March 07, 2007

Krugman: Market Meltdown And Irrational Complacency - "Why didn't they see the risks?"


Krugman is another of the guys who simply gets it (like Shiller, like Schiff). Here's his latest column, written a year into the future, when it will all seem so obvious.

Everyone ready?

The great market meltdown of 2007 began a year ago, with a 9 percent fall in the Shanghai market, followed by a 416-point slide in the Dow. But as in the previous global financial crisis, which began with the devaluation of Thailand's currency in the summer of 1997, it took many months before people realized how far the damage would spread.

What made the market so vulnerable to panic? It wasn't so much a matter of irrational exuberance — although there was plenty of that, too — as it was a matter of irrational complacency.

After the bursting of the technology bubble of the 1990s failed to produce a global disaster, investors began to act as if nothing bad would ever happen again. Risk premiums — the extra return people demand when lending money to less than totally reliable borrowers — dwindled away.

Sooner or later, however, reality was bound to intrude. By early 2007, the collapse of the U.S. housing boom had brought with it widespread defaults on subprime mortgages — loans to home buyers who fail to meet the strictest lending standards. Lenders insisted that this was an isolated problem, which wouldn't spread to the rest of the market or to the real economy. But it did.

In retrospect, the complacency of investors on the eve of the crisis seems puzzling. Why didn't they see the risks?

29 comments:

Anonymous said...

Soon the $1 will become the $1 million dollar note, and a cup of coffee will cost $3.5 million. By the way, George W's pic will be on the detested $1 million note.

Anonymous said...

First Donald Rumsfeld gets thrown under the bus. Now Scooter Libby becomes the scapegoat. Dignity and honor? Not on this watch.

Anonymous said...

add this keith. Maybe she should hook?

http://www.youtube.com/watch?v=Q5EJOAxHe3Q

Anonymous said...
This comment has been removed by a blog administrator.
Mort said...

A post about complacency followed by one about insider selling. Perfect combination.

Anonymous said...

"First Donald Rumsfeld gets thrown under the bus. Now Scooter Libby becomes the scapegoat. Dignity and honor? Not on this watch."

So, are you saying the rot goes all the way to the top?

You're right, you know.

Anonymous said...

Why didn't they see the risks?"

There are four "theys".....

1) Talking heads in positions of supposed authority who can barely predict day vs night let alone tomorrows stock market or latest bubble (e.g. your oft quoted RE cheerleader)

2) The bubble architects (and their cohorts) who engineer bubbles, know when to get in, and know when to get out to maximize profit. (e.g. the FED and global elite/insiders)

3) Intelligent people who can put things together to make logical predictions (either profiting from a situation or just calling it out) (e.g. Keith and his minions)

4) Sheeple (FBs/GFs/etc.) (e.g. J6P)

As a rule 90% of media quotes come from type 1).

It is a game to type 2), and since they control it, they almost always win.

Anonymous said...

Article from 1997 relating to The Plunge Protection Team. A Must Read!

http://www.washingtonpost.com/wp-srv/business/longterm/blackm/plunge.htm

Anonymous said...
This comment has been removed by a blog administrator.
Anonymous said...

anon 6:41,

And all the while house prices will be crashing and your rent will be goig up 2% a year right?

I wish someone could explain to me how hyprinflation, a crashing housing market and steady rents are possible.

Anonymous said...

But wait....all the "there is no conspiracy" types always refer to the PPT in the same sentence as "little green men" and "tin foil hats".....

And yet....there it is...in print.

Anyone who denies the PPT exists most probably would denounce the fact that there is a HUGE RE bubble.

I hear ostrich meat is tasty.....

Anonymous said...

Its easy to explain why rents won't go up much even if there is inflation. Supply and demand.

Many people will be forced to give up single family houses and live in apartments. Many apartment dwellers will double up or move back with mom and dad. Others will rent out rooms in their houses.

Rents won't go up much because there will be enough supply to handle the demand.

Bake McBride said...

This is Paul Krugman's ninth bear market recession forecast in the last four years.....

Anonymous said...

Krugman doesn't get it.

He's like everybody trying to get in front of
the parade and pretend he leads the thing.

He's an embarrasment to the economics
profession -- and that's an achievement
because the profession doesn't need much
help to be an embarrasment.

A year and a half ago, towards the end of
2005 and at the peak of the bubble, Paul
Krugman spoke at the 92nd St. Y in NY.

During the Q & A part of that event Paul
was asked: Is there a housing bubble?

Paul Krugman's answer: No.

Is this then a good time to buy real estate?

Paul Krugman's answer: Yes.

It's on tape. Anybody can verify this.

The guy doesn't get it.

Please stop pumping up the ego of an
idiot who doesn't need much help to
inflate his pompous ego.

And please, stop saying that he gets it.

He never did.

Anonymous said...

Anonymous said...
anon 6:41: I wish someone could explain to me how hyprinflation, a crashing housing market and steady rents are possible.

maybe because of the VAST numbers of empty homes which will drive rental rate down.

Anonymous said...

"RISKS" are so 1990's there are NO risks in today environment, just rewards, OK, end of discussion, class dismissed.

For homework please read:

"Sheeple and proud" pages 110-178

Mort said...

