Jeremy Siegel on Why So Many Experts Missed the Crash

• Report this Comment On December 27, 2011, at 12:58 PM, arizonamike303 wrote:

  Thank you very much Nancy Pelosi and Barney Frank.

• Report this Comment On December 27, 2011, at 12:59 PM, pbass003 wrote:

  Blah,blah, blah. Professor of BS. You can sum it up in one word-greed.

• Report this Comment On December 27, 2011, at 1:06 PM, wolfman225 wrote:

  Morgan, is there any way that a transcript could be posted under the video for those of us who may not have access to broadband or hi-speed wifi? I'm on the road 300 days a year and my ability to access media is limited, at best.

  I very much enjoy reading your articles (and the resulting comments) but it's hard to put the comments into context if I can't play the video.

• Report this Comment On December 27, 2011, at 1:08 PM, TMFHousel wrote:

  Wolfman225,

  We're putting together a short ebook based on these interviews (we did several of them). Should be out within a few weeks. Stay tuned!

• Report this Comment On December 27, 2011, at 1:33 PM, PSU69 wrote:

  I recently read Reckless Endangerment by Gretchen Morgenson and Joshua Rosner. I highly recommend the book. This book helped me understand how our greed system functioned to create the bubble and how the power in Wall Street merges with the power in DC to perpetuate their success at the risk of the stock holders. This interview certainly is fun yet it comes up short drilling down on root causes. SEC has been so clueless and the result is aggressive power holders take advantage and few fell the sword of justice.

• Report this Comment On December 27, 2011, at 1:42 PM, talan123 wrote:

  I'm sorry but I just think that this professor was making excuses for his and other economists poor performance.

  He kept comparing this to the Tech boom of the late 90's and early 2000's but that was a fundamentally different situation. That was a stock-market bubble with corrupt broker's.

  This is the first time that investors started to make bets and gamble on people's homes, the fundamental American dream. For the first time in history, the entire housing market is screwed up at every level from the title owner to the person looking to buy a house. It will be decades before people even know who owns what, thanks to the banks and their robosigners.

  The professor ended by saying that the only way we could have done something about this is if we designed our economy to take out shocks and then went on to say that was communism and how that doesn't work. Talk about a red herring. Preventing people from destroying the economy through dishonest/illegal behavior is not communism. It's common sense. If people lose trust in the market then they go looking for alternatives and they aren't always pleasant. So this second great depression probably isn't "worth it."

  I would like to see all economic professors outside economical activities, as in who pays them to write what they write and who is paying them for their textbooks, I think seeing something like that would make this whole mess much more clearer.

• Report this Comment On December 27, 2011, at 1:45 PM, TMFHousel wrote:

  <<He kept comparing this to the Tech boom of the late 90's and early 2000's but that was a fundamentally different situation. That was a stock-market bubble with corrupt broker's.>>

  Yep, and not properly distinguishing that with a credit-driven boom with debt held at banks is what caused him to miss the crash, as he explains in the video.

• Report this Comment On December 27, 2011, at 2:14 PM, DJDynamicNC wrote:

  Glad to hear this will be out in eBook format; the videos are a great idea but I'm a reader at heart and am rarely in a position to watch them.

  And I just got a Kindle for Christmas that I'm eager to load up.

• Report this Comment On December 27, 2011, at 3:34 PM, erikwalter07 wrote:

  @talan123 - who gambled on people's homes? Surely it was the homeowners who borrowed against the equity in their homes to fuel their spending or purchasers buying much more than they could afford. Banks may have added fuel to the fire, and certainly they were negligent in making NINJA and other unsupportable loans, but the homebuyers (including a huge number who owned multiple properties) are more culpable. The greed ran from the ground up, but it's only at the aggregated levels that we seek to assign blame.

• Report this Comment On December 27, 2011, at 4:14 PM, phillyarchitect wrote:

  Since one primary cause of the crash was the turning of mortgages into commodities that could be sold with highly leveraged transactions, can't we make that against the law, and force banks to hold mortgages intact and not split them into tiny little pieces? In other words go back to the system that was there originally.

  Can't we reintroduce the Glass Steagall Act separating commercial and investment banks?

  I don't read anything about these very simple legislative moves being made, and wonder why.

  And lastly can't we go ahead and let the Bush Tax Cuts expire as they were intended to do? With our economy so badly in debt, why are we even considering extending those ill conceived tax cuts?

• Report this Comment On December 27, 2011, at 4:20 PM, sjankins wrote:

  Are we better at predicting those trends today? Simple answer, no.

  There is an even greater debt bubble growing right under our noses. Gov't debt is $14 trillion and growing. Tax revenues are roughly $2 trillion per year. Would you lend to someone with a 7:1 debt to income ratio? Should we fool ourselves by thinking we can somehow put our economy into hyper-drive and grow our way out of this mess? Should we just raise taxes to all time highs in the middle of a prolonged economic down turn? I think we all know the answers to those.

  The main difference between the homeowners with mortgages they couldn't afford and the US Gov't is that Uncle Sam can just turn on the printing presses and monetize our debt. Instead of defaulting we just pay back the debt in dollars worth less than they were before. How much less? Well thats a good question. Either way inflation is looming ahead and its only a matter of time before its here.

• Report this Comment On December 27, 2011, at 4:41 PM, wolfman225 wrote:

  <<We're putting together a short ebook based on these interviews (we did several of them). Should be out within a few weeks. Stay tuned!>>

  That's great news! I've been playing with a Kindle Touch I got as a gift (I've already downloaded your ebook from Amazon) and I'm looking forward to digitizing my library. I'll keep looking for the release.

• Report this Comment On December 27, 2011, at 4:48 PM, smartmuffin wrote:

  The Austrians didn't miss it.

  What an amazing coincidence that must be!

• Report this Comment On December 27, 2011, at 5:28 PM, DJDynamicNC wrote:

  You mean like Hyman Minsky, the guy universallly lauded (after the fact) for predicting the crash in bold detail (before the fact)?

  No, wait, he's a Keynesian.

  Now, in late 2006 plenty of Austrians (like Peter Schiff) were predicting a housing crash... but then, so was "The Economist," and plenty of other mainstream sources, by that time.

  What I think you're thinking of is the fact that Austrians are at all times predicting economic disaster. Consequently, whenever there is an economic disaster, they claim full credit for predicting it.

  What you miss, though, is that they are then wrong all of the time there isn't a disaster. For example, see a few comments above - hyper inflation is looming! Oh noes! But it's been looming basically since Austrian school economics were developed. And I don't know about you, but you can only get away with "hyperinflation/economic collapse/the rapture is just around the corner!" for so long before it begins to look like fundamentalism rather than evidence-based reasoning.

  Of course, since the entire premise behind Austrian economics is that it's NOT evidence-based but is instead based on "first principles" which may or may not have been invented whole cloth by Von Mises and Hayek, well... I suppose they view that as rather a positive.

• Report this Comment On December 27, 2011, at 5:32 PM, DJDynamicNC wrote:

  @Philly - I agree across the board with you on that post.

• Report this Comment On December 27, 2011, at 6:02 PM, moneytrail wrote:

  Does this guy actually get paid to do studies that totally miss the point? Like most "big-brained" economists (Greenspan, Bernanke, etc) he might want to consider a career as a circus performer.

  Of course leverage magnifies losses. What caused the economic calamity we are still suffering is the fact that trillions of dollars of subprime (e.g.- non-credit

• Report this Comment On December 27, 2011, at 6:24 PM, moneytrail wrote:

  Does this guy actually get paid to perform studies that conclude the obvious, as reported in USA Today and other tabloids, while missing the point of an economic catastrophe, entirely?

  Of course leverage magnifies losses; and the greater the leverage the greater the losses. However, what caused the economic calamity of ’08, from which we have yet to recover, is the government (Barney Frank, Nancy Pelosi and Gang) forcing lenders to provide trillions in loans to non-creditworthy borrowers, most of whom had no chance of ever repaying them. Then FREDDIE and FANNIE misrepresented the magnitude of the dollar amounts involved to the firms who were securitizing them, as the SEC is just beginning to get its arms around. Gee, does anyone wonder why Barney isn’t running for Congress this time around?

  The lesson here is power corrupts: legislators ignoring every sound principle of economics to achieve personal, corrupt political goals.

• Report this Comment On December 27, 2011, at 6:26 PM, maniladad wrote:

  It's important to note that the impetus to the 'reckless' financing of mortgages with minimum downpayments was US Federal government policy. Well-intentioned policy makers wanted to give everyone the opportunity to participate in the American Dream of owning his own home. Prior to about 1995 the 5% down mortgage was a rarity. With government encouragement it became common over a short period of time. The lesson I take from this is that good intentions are no substitute for sound economic policy.

  Also, as other commentors have noted, plenty of people recognized the danger, publicized it and were ignored. Among others, Martin Weiss (Weiss Research) called a number of events (bank failures, housing crash, sovereign debt crisis, gold appreciation, et al) as well. I wouldn't suggest blindly following his (or anyone's) specific investment advice but it's enlightening to read his macroeconomic views, if for no other reason than as a counterpoint to the prevailing perpetual optimism of MF.

• Report this Comment On December 27, 2011, at 6:48 PM, yragca wrote:

  So they didn't look at the charts, available many places, showing the level of debt in the banks, consumer, and government? Or they didn't understand that leverage to an extreme causes a crisis?

  He basically says, "Who knew?"

  Pathetic!

• Report this Comment On December 27, 2011, at 6:51 PM, TradeDragonfly wrote:

  I think it's hilarious that there are so many people who come on here and troll the economist and give their two cents as if they are some kind of expert in the matter. Seriously, find something better to do. Great video, I am loving these new video segments and interviews. Keep it up.

• Report this Comment On December 27, 2011, at 6:56 PM, xetn wrote:

  As a matter of fact, Ron Paul predicted the bubble in 2003! All based on his analysis of the Fed's actions.

  This also resulted in his predictions of a housing bubble.

  The Austrians base their insight on Ludwig von Mises and Fredrick Hayek (Nobel Laureate) creation of the Austrian Theory Of The Business (Trade) Cycle.

  A power point of the theory is here:

  http://www.auburn.edu/~garriro/cbm.ppt

• Report this Comment On December 27, 2011, at 7:01 PM, xetn wrote:

  Here are a few of Ron Paul's predictions:

  http://www.youtube.com/watch?v=A5nGCpzel6o

• Report this Comment On December 27, 2011, at 7:03 PM, shotel wrote:

  Good thing I'm no "Expert", because I saw this bust coming a mile away. As far back as 2004.

  It doesn't take a rocket scientist (AKA: Wharton MBA educated idiot) to understand that a part-time Target employee can not afford a $700,000 home. I personally knew of a prison inmate who signed refi docs on a house he inherited while still incarcerated. Friends of mine with $120K household incomes sold homes in 2005, made $250,000 in net profit, only to use that as a down payment on a $900,000 home less than a mile away (Yep, So. California). I begged them not to, but they all swore that their $900K MacMansion would be worth $1.2M in 24 months.

  Sorry, $120K in pre-tax household income (especially with children and in California) can not support a $650K mortgage...regardless of what the TV news, fool.com, and the loan broker tell you. Rule of thumb: 3x annual household income = price of affordable house (that assumes no children or other outstanding debt).

