Economists, as a group, have been criticized for not predicting the collapse of the economy in 2007 and 2008, even though there were a few lonely voices. We need to learn to listen to the ones who sometimes tell us what we don’t want to hear.
Here’s Raghu Rajan from his blog, Fault Lines:
Critics argue that the fundamentals were deteriorating in plain sight, and that the market (and economists) simply ignored it. But hindsight distorts analysis. We cannot point to a lonely Cassandra like Robert Shiller of Yale University, who regularly argued that house prices were unsustainable, as proof that the truth was ignored. There are always naysayers, and they are often wrong.
Rajan seems to be saying that, in contrast to Shiller’s analysis of the the housing bubble and his prediction of its collapse, too few reputable economists were predicting the global collapse of financial markets. He gives three reasons:
I would argue that three factors largely explain our collective failure: specialization, the difficulty of forecasting, and the disengagement of much of the profession from the real world.
Rajan was not one of the guilty. His 2005 paper, delivered at the retirement celebration of Alan Greenspan, outlined the coming liquidity crisis and the lack of structural controls that could have limited its damage.
The problems weren’t just the lack of messages and the timidity and remoteness of the messengers, but the inability of market players and central bankers and regulators to make course corrections to avert disaster.
In the Ozarks, at the end of the line, we have to deal with whatever Congress, the Fed, the banking and securities regulators and the EU come up with, as well as market forces. The lesson for protecting ourselves is that we need to become more literate about economics and more skeptical about what seems to be good for us in the short run.
If you think housing is coming back, you might want to listen to Shiller:
IT will take a while for the housing market to recover fully. Still, many people continue to think of housing as an investment, and so it does seem that we are in danger of encountering another whopper bubble someday. Even so, both the history of land bubbles and the slowness of shifts in public opinion suggest that such bubbles will be fairly rare.
Add the new policy restraints and the excess supply in most parts of the housing market, and a new national housing bubble looks even less likely anytime soon.
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There were a lot of us that sensed that something was wrong, but nobody had all of the pieces of the puzzle until the bus was careening off the cliff and was about to hit the ocean.
As an appraiser, I noticed and was going around telling everybody that the whole pricing structure was out of whack. I noticed that people were building things that there was no market for because prices were high and financing was available while other people were looking for certain things to buy, but could not find what they wanted. The more I talked that way, the less credible I was in the rest of my work.
That was probably the case with actual economists. The more they acted like chicken little, the lower their reputation in the field sank. Years later, if they said anything at all, they are forgotten. Oddly, the economists in the Fed that led us into this financial fiasco are still considered the high priests of economic thought.
At the ground level, we had plenty of warning that this was going to happen, but couldn’t see the forest for the trees. When I was in college in the 1980s, a professor I knew named Hyman Minsky was writing extensively about what caused the 1920s/30s depression, and people were raking him over the coals over everything he was concluding, and that was fifty years later. Economists were still arguing what happened in 1928/29 leading up to this recession. I wonder if it might take the perspective of another fifty years to determine what happened in this Great Recession.
Since we are not going to figure it out anytime soon, we may as well just deal with what we have.
Do I understand you to say that appraisers and economists with negative outlooks are tempted to skew their reports in order to keep working?
There are two things that need to be conveyed in an answer to that question.
First, when an appraiser makes a report, he reports his value conclusion and he reports a wide range of anciliary data and opinions. The quantified value conclusion is what they’ve gotta have and is often all they care about, but the supporting data and observations are sometimes more relevant to the client’s actual decision process, though typically ignored.
There were several times when I thought the deal really sucked, the bank customer was a crook or incompetent to develop or both, or thought the market was about to crater, but the sales all indicated a value that made the bank’s deal work. You have to put stuff like that into the report obliquely because if it is written directly, it causes problems for the bank with its customer. So you report that sort of stuff directly verbally. I can think of several occassions where the report stated value = X dollars, but I went in and warned the bank that if they make the loan they will eventually own the property and loose their ass. They would make the deal anyway, and then two years later loose their ass.
The second thing you must realize is that when an appraiser reports an opinion of value, he is not reporting what he, the appraiser, thinks about the property and its value, he is supposed to be reporting what he interprets that THE MARKET thinks about the property and its value. I can think of several occassions where I had literally a dozen sales that said the market ~~loves~~ a particular property type, but I thought it was a total stinkeroo, or that the proposed development was a total pooch screw waiting to happen–but you report what the market thinks. You then go in and tell the client verbally what you think about the property or the situation. Leading up to the recession, there were several occassions where I could prove with relatively simple arithmetic that the deal could not possibly work, and everybody involved (except the appraiser and the attorneys) were going to loose buckets of cash in the course of the deal, but there were five people standing in line with cashiers checks wanting to buy into it.
Am i smarter than the market?? Probably, but one of the big things they try to teach us in the elementary appraisal classes is that we are not there to outsmart the market, appraisers are supposed to REPORT the market. In this sense, appraisers are sort of like journalists who report that congress passes Bill X and that experts project the consequences to be Y. They don’t say ‘those turds in congress passed Bill X; don’t they realize that Y will be the result?’ That is the purview of something crossing the line outside of journalism into analysis or entertainment, ala Limbaugh, Maddow, etc. Same for appraisers. Market value is NOT what the appraiser thinks, it is what the appraiser interprets that the market thinks. If the market is nuts, you report their nutty thoughts, but you are not really under any obligation to report that you think the market is nuts.
On the flip side of the recession, there have been a couple of deals that I have been involved in that I think are pretty attractive, that if I won the lottery I would hire an attorney to go out and secretly buy for me, but the market thinks they are turds and you can’t give them away right now. If I express that kind of opinion, I would be doing my client a disservice since they need to know their chances of disposing of the property.
Does that help???
To answer the question more directly, you are obligated to report your viewpoint only if they have requested and are paying for your viewpoint. Usually, they technically are requesting only an estimate of market value, which you can report with or without a viewpoint, and during the boom times, they really didn’t care what your viewpoint was, and if it was negative they really didn’t want to hear it because they were making the loan regardless.
It is usually up to the appraiser to decide as a business decision whether it is politically or socially appropriate to report his viewpoint along with the market value estimate. I think you have heard me warn people on many occasions that when I report an estimate of market value, it is an opinion of market value, it is not an endorsement by the appraiser of the merits of the deal or that the purchase at that price is a fully rational act.
It’s not that there weren’t many economists warning of the dangers that were to come, it’s that the main-stream media chose not to listen to them, chose not to interview them, or chose to ridicule them when they did. These economists mostly all were of the so-called Austrian school of thought, rather than the crazed Keynesian, and slightly-less-so Chicago schools. And, they not only predicted it all well before it came, but continue to be correct as it unfolds.
No system of economics is 100% perfect, but the Austrians come closer than anyone. Have a look at http://mises.org
Congress serves powerful interests that have a vested interest in overspending. Bipartisanship has created some of our worst problems.
I believe that there’s quite a lot of consensus among economists on the big questions, such as the unfortunate effects of housing subsidies, especially the mortgage tax deduction. Keynes only prescribed deficit spending when aggregate demand slumped, which is the opposite of what Congress did between 2000 and 2008. It seems ironic that we’re talking about cutting deficits in a recession, while Republicans and Democrats alike were spending like crazy during an expansion.
Thanks for writing and for your link to http://mises.org.