I Saw the Crisis Coming. Why Didn’t the Fed?(nytimes.com)
nytimes.com
I Saw the Crisis Coming. Why Didn’t the Fed?
http://www.nytimes.com/2010/04/04/opinion/04burry.html?ref=opinion
82 comments
But that still means that Greenspan was wrong. He said that no-one predicted this crash and this is clearly wrong.
Even if the people that did predict it were the kind of people that always predict recessions, they still should have caused a little bit of head scratching in the Fed and in the top banks and the rating agencies. Somebody could have actually done some simple arithmetic to determine whether the average person can afford the average house. I mean this is not difficult stuff.
Even if the people that did predict it were the kind of people that always predict recessions, they still should have caused a little bit of head scratching in the Fed and in the top banks and the rating agencies. Somebody could have actually done some simple arithmetic to determine whether the average person can afford the average house. I mean this is not difficult stuff.
The correct quote is by the late great Paul A. Samuelson and he said:"The stock market has forecast nine of the last five recessions"
The rest of your comment is right on the mark.
The rest of your comment is right on the mark.
I have to agree with the idea that he just got lucky.
If he was really so sure of his assessment back then then why didn't he short sell a bucket load of these mortgage backed securities?
If he was really so sure of his assessment back then then why didn't he short sell a bucket load of these mortgage backed securities?
He came up with the credit default swap trade where you buy insurance against mortgage backed securities failing.
This was really a great trade because his losses were capped at around 5% a year while his upside was huge, imagine a 6:1 payout.
This was really a great trade because his losses were capped at around 5% a year while his upside was huge, imagine a 6:1 payout.
> If he was really so sure of his assessment back then then why didn't he short sell a bucket load of these mortgage backed securities?
"The market can stay irrational longer than you can stay solvent." is the traditional response.
The problem was "obvious" in 2001.
"The market can stay irrational longer than you can stay solvent." is the traditional response.
The problem was "obvious" in 2001.
"Everybody missed it. Academia, the Federal Reserve, all regulators." - Alan Greenspan
That is complete bullshit. Try telling that to Paulson, who made billions on the crash. I saw the signs myself, but did not understand them, not believing that people like Greenspan would allow something so stupid to take place. When studies show that Americans trust their government less than ever, mark me down as a statistic.
When a bank official told me that "jobless, bankrupt, illegal immigrant, it doesn't matter," they can get somone a home loan, I should have known what that meant, and so should the Fed.
Greenspan should just shut up and accept his legacy.
That is complete bullshit. Try telling that to Paulson, who made billions on the crash. I saw the signs myself, but did not understand them, not believing that people like Greenspan would allow something so stupid to take place. When studies show that Americans trust their government less than ever, mark me down as a statistic.
When a bank official told me that "jobless, bankrupt, illegal immigrant, it doesn't matter," they can get somone a home loan, I should have known what that meant, and so should the Fed.
Greenspan should just shut up and accept his legacy.
There were a lot of us watching the signs in 2005 or so. There were a lot of us who didn't miss it. And it wasn't "crackpot conspiracy theory" types; it was normal people looking to buy a home and wondering why median prices in our area climbed from 3x to 5x median income within a few years, when the 3x figure had been pretty steady since WWII. A little bit of research showed that a lot of houses had been bought on unusual terms -- no-doc loans, very little down, adjustable rates, and so on. For those of us who expect to buy a home with 20% down, a 15-30 year mortgage, and payments less than 38% of take-home income, it seemed very strange that banks were lending people money on considerably looser terms. Easy money leading to a sharp climb in prices, combined with a big increase in speculators/flippers, should have been a tipoff that we were looking at a bubble market.
There's no excuse for "experts" like Greenspan to have missed it, when the everyday people running websites like seattlebubble.com saw it coming.
There's no excuse for "experts" like Greenspan to have missed it, when the everyday people running websites like seattlebubble.com saw it coming.
It dawned on me when I saw this in the NY Times:
http://graphics8.nytimes.com/images/2005/06/15/business/arm3...
Note the date.
http://graphics8.nytimes.com/images/2005/06/15/business/arm3...
Note the date.
You are absolutely right. If you look at most housing forums on the internet, for example most people looking to buy housing were absolutely certain there was a bubble going on. They just knew that (i) ordinary people in their neighbourhood could not afford the houses in their neighbourhood and (ii) there were no rich people coming in buying those houses either so something had to give.
Just to note -
It was Burry that came up with the idea for using credit default swaps (CDSs) to short the subprime mortgage market.
That idea eventually found its way to Paulson, who was able to use it on a larger scale.
It was Burry that came up with the idea for using credit default swaps (CDSs) to short the subprime mortgage market.