  What really gets me is these "so called" experts like this bozo are still claiming we are in some sort of recession...as if things will get better. Things won't get appreciably better. U3 Unemployment will NEVER go below 7.5% again. Ever. (The government will cook the numbers and make it seem like the rate will go down, but the effective distributed income...can never go up again in our lifetimes). See Japan's (google; "japanification") unending recession to see whats in store here.

• Report this Comment On December 27, 2011, at 7:47 PM, TMFTomG wrote:

  I enjoyed the interview. I find the talking points disseminated by lobbyists to be so incredibly tedious.

  Consumers bear some blame, yes.

  But far and away, the two biggest catalysts of the destruction:

  a) the banking industry

  b) the government

  In that order, I would argue.

  But let's leave the ranking aside for a second.

  BOTH are to blame. BOTH are polluted with cronyism. What happened at Fannie and Freddie was absolutely disastrous. The same is true of what happened at Lehman, Bear Stearns, AIG, Morgan Stanley, Goldman, JP Morgan, et al.

  Anyone who tries to parse out the blame in just one direction or the other ....either lacks context, lacks objectivity, or has a mind that's been paid for.

  The tragic thing is -- all you have to do is to look at MF Global.....and the intertwining with JP Morgan...to see that so very, very little has changed.

  I hope our President plans to speak out about MF Global, about Jon Corzine, and to acknowledge that the real goal of new taxation is to continue bailing out banks that are now MUCH too big to fail.

  The forces putting America at risk.... are the guys running leveraged big banks...and the governing officials overfed by banking lobbyists.

  Tom Gardner

• Report this Comment On December 27, 2011, at 8:42 PM, gmoney1158 wrote:

  Jeremy Siegel is an idiot economist! He says he should have seen the real estate crash coming, Duh! Everyone saw real estate prices reach ridiculous price highs, especially in California where I live, and almost everyone predicted they could come down again. But no one predicted how quickly they would crash and that's why Siegel is an idiot. As an economic professor, he should have followed the money trail and figured out why the housing bubble was growing so fast. He should have seen the Investment Banks levereging themselves to the gills with high risk derivatives. By the way, Greenspan and Bernanke are idiots also!

• Report this Comment On December 27, 2011, at 9:03 PM, Merton123 wrote:

  Warren Buffet back in the 1970s closed his partnership and waited for the stock market to collapse. The stock market has recovered from the last crash. We will probably see slow growth moving forward.

• Report this Comment On December 27, 2011, at 10:17 PM, skypilot2005 wrote:

  On December 27, 2011, at 4:20 PM, sjankins wrote:

  “The main difference between the homeowners with mortgages they couldn't afford and the US Gov't is that Uncle Sam can just turn on the printing presses and monetize our debt. Instead of defaulting we just pay back the debt in dollars worth less than they were before. How much less? Well thats a good question. Either way inflation is looming ahead and its only a matter of time before its here.”

  I agree.

  I am surprised inflation isn’t greater than it is, already.

  What do I do as an investor?

  One opportunity I feel is to buy quality P. M. Miners. I have been and have profited handsomely, already.

  I recommend you read fellow Fool TMF Sinchirunas’ articles. They are posted here: http://www.fool.com/author/1632/index.aspx?source=iapsitlnk0...

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  Fool On

  Sky Pilot

• Report this Comment On December 28, 2011, at 12:49 AM, Vonux wrote:

  Could you please post a transcript for those that are hearing impaired?

  I thought websites are suppose to follow disability guidelines? Most don't but many large websites do... It is a shame Fool.com doesn't.

  I have wanted to participate in this interview as well as the Prof. Shiller interview but have not been able to because fool.com doesn't accommodate people with disabilities (in my case hearing disability). Both seem very interesting!

  I'm sure I'm not the only deaf person to visit this website!

