED the macroprudential behavior of the private sector.

A lot of prime mortgage that have 20% down are still in trouble... So I don't think it'll prevent it.

However, I agree that it's a very crucial factor to REDUCE the severity of any run up/subsequent crash.

I wrote another piece in my ongoing, CR inspired, story of doom "American Apocalypse."

If anyone is interested - a sample.

The government had announced the formation of new communities. They didn’t call them “camps.” They were “Planned communities with a full range of amenities.” Minus all the government verbal engineering the goal was to identify, tag, and transfer the sheep into government flocks. The way it was going to work was, on the surface, commendable in many ways. It was long term, total care, disaster relief. They already had a camp system built and in place for a couple years. These were primarily homeless shelters on a large scale. Designed like military bases, including the gates and fences, they provided facilities for those who needed them.

They provided schools for the children an adults. All participants over 18 had to complete the GED certification within a year or leave. For those who already had a high school diploma; ongoing online training in an approved field was required. Job placement was provided, this included daycare and transportation. Clothes were provided. It was a mass produced, easily identifiable uniform that was a parody of civilian attire. An entire black market industry sprung up in the camps for the modification of these clothes. There was a minor scandal about the governments efforts to pay media people an others to wear it, at least for vid’s going out on the Internet. That blew over fairly quickly.

site: afterthecrash.net

hc (profile) wrote (in reply to...) on Mon, 6/29/2009 - 5:48 pm
A lot of prime mortgage that have 20% down are still in trouble... So I don't think it'll prevent it.

Remember that, if we always had a 20% minimum, we would not have had the same bubble and not be where we are today.

However, unemployment and other personal crises still can sink an 80% LTV mortgage.

A 20%-down 30yr mortgage is lax compared to pre-WWII prudence.

I don't think you need to posit a vast conspiracy behind market manipulation, just a confluence of interests.

Government knows passing TARP 2.0 will mean the pitchforks and torches come out. It needs the market higher so financials can issue secondaries and recapitalizae.

CNBC remembers the depths of 2002, when GE almost pulled the plug. People who advertise to millionaires don't like bear markets.

Insurance companies were incredibly exposed to the market via annuities. They're state jurisdiction, but no state could ever afford to bail them out. They need the market higher.

There's no political will to address public pensions, much less private ones. They needed the markets higher.

Liz, how many foreclosures could a judge possibly do in a day, if each and every one of them were completely routine?

hc,

Definitely agree. I don't know how you construct a regulatory agency so that: (1) it's not "captured" by those it's supposed to regulate; (2) so that the apparently misanthropic staff members who start talking about the emperor not having any clothes on are at least listened to, if not respected--and not just by other agency staff/management but by the exec branch & those Congresspeople who are so easily influenced by a select constituent group.

It may be difficult to see a bubble, but somehow, quite a few people, including CR, seem to have perceived that a housing bubble was developing at a time when Greenspan was still saying things were great.

It seems the US used to have some legislation (Glass-Steagall, for instance) that might've decreased the size of the bubble & resulting damage and that there are laws that, had they been enforced, could've limited the damage. Part of the problem seems to be preventing either/both the exec & too many Congresspeople from overriding regulators who do see some of the hazards and start to do something about it/them AND finding ways to recruit, keep & support those people who would become that type of regulator. Having a civil service was supposed to help solve that problem, but apparently it's not enough.

"Bubbles are caused by irrational credit, and not by fiat currency. "

this is a variant on the 'guns don't kill people, people kill people' fallacy.

give every prisoner a loaded handgun at folsom and test that one out.

...not too different from giving a politically captured institution addicted to creating credit bubbles for the profits of the members of the institution control over a fiat currency.

guns may not kill people, but they sure make it a hell of a lot easier.

"and any chance of ever being able to dig themselves out of the current mess"

that's ridiculous. see: Japan 1995