MICHAEL J. BURRY: I Saw the Crisis Coming. Why Didn’t the Fed?

[Elmore Furth]

I remember worrying about the possibility of economic over optimism and I didn't think I was autistic, like what they are saying about Michael Burry. Could it be that Greenspan and the bulk of people were just stupid?

ALAN GREENSPAN, the former chairman of the Federal Reserve, proclaimed last month that no one could have predicted the housing bubble. “Everybody missed it,” he said, “academia, the Federal Reserve, all regulators.”

But that is not how I remember it. Back in 2005 and 2006, I argued as forcefully as I could, in letters to clients of my investment firm, Scion Capital, that the mortgage market would melt down in the second half of 2007, ...

The market for subprime mortgages and the derivatives thereof would not begin its spectacular collapse until roughly two years after Mr. Greenspan’s speech. But the signs were all there in 2005, when a bursting of the bubble would have had far less dire consequences, and when the government could have acted to minimize the fallout.
The market for subprime mortgages and the derivatives thereof would not begin its spectacular collapse until roughly two years after Mr. Greenspan’s speech. But the signs were all there in 2005, when a bursting of the bubble would have had far less dire consequences, and when the government could have acted to minimize the fallout.

Instead, our leaders in Washington either willfully or ignorantly aided and abetted the bubble. And even when the full extent of the financial crisis became painfully clear early in 2007, the Federal Reserve chairman...

In February 2004, a few months before the Fed formally ended a remarkable streak of interest-rate cuts, Mr. Greenspan told Americans that they would be missing out if they failed to take advantage of cost-saving adjustable-rate mortgages. And he suggested to the banks that “American consumers might benefit if lenders provided greater mortgage product alternatives to the traditional fixed-rate mortgage.” ... Mr. Greenspan directly. The former Fed chairman responded that my insights had been a “statistical illusion.” Perhaps, he suggested, I was just a supremely lucky flipper of coins.

I Saw the Crisis Coming. Why Didn’t the Fed?

[Oceansaway]

1. K&R...n/t

[Hissyspit]

2. Heh. Most everybody at DU saw the crisis coming.

Multiple threads on it three, two, one year before.

[Lost4words]

9. the real number, 30 years to get where we are today.

30 years pounding away at our democracy, 30 years hammering down civil liberties, 30 years of corporate pandering, 30 years of weakening unions. All the various ups and downs over the 3 decades are inconsequential to their ultimate objective which is total freedom to profit at any and all costs. All our lives can be measured on their balance sheets.

[tom_paine]

3. Of course Greenspan and the rest saw it coming. They were just making too much money off us Plebs

to give a shit.

[Lost4words]

7. Hell, they helped engineer it, while laughing as us. nt

[PDJane]

Not stupid; blinded by the right.

Idealism trumped reality.

[PDJane]

4. dupe; fast fingers.

[Lost4words]

5. Because they saw advantage of economic shock on the masses.

And cut social programs and divide the pie up among themselves. Read The Shock Doctrine by Naomi Klein, factually devastating.

You will get a glimpse of exactly who has been manipulating markets against the working class of the World.

It will give you the kind of insight you will never get from the MSM.

Read everyday, read like there is no tomorrow. Urge others to do the same. We need to educate others to survive.

I am not shittin ya!

[no_hypocrisy]

6. Who's he shitting?

I saw the crisis coming with the "return" of "our" money the first month * was in office and on 9-11. After that, everything was redundant.

[FormerDittoHead]

8. Mr. Greenspan here's a clue: when it sounds crazy, it probably IS.

I had a friend in real estate and he was telling me 4 YEARS ago "it's crazy out there - they'll give a mortgage to anyone for any price without any background checks or anything..." (not the much-talked Republican talking point about low income "required" mortgages...)

Then, I heard a story from a friend of my wife's whose brother was a mortgage broker who was working 18 hour days processing mortgages. They knew that it was a bubble and they get to get the paper OUT onto the market of derivatives or the business has to pay the price for a default.

Then, once the wave started cresting, Morgan Stanley and AGI et. al DOUBLED DOWN and accelerated their issuance of the derivatives knowing that WHEN losses came, the gov't would only bail them out if the loss was so catastrophic that the gov't "couldn't" let them fail...

FOLLOW THE MONEY. From US to THEM. The rest is the "acceptable narrative". Being perfectly honest, if I could literally make a BILLION DOLLARS ripping off the gov't, I'd tell you any damn story, if you'd believe in it and then forget about it...

[nagle]

10. It's not that hard to see the bubble. The hard part is market timing.

I'm on record as having called the housing crisis, the oil spike, and the dot-com collapse. See Downside, where I've been making occasional predictions since 2000 based on fundamentals. Take a look at 2006-01-01 on "News" on the Downside site, which I own.

It's not that hard to detect a bubble. The fundamentals will tell you that. For housing, the median house price is normally about 2x to 3x the median income. That ratio hit 4 for the US nationally and went as high as 10 in some markets, like California. It was obvious that something had to give. The housing market was running on "greater fool theory", which never works for long.

But predicting when a bubble will collapse is tough. Both I and Burry expected it a year or two earlier than it happened. It was blindingly obvious that something had to break. But when? The Fed kept interest rates artificially low for several years longer than they should have, which both postponed the inevitable and made it worse when it happened. As William McChesney Martin, Chairman of the Fed in the 1960s, wrote, it is the duty of the Fed "to take away the punch bowl just as the party gets going". Greenspan failed in that duty.

Burry had to maintain his short positions for longer than was comfortable, and he bailed out just before things really tanked.

From a more general perspective, part of the problem was the refusal to recognize the runup in housing prices as inflation. We used to hear talk of a "wealth effect" from increasing housing prices. But that was fictitious, and we don't hear that phrase used much now. House prices are vastly underweighted in the CPI (a change in the 1980s), and this distorts our view of inflation.