• Report this Comment On December 28, 2011, at 2:06 AM, frank231 wrote:

  It seems as if he was using just the loss of equity in housing. if you were to add onto that the loss in stock market valuations worldwide on top of loss of equity in housing...I suppose that he is making the assumption that lehman never went under and the markets wouldn't have tanked.. Losses are losses and i feel that they would have manifested themselves one way or another... But I do think that he has a very interesting point.. what if the banks didn't keep any of that paper on their books. would things have played out the same way. He might be right, the losses would have been spread out over the entire planet, and we may have been spared the collapse of lehman

• Report this Comment On December 28, 2011, at 4:53 AM, ndhamer wrote:

  There also needs to be something better than Flash Player for these interviews. I have a very slow internet connection and I get to listen in jerky little bits. Nothing is buffered, so when I try to go back, I just start again with jerky little bits. I look forward to the ebook of these talks.

• Report this Comment On December 28, 2011, at 8:34 AM, Calimesa wrote:

  So many experts missed it because they were blinded by greed.

• Report this Comment On December 28, 2011, at 8:40 AM, DJDynamicNC wrote:

  "The forces putting America at risk.... are the guys running leveraged big banks...and the governing officials overfed by banking lobbyists. "

  This.

  It's funny how the talk is always about "tightening our belts" when it comes to services and funding for working class people, but when it comes to the bankers, we just turn on the free money spigots and let it flow because they're "too big to fail." If they're too big to fail, they're too big a risk to allow to exist.

  Where's Teddy Roosevelt when you need him?

• Report this Comment On December 28, 2011, at 9:31 AM, jlwhithaus wrote:

  What the professor missed (!!!) is that fifty percent of the foreclosures were from people owning more than one house; some as many as 4 or 5 houses. If your house burns down (becomes worthless), you have insurance to replace it. When these houses became worthless in the market, the investors had no insurance (or no funds of their own) to replace it. The financial institutions got them in foreclosures. The financial institutions had credit swaps to cover their loses but the credit swaps were insufficient and they could not pay the financial institutions. The U.S. is the only country that allows you to walk away from a mortgage without going to jail. When you buy a car, you take a loan with the assumption that the value will go down. When people bought houses, they assumed the value would always go up - WRONG! People (and financial institutions) should be required to take a home loan based on the assumption that the home will gradually become WORTHLESS! A blind man could see it coming! The system has not been fixed. It will happen again!

• Report this Comment On December 28, 2011, at 11:34 AM, whereaminow wrote:

  When I get a chance, I'll watch the clip. But the title of the article is kind of funny. It's like "Why did so many witch doctors fail to diagnose the colon cancer?"

  Um, maybe it's because they are witch doctors and not actual doctors. That's the state of mainstream economics. They're not actually economists, but quacks parading as economists. That's why they missed the crash.

  David

• Report this Comment On December 28, 2011, at 2:13 PM, awa99 wrote:

  Th clip is almost worthless, whoever said hindsight was 20/20 never listened to Jeremy Siegel.

• Report this Comment On December 28, 2011, at 3:08 PM, MichaelLittleBig wrote:

  Mr. Siegel is entitled to his opinion.

  In my opinion there was financial fraud-

  the message here is that you can commit financial fraud without fear of being held criminally

  accountable or responsible.

  If what I say is true then- we certainly will see more of the same.

  One minor indication of this is the Republicans

  that are trying to water down any consumer protection by defunding the ConsumerFinancial Protection Agency.

  Over 10 million lost their homes in foreclosure since 2000.They had no rights or financial means to protect themselves within the same regulatory system that the Banks lent their mortgage money.

  In December 19 2007 the Office of Thrift Supervsion stated in their letter to me that there was nothing that they could do to protect the consumer since Congress did not legislate and Consumer Banking Regulations.

  Accordingly we can expect more of the same in the future-financial fraud without punishment.

  Michael Littlebig

  Cleveland Ohio Foreclosure case # 584018

• Report this Comment On December 29, 2011, at 5:38 AM, Sunny7039 wrote:

  Why did so many economists "miss" the crash? Exactly what was the incentive to get it "right?"

