How Goldman Sachs saw house crash coming – http://bit.ly/3MgLGL

For the record, in Britain, Charles Goodhart warned about a house-price bubble in 2002:

“CHARLES GOODHART, a former member of the Bank of England’s monetary policy committee, warned yesterday that the Bank is failing to take sufficient account of the house price boom in setting interest rates.

“His warning comes amid growing fears among economists that house prices, fuelled by the lowest interest rates for 38 years, are getting out of control. Yesterday, new figures showed that homeowners are borrowing record amounts against the rising value of their homes. . . ” [6 April 2002]
http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2002/04/06/cngood06.xml

And see this news report by Philip Thornton on 1 May 2002 about rising house prices:
http://www.independent.co.uk/news/business/analysis-and-features/is-the-house-price-boom-an-unsustainable-bubble-653078.html

Roger Bootle wrote a book about it: Money for Nothing (Nicholas Brealey Publishing, 2003)

The IMF was warning about a house-price bubble in Britain back in 2003.

HM Treasury and the Bank of England cannot claim to have been unaware of the issue.

Why do you think I have GS shares in my pension fund?!

“How Goldman secretly bet on the U.S. housing crash”

QWhat excellent news. As Bob Shiller has been pointing out, if more people had been betting on house prices falling (and as he goes on to point out, if the speculative tools were more available for people to do so) then the boom wouldn’t have got as far as it did and the effects of the crash greatly mitigated.

Is this the least-informed article on financial products ever? Look at the two screamer ‘scoops’:

1. Goldmans had a securitisation department.
2. Goldmans structured its securitised bond issues through SPVs in the Caymans and other low-tax jurisdictions.

Those two ‘scoops’ describe the operating procedure of every investment bank, in the US and Europe. It’s like declaring breathlessly that ‘Liberal Conspiracy [for example...] has discovered that British bank HSBC has been making money by paying its account holders nugatory rates of interest AT THE SAME TIME AS charging borrowers significantly more!’

And I’m not exactly blown away by the fact that a financial institution with substantial exposure on mortgages took out hedging positions to protect themselves in the circumstances that house prices collapsed. That’s called risk management, and we could do with more of it. Financially illiterate journalism at its very best.

Tim W @3: What’s the best weblink to Bob Shiller’s point of view on this?

Do you think there’s a chance that Kroll’s much-vaunted ‘investigative-style’ credit rating, in opposition to/supplementary to the bond-issuer paid ratings offered by the mainstream rating agencies might have something like the effect you desire i.e. investors (at least those who can afford Kroll-like services) starting to see how likely the bubble is to burst soon and therefore taking the same steps as Goldman Sachs? Not exactly an additional speculative tool, I guess (though I’d be interested to see more exactly what Bob Shiller is proposing), but might such a development change things, do you think?

No particular agenda with these questions – just trying to explore further a world I don’t inhabit.

Apologies for the ego here but the first thing I could think of was the review of his book I did.

http://www.theregister.co.uk/2008/09/01/schiller_subprime_review/

Thanks, Tim

Some interesting ideas there around additional speculation-through-a-zero-sum housing-futures-markey being a fix for speculation-gone-wrong (just proving I’ve really read it), and good to see that you don’t do the total free market thing, and that it’s all a bit more instiutionally nuanced than that.

I may come back to the whole thing in a separate post if time allows, and look at what I suggest may be the difficulty in your argument, namely the conjuncture between fixing the market by extending it and the acknowledgment that markets are ‘places’ where exisiting institutional power is wielded in self-interest.

Or something.

sorry to tip toe into this debate, but i too have only recently discovered an interest in economics through questioning ‘why the fuck are we here’ like everyone else and …..

If the analysts were to encompass the ‘illegal’ practices of investment banks wouldn’t they be admitting that hedging using these practices (for example. exposing a derivative to a known risk and selling it off) is not simply risk management but an endorsement of the practices themselves as a means of control over speculation?

Surely not, in order to do that then you would need to know how far a drop would be by controlling the rate of decline by say, illegal ‘naked-short selling’ (as well as other practices) to fuck a bank (with higher risks) to a shoddy market (that you’ve created) and then be in control of the bail-outs given by governments to bi….oh…bugger..

they did and they were.

Incidently, as much as the supposed illegal practices of investment banks are laid bare in the press, it is also the legal practices that shock and disgust people like me (a pleb!) just as much as the ‘illegal’ practices. It’s just that the ‘illegal’ practices are being investigated so we are finding analysis of the ‘legal’ practices used by investment banks in the popular press. Maybe i just don’t see the bigger picture like a ‘pure’ (and therefore bereft of moral judgement) economic analyst would, i just see lots of real people being fucked.

I think it’s kind of cool that NINJAs were partly responsible for fucking up the market though.

ps is that he same Kroll fellas that interviewed the poor whistle blower chap at HSBC just before he jumped to his death from the office window?

“and good to see that you don’t do the total free market thing”

When I’ve time and space I don’t do so. For markets are indeed lovely things but they ain’t perfect. The trick is in working out when they’re worse than alternative methods: something which of course I tend to think happens a great deal less often than many others.

I did have to raor with laughter once when I was trying to point out why copyrights and patents exist (and I was defending the concept if not the detail) and be accused of insisting that free markets all the time was the way to go. When, of course, copyrights and patents are a classic case of noting that free markets won’t work (as they tend not to for public goods) and so I was in fact pointing out exacvtly the opposite of the free market case: that we have to intervene sometimes.

It’s the definition of “sometimes” which causes the problems.