Buy FNM, like the big dogs do. OPM will make you high.

Mark in San Diego said...

Also some irrational complacency on the gasoline front - Gas here in California is back to over $3 in many areas. . .this was supposed to be what would push the homedebtor consumer over the edge. . .hmmmm guess those foreclosures will keep climbing.

Anonymous said...

Krugman has been calling for a economic crash since 2001. For years he compared us to Argentina. After six years of a fabulous and improving economy he is still at it, although leaving the Argentine out of it.

Anonymous said...

On HP anything is possible including a hyperinflation and a global depression occuring simultaneously.

Joey Wadd said...

I wish someone could explain to me how hyprinflation, a crashing housing market and steady rents are possible.

It's real simple:

If renters can't afford the rent they will move to a place where they can. This includes relocation if need be. Unlike you, I'm not tied to some shitbox house that can't be sold.

economics101 said...

simple supply-demand economics:

There are plenty of vacant rental units, so rents will not increase much.

There are way too many houses, at prices that are way beyond the reach of workers, so home prices will crash.


This is true in most areas.

Anonymous said...

Prediction:
"We have a sluggish economy, which is, for all practical purposes, in recession..."
— Paul Krugman, May 29th, 2003

GDP Growth Q3 2003: 8.2%
-----------------------------------

Prediction:
"An oil-driven recession does not look at all far-fetched."
— Paul Krugman, May 14th, 2004

GDP Growth Q3 2004: 3.3%
-----------------------------------

Prediction:
"We're looking at an economy pushed right back into recession."
— Paul Krugman, May 27th, 2005

GDP growth Q3 2005: 3.8%

-----------------------------------
Prediction:
"there’s an economic slowdown coming."
- Paul Krugman, August 7, 2006

GDP growth Q4 2006: 3.5%

-----------------------------------

So lemme guess, he's predicting a recession, right? Yeah I'll be sure to look out for that. Averaging the last 4 quarters after a Krugman recession prediction, I predict Q2 2007 will have a GDP growth rate of 4.7%.

WhiteTower said...

Well, like all socialists Krugman doesn't understand that it is government that caused the lack of foresight on the part of the experts within the mortgage lending industry.

Specifically, the Federal Reserve kept interest rates too low, too long. With all the liquidity sloshing around in the markets, this sent a "false signal" to investors that essentially free money would be readily available, even for the most speculative ventures.

It could have been tulips or dot-com stocks but the speculative investment this time was houses.

For a century, "Austrian" economists like F.A. Hayek and Ludwig von Mises have told us that the fact that the government controls the currency flows into the market will also create speculative bubbles.

Always has, always will.

Anonymous said...

Yes, I want scooter to frogmarch, but I really want the big enchalada; the 'rogue' to do the shimmey shimmey two step down pennslyvania avenue.

The filth the republibans have brought on this country is finally starting to get reveiled... These scumbags must be prosecuted in order for this to never happen again, and then the country can begin to heal.

Anonymous said...

Joey Wadd said...

I wish someone could explain to me how hyprinflation, a crashing housing market and steady rents are possible.

It's real simple:

If renters can't afford the rent they will move to a place where they can. This includes relocation if need be. Unlike you, I'm not tied to some shitbox house that can't be sold.

March 07, 2007 11:30 PM


---------------------------------
Dude take an econ 101 lesson, that is downright ridiculous.

In a hyperinflating scenario, house prices increase and rents increases. Doesn't matter if you relocate doofus. The one thing that doesn't increase is mortgage payments. Even ARMs have a cap on them.

Anonymous said...

Thank BushCo and Greenspan for this catastrophe. Everything BushCo touches turns to shit. Bush supporters, past and present, should be shot.

Anonymous said...

Bush supporters, past and present, should be shot.

What happened to the tolerance and diversity found in the Democrap party?

Anonymous said...

Anonymous said...
Joey Wadd said...

I wish someone could explain to me how hyprinflation, a crashing housing market and steady rents are possible.

It's real simple:

If renters can't afford the rent they will move to a place where they can. This includes relocation if need be. Unlike you, I'm not tied to some shitbox house that can't be sold.

March 07, 2007 11:30 PM

---------------------------------
Dude take an econ 101 lesson, that is downright ridiculous.

In a hyperinflating scenario, house prices increase and rents increases. Doesn't matter if you relocate doofus. The one thing that doesn't increase is mortgage payments. Even ARMs have a cap on them.

................................
What about renters becoming squatters in the abandoned houses that the FBs had to abandon?
No rent due for an abandoned house, and there will be plenty of 'em to choose from.

If hyperinflation does kick in, a FB could, theoretically, pay off a $400,000 mortgage with hyperinflation money, of which $400,000 in hyperinflation terms, if it gets real bad, might buy a burger and fries.
The FB would feel mighty confident making such a wise move, paying off the mortgage, but when the real estate tax bill arrives with a due amount of, say $350,000 in hyperinflation dollars owed, the FB will really discover that they truly are F'd.
Renters who signed a lease good for one year under pre hyperinflation dollars would pay the equivalent of pocket change for rent until the lease expires, giving the renters time to figure out which abandoned McMansion to move into.
Ain't Hyperinflation fun to think about?