  Let's see. Who do you think is going to make more money:

  (a) Someone who says what the richest guys in the room want to hear; or,

  (b) Someone who says what the richest guys in the room do not want to hear?

  Or how about this. Who is going to make more money:

  (a) Someone who participates in creating a bubble; or,

  (b) Someone who does not participate in creating a bubble?

  And anyway, what does it mean to "get it right?" Doesn't it mean to end up with the most money in your pocket? If the way to do that is to "miss" a bubble, well, then how did you get it "wrong" and still end up rich?

  There is a more fundamental problem here than the problem with this bubble or that bubble. There has arisen a fundamental disconnect between work and money, exactly mirrored by the disconnect between telling the truth and being rewarded for it.

  http://www.theatlantic.com/magazine/archive/2009/05/the-quie...

  http://harpers.org/archive/2008/02/0081908

  http://www.sec.gov/news/speech/1993/110393beese.pdf

  Oh, and speaking of telling the truth, have the major banks returned to Mark-to-Market accounting? No? Well then, what is it that those balance sheets are about, and what are the accountants being paid to say, exactly? Hmm? How are they coming up with it?

  Are you allowed to make up your own balance sheet (i.e., net worth) that way, too?

• Report this Comment On December 29, 2011, at 10:04 AM, Gyre07 wrote:

  There is a simple bottom-line way to address what happened. It's not a global solution; but rather a pin-point law.

  Enact a law to punish officers of banks for lending money to those who cannot reasonably be expected to pay the money back w/in a set time-frame. If the banks can't be trusted to regulate themselves then the solution if to set up the framework for Federal prosecutions.

• Report this Comment On December 29, 2011, at 11:59 AM, DJDynamicNC wrote:

  --> "And anyway, what does it mean to "get it right?" Doesn't it mean to end up with the most money in your pocket? If the way to do that is to "miss" a bubble, well, then how did you get it "wrong" and still end up rich?" <--

  This, and the subsequent lines about the disconnect between money and work, absolutely nails it. We have structured our society in a way in which the incentives are almost all perverse.

  I mean, look at the 401 (k) debacle. Now, I love investing and I love that I can do it and I love that the government encourages me to do it with tax incentives. I'm on the Fool for a reason. But another reason I'm on the Fool is because I like talking about this stuff and I can talk about it with people here - and when I try to talk about it with 98% of the people in my day to day life, they lose interest immediately.

  Now, that's fair enough - but we as a society have decided that in order to retire with anything like a decent income, you HAVE to invest.

  I'm really not sure how throwing into the stock market millions of amateur investors with neither the interest nor the ability to pursue prudent investing achieves positive outcomes for allocating capital, nor how that is the best social gain for the country when it turns into (as it inevitably has) an ongoing crisis of retirement funding shortfalls.

  Here's a good article elaborating on that point: http://www.slate.com/blogs/moneybox/2011/12/28/social_securi...

• Report this Comment On December 29, 2011, at 9:00 PM, Sunny7039 wrote:

  Thanks so much, DJ, and thanks for the link.

  Michael Lewis just wrote this on Bloomberg:

  http://www.bloomberg.com/news/2011-12-29/princeton-brews-tro...

  It's sobering to see that what we discuss seriously is already the subject of well-developed parody to those who know what's going on.

  IOW, this is really old news.

• Report this Comment On December 30, 2011, at 11:41 AM, F111epilot wrote:

  Experts missed this. It was pretty obvious to many. What caused this, greed. Corruption in Washington., Barney,Dodd, bush, banks making millions. What happened to the money all of us paid in mortgage insurance? Now the people who lied, bought way beyond their means are being painted in a positive" poor me way" by" Pravda". While the rest of us who paid 20% down. Bought the smaller house and stayed within our means are made to pay for the bailouts. It's frightening when the good guys are denigrated. While the experts, make excuses for their poor judgment, are still the experts with know loss of credibiliy.

