Tuesday, September 30, 2008

The real estate crash was expected - but who anticipated the bank crash?

I read Krugman, but even without his help I think it was obvious we were in a real estate bubble at least 4-5 years ago. When we moved 2 years ago we expected we'd lose money in the near term; we'd sold high but bought higher.

There were lots of solid predictions of doom ...
The Media Equation - Daring to Say Loans Made No Sense - NYTimes.com

... Mr. Davidson said that the idiosyncrasy of the instruments, combined with the overlay of technology, allowed the traders to live in denial. They would sit at terminals and use data — historical data that had been gathered before they started giving out money to people with no ability to pay — and decide that the risks were manageable. All of it was unreal, ineffable, tough to know. Except the way it turned out, as Mr. Davidson notes near the end of the story.

“It’s as if the global pool of money thought it was putting trillions of dollars in a savings account, but really, half of it was going into a furnace. The monI didn't figure the entire financial system would collapse, and take our investments down as well. I thought things would be a bit more contained.ey is gone, burned up, never to come back.”
Was the money really destroyed? If you sold a house at the peak, then bought a smaller home and put the difference in a money market fund, didn't you come out ahead?

On the other hand a huge number of homes were built in some parts of the country that will never recover their costs. The physical stock is deteriorating, and they may be bulldozed. Even there, though, the workers spent the money they got. The real losers were the trees, and the opportunity cost of wasted work.

My hobbyist understanding of the economics is that what we end up with is largely a huge transfer of money. We talk about the losers now, but someone is profiting somewhere. So the money will still slosh around somewhere, still looking for the next bubble.

On the other hand, while we expected a near term painful drop in our home value, we didn't expect an equivalent drop in our investment value. We hoped for a softer landing, but we didn't realize how big the Ponzi scheme had become. We didn't realize how vulnerable banks really were; they didn't exactly vaporize in the bubble of 2000. We thought the lessons of Great Depression I and the crises of Japan and Sweden were well understood.

So did those TV shows predict the collapse of the banking sector, or did they miss that too?

No comments: