The best caption I read this morning

Nine-party coalitions are fragile, and Italy’s 61st postwar cabinet was no exception.

Here are related articles, I cannot find this caption on-line but it is in the print NYT

Elsewhere in the Times today, David Brooks has an excellent column on Wall Street and the recent financial mess.  Scream it from the rooftops, as they say.


In his article, Brooks writes that "The U.S. has enjoyed 25 years of strong economic growth". Assuming that he is talking about the period 1983-2008, what is the evidence for this statement, with particular reference to the words "strong" [comparative to what?] and "growth"? Taking both inflation and population growth into account, surely an argument can be made that there certainly hasn't been 25 years of economic growth and what growth there has been has not been strong relative to other periods of growth. Certainly Brooks is entitled to his opinions but not to his version of the facts. I guess he is still on his "learning curve".

Derek, well, real GDP per capita, by definition, takes both inflation and population growth into account. That statistic has been much stronger than the big drop in Real GDP during the hyperinflationary 70s. Granted, there are problems with the statistics, but most macroeconomic indicators have increased a good bit since 1983.

I think the problem goes well beyond a failure of risk management at the rating companies. A huge portion of the population was duped into believing ridiculous things about real estate and practically NO ONE stepped up to do anything to educate them.

For instance, a few years ago it was common to hear people with little financial knowledge say with certainty that real estate "CANNOT" go down, it can only level off. Arguing with these people was futile, because this is the only message they heard consistently from people who they thought were authorities in the real estate industry (i.e. scummy lying mortgage brokers and real estate brokers, and even some "experts" in the mainstream media), and no one in the press, and none of the financial pundits out there did anything to correct them.

Now obviously the notion that real estate can only go up is absurd, but if it were TRUE, it would make sense to get a crazy interest-only ARM, and lie through your teeth about your income to do it, because when the payments went through the roof you would be able to re-finance, and take out some of the equity you earned through appreciation to help with the payments. If "worse came to worse," and the real estate market "leveled off,' you could sell your home at a wash.

So where were all the experts who have the ability to look at the growth in incomes, population growth, and rental prices and say the growth in housing prices is unsustainable, and heading for a crash? Where were all the stories in the mainstream media warning people? If the average home buyer knew that a real estate crash was probable, or even possibile, I think the mortgage crisis would never have happened.

I remember thinking how crazy this all was as it was happening; looking at the prices skyrocketing for no apparant reason, and the insane loans people were getting, and wondering why no one was talking about how crazy it was. The only person I ever saw do reasonable rational analysis of the situation was the guy at, and nobody in the mainstream media would listen to him. Why didn't any of the so-called experts ever bother to do the same kind of analysis and warn people?

I think this was a failure not only of risk management at the ratings companies, it was a failure of the media and of the financial pundits, and it was created by positive fraud on the part of fly by night mortgage companies and real estate brokers who sold people on the absurd notion that their homes could only rise in value.

Re: Doug

I'll quote you (that just happens to be really convenient) from the comments on the bargaining theory a couple of posts ago.

"Even when the other side reveals some potentially enlightening information about their perspective, we typically use that information to attack the perspective, and prove that our own perspective is superior, instead of taking the opportunity to use the information to search for a compromise that might satisfy both sides."

If people really do believe that housing prices (or real estate) can only level off or go up (which makes no sense to me but I remember someone, maybe a friend of mine, being in disbelief when I told him housing prices in our hometown in FL had shot up and then DROPPED off a cliff - he just couldn't believe they didn't level off), and someone states that this is probably not true, then doesn't your statement apply here as well? If someone wrote/said that "real estate prices can fall" could not the "real estate prices can only level off or go up" group somehow turn this into information to attack the prices can fall perspective?

As for me, I lived through the (relatively) inexpensive baseball card boom and bust as a kid, and know a little better than to believe anyone who tells me "prices of good Z can only go up or level off" ...

Brooks is only right if financiers were "innovating" for the right reasons, i.e., to manage/reduce risk. However, anyone familiar with the incentive structure on Wall Street knows that this is extremely unlikely. Year-end bonuses, for example, give traders and bankers an incentive to pursue short-sighted strategies that may reduce the risk of short-term losses, but dramatically increase the risk of losses in the long run.

Packaging some subprime ARMs into mortgage bonds with traditional prime-rate mortgages looks like a great way to spread risk for the first few years (that is, before the interest rates reset), but when the subprime borrowers predictably start to default a few years later, then holding mortgage bonds becomes a game of blindfolded hot-potato. That's when everyone realizes that the "innovation" of a few years ago wasn't designed to reduce risk at all, it was designed to shift the timing of the risk.

I don't buy the "Greed" narrative either, but Brooks' "Ecology" narrative is as naive as it gets ("It's all just innovation! Innovation is always great!"). Any half-competent market proponent knows that outcomes depend on how the incentives are aligned. When the incentive structure in a particular market produces bad outcomes, calling for a reform of that market's incentive structure isn't "anti-capitalism." On the contrary, calling for reform of a bad incentive structure shows a much greater understanding of and appreciation for capitalism than blindly tut-tutting that anyone who criticizes the current system doesn't understand how markets work.

Give me a break. Brooks has been living in a make-believe world of Black and White for years.

By the way Allen, I am not advocating a "bail out." All I am saying is that along with the scorn that is being heaped on the banks and ratings companies, a large helping should be dished out to the mortgage brokers and on the media and their cadre of experts that did nothing to prevent this.

Alternatively, if the experts did know what was coming and were still driving up prices anyway (to profit from the bubble before it blew up), then they wouldn't have any incentive to tell others what was ahead.

"I hear what you are saying, but consider: If there were a lot of experts who did what you said, how could there have been a bubble in the first place?"

There wouldn't have been (or at least it wouldn't have gotten as big). That's the whole point. While the experts that could predict the timing of the bubble with sufficient accuracy to make a boatload of money may have all been at golman sachs and may have had no incentive to warn anybody, I still think someone in the mainstream media should have been able to do enough homework to realize that the mortgages people were taking on were extremely risky, and that the popular conception that housing prices could not crash was patently false. I believe that the reason this didn't happen is that people were sleeping on the job.


I believe you'll find people in the mainstream media are very often sleeping at the job ;) They just don't have the incentives to appoint real experts. No layman wants to look at real experts on television, not when they could look at attractive people with charisma instead.

As the Internet takes over media, at least the truth will be out there for people willing to look for it.

I'm glad to see the young of this country taking charge and wanting a real future! The republican party has been hijacked by the extreme right and their policies have damaged this country's future. I hope Obama can layout a new direction for the country and help us remove the shackles of the neocons and their right-wing agenda. I voted for Obama because I want to see this country return to a place where community matters. Extreme individualism leads to narcism, which is very rampant in our society. I think that the youth needs to make their vote and their voice count because they are the future and right now the future does not look too bright.

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