• Report this Comment On December 30, 2011, at 3:31 PM, wolfmansbrother wrote:

  What's missing from this analysis is that Greenspan and others in key positions of power were staunch advocates for revoking Glass-Steagall and other sensible regulations put in place during the Great Depression that protected our economy from the types of speculative excesses in highly-leveraged institutions that caused this crash.

  At the end of the clip, Siegel tries to reassure us by pointing out that it was seventy-five years between the two crashes. What changed during those seventy-five years? De-regulation of our financial markets.

• Report this Comment On December 31, 2011, at 11:29 AM, bkri wrote:

  Duh...Guess I could teach economics at Wharton. Where is the "insight" in this?

• Report this Comment On December 31, 2011, at 12:24 PM, sharpx2 wrote:

  Gee. Missed the crash . . . I recall quite clearly that you could turn on CNBC for a full year or more before the crash, and hear about questionable mortgages. It was common knowledge that over 90 percent of mortgages originated in California were interest-only in the final stages - - thus were predicated on the idea that real estate values would rise forever. The behavior by the banks and funds was also transparent; it was simply a matter of getting stuff off your books so fast that you wouldn't be left with the flaming bag of dog doodie. Like so many manias, many of those hurt the worst were the last ones to jump on the trend, just as it ran off a cliff.

  In the end, there's a huge dose of greed on every level from personal to corporate, mixed in with some questionable social engineering. Those of you so quick to blame Pelosi and Frank should remember that the idea of expanding home ownership gained momentum in the Clinton administration, but was embraced whole hog by the Bush folks as well. So let's distribute the blame.

  It is shameful that there have been no criminal prosecutions, since so many powerful parties were clearly complicit in writing and packaging mortgages that were clearly destined to fail. The most salient case of this was when investment banks deliberately shorted the very securitized products they were pushing to their clients!

  Faith in the 'free market' is silly. First of all, it is not free, but rather, gamed and corrupted by all sorts of power plays. And second, we already learned from the Robber Baron era that without regulation the rich and powerful simply hoard as much money as possible. Capitalism in general seems to function better than collectivisation, but without controls and checks it can't help itself - - it leads to excesses, rip-offs and scams of every sort. Pure capitalism presupposes a very high level of moral thinking on the part of those with all the capital. All the trends in our society are moving away from any kind of morality other than "greed is good" and "money is good - - the more the merrier."

• Report this Comment On January 02, 2012, at 10:37 AM, Gyre07 wrote:

  America is awash in BS. Doesn't matter what the source is, you're always being sold something. But it's not a bad place to live as long as you don't identify with the country, or the people who live here.

• Report this Comment On January 03, 2012, at 8:05 PM, jocgar wrote:

  John Cassidy's "How Markets Fail" is good background for this issue. See for instance, Hyman Minski and Behavioral Economics.

• Report this Comment On January 04, 2012, at 9:47 AM, DJDynamicNC wrote:

  @Sharpx2: +1 to that.

• Report this Comment On January 05, 2012, at 7:11 PM, devoish wrote:

  http://www.calculatedriskblog.com/2007/04/walk-down-subprime...

  The link is to the rest of this blog post written by Tanta of Calculated Risk. It goes a long way toward explaining why I blame the housing bubble on the lending industry, far more than the borrowers. Don't skip the comments.

  "But the prime depositories of those days weren’t necessarily interested in placing these loans in their own investment portfolios, and they weren’t eligible for sale to the GSEs, which were the major buyers of loans the depositories didn’t hold. So banks and thrifts started developing whole-loan servicing-released loan sale programs, where the “fallout” from the prime pipeline could be recaptured by making a subprime loan and then selling it outright to a subprime conduit. Everybody gets a loan; all costs are eventually recouped; opportunity thrives. The subprime conduits could securitize the stuff and lay off the risk. It was great.

  Except. There’s always an except. One unforeseen difficulty was that it became possible for certain participants who had always lived in the prime world to compare the profit margins on good old Fannie Mae fixed rates (maybe 50 bps if you were good at it) to those subprime deals (easily 150-200 bps if you were fair-to-middlin’ fastidious). Increased subprime lending could even improve those prime margins: as more and more of your weakest loans fell out of the bottom tier of your GSE loans and into the top tier of your subprime loans, you got paid better by the GSEs in the form of improved guarantee fees (since your average credit quality was so much better) and by your subprime investors (since your average credit quality was so much better). There was, in short, a moral hazard in play: in the shift from non-price to price rationing, more borrowers got mortgages, but it wasn’t always clear that they got the cheapest mortgage they should have gotten.

  Those of us who were there at the time that the story about how “subprime is a way of serving the poor” got written do, then, tend to be somewhat more skeptical of this claim than others. The fact that many participants did not start out with the intention of preying on borrowers doesn’t change the fact that predation became widespread, or that a form of lending that had once been reserved for people with a lot of equity became associated just a few years later almost exclusively with people who had no money at all.

  We can certainly debate the extent to which price-rationed lending provides true benefit to the historically credit-constrained. I’m game. I just think that market participants with short institutional memories are a menace. To all of us."

• Report this Comment On January 06, 2012, at 10:25 AM, NEMnyWtch wrote:

  Thanks again Mr. Housel, great video! I really enjoyed it, and completely agree with this economist. I hope those new to the game (and by new, I mean under 10 years experience) really pay attention to it.

  This has been a tough market, and times are tough, so I understand the anger. However, I have not heard it explained in some time, to remember that the CDS's were the root cause, and the lack of Glass-Steagal that allowed for the over-leveraging into them by large financial institutions.

  Now, what can we learn from it? The only point on which I disagree is that if these securities had been available to all, the spreading out of risk would have softened the blow. We need to get rid of CDS's in my opinion, bring back Glass-Steagal, and keep the banks strictly separated from the brokerage firms. I also agree that Mr. Greenspan should have seen this coming.

• Report this Comment On January 06, 2012, at 4:58 PM, Darwood11 wrote:

  I don't quite agree with Prof. Siegel. He seems to minimize the incredible distribution of the overleveraging.

  Currently (November 2011) about 17% of homes in the US are underwater. However, the average household debt in 2008 was the highest it had ever been. Something like $25K in revolving debt, excluding housing.

  I also think 2008 was a true panic, as opposed to the dot-com bust. In 2008 people (the average investor) realized that their retirement security was a risk. Even self styled investment "experts" such as Jim Cramer, got on national TV and told people the day after, to pull all of their money out of the market, or words to that effect!

  I had gotten really, really nervous in 2007 and re-organized my investments. If I hadn't I would have take a worse drubbing. Of course, in hindsight, I would have been better selling everything.

  I didn't expect people such as Jim Cramer to tell get on the Today Show and tell everyone to bail!

  As it is, I did OK. But I trust no one. Not the government, and most of all the politicians. None of us can predict the future. I think the world economy is still fragile. The US economy could sputter along for another decade, or not.

  BTW, in 2007 I suggested to family that they prepare for some tough and difficult times that could span a decade. I reiterated that after the panic hit.

  My personal failure in all of this? Not quite realizing the depths to which the system is rigged! Mr. Buffett went public and exhorted people to "buy American stocks." He has a personal perspective, and he arranged a financially sweet deal with GE. However, the average man or woman in the street, who held GE shares, got trounced and saw their shares further diluted.

  Ultimately, I think the reason the crash was missed is because of 1) Greed, 2) The "emperor has no clothes" phenomenon, 3) No one wants to be wrong, 4) The average investor is chasing yield and is not very sophisticated, 5) In the final analysis, we're all a bunch of lemmings, running together.

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