That idea eventually found its way to Paulson, who was able to use it on a larger scale.
The problem is: Greenspan may very well be right in his assessment that Burry may just have been 'a supremely lucky flipper of coins'. There are thousands of people in similar positions making predictions about all kinds of phenomena. Whatever the outcome, there are always a number of predictions that are 'uncannily' close to that outcome. Unfortunately, these 'correct' predictions are only seldomly made by the same people. If someone truly had better insight, you would expect them to make the right predictions more often. However, if history teaches anything, it is that I can safely predict that Burry will never again make such an accurate prediction and that it will never be clear whether he was a prophet or a lucky bastard.
I think that Burry is simply arguing that the methods he and other shorts used to call this crisis (which Taleb refers to as a gray swan -- since so many called it) should be more closely examined, rather than being simply dismissed as statistical aberrations. Maybe investors/wall street can learn a useful thing or two from them.
To me, spotting bubbles is not so difficult. There are a few great investors who have excellent track records when it comes to dodging bubbles/crises. They may not profit immensely, but their downside is usually protected and they are cash rich to pick up securities on the cheap.
The real difficulty comes from figuring out when a bubble will burst -- which is really anyone's guess. Burry himself ran into trouble on this end which created friction and eventually lawsuits with his investors.
To me, spotting bubbles is not so difficult. There are a few great investors who have excellent track records when it comes to dodging bubbles/crises. They may not profit immensely, but their downside is usually protected and they are cash rich to pick up securities on the cheap.
The real difficulty comes from figuring out when a bubble will burst -- which is really anyone's guess. Burry himself ran into trouble on this end which created friction and eventually lawsuits with his investors.
Figuring out the "when" is definitely the most difficult part. I had been watching the markets and the housing bubble very carefully for years before the crisis finally arrived. It is so amazing how long these things take to play out, and how distorted the markets can get before they finally snap.
Despite the attention I paid to it, I still failed to make a profit. When things finally started unravelling, I took several put option positions (assuming the price would decrease) in the obviously doomed companies, for really cheap prices. But my mistake was not goibg out further time wise. I was up substantially (500% was my best) in almost all my positions within a week or two, but when the fed and other players weighed in with changes to the rules of the stock market, and CEO's taking actions that are blatently fraudulent but not enforced by the SEC, things turned against me and I ended up selling for a 40% loss. Of course if I had simply taken a boring short position I could have made a guaranteed 40-60 percent, but how exciting is that?? :)
Making money in the market, even when you KNOW what is going to happen, is amazingly hard. Especially when the FED and SEC are literally changing the rules on a daily basis, as they were back then, and when CEO's can lie, cheat, and steal with impunity.
Despite the attention I paid to it, I still failed to make a profit. When things finally started unravelling, I took several put option positions (assuming the price would decrease) in the obviously doomed companies, for really cheap prices. But my mistake was not goibg out further time wise. I was up substantially (500% was my best) in almost all my positions within a week or two, but when the fed and other players weighed in with changes to the rules of the stock market, and CEO's taking actions that are blatently fraudulent but not enforced by the SEC, things turned against me and I ended up selling for a 40% loss. Of course if I had simply taken a boring short position I could have made a guaranteed 40-60 percent, but how exciting is that?? :)
Making money in the market, even when you KNOW what is going to happen, is amazingly hard. Especially when the FED and SEC are literally changing the rules on a daily basis, as they were back then, and when CEO's can lie, cheat, and steal with impunity.
For ordinary investors, the housing bubble was a tricky thing to play.
There were two public companies that had CDS portfolios where they stood to make a lot of money. A direct equity investment or LEAPS would have worked well there. I took this approach.
Alternatively, it seems like out the money puts on financial institutions would have done really well. Michael Lewis chronicles a few guys from Cornwall Capital that made something like 100:1 payouts on out the money puts for Bear Stearns. These guys crushed it when Bear went BK. This cheap insurance approach is used by a few really well known investors and it is the one I'm gravitating towards for the future.
There were two public companies that had CDS portfolios where they stood to make a lot of money. A direct equity investment or LEAPS would have worked well there. I took this approach.
Alternatively, it seems like out the money puts on financial institutions would have done really well. Michael Lewis chronicles a few guys from Cornwall Capital that made something like 100:1 payouts on out the money puts for Bear Stearns. These guys crushed it when Bear went BK. This cheap insurance approach is used by a few really well known investors and it is the one I'm gravitating towards for the future.
Ya, out of the money puts was the route I took as well. However, when the company you buy puts in suddenly takes on a couple hundred million of new debt in order to do a share buy back so the CEO can cash his shares out, puts don't perform too well.
Nor do they do so well when the SEC decides to suddenly ban short selling on a certain subset of stocks.
Nor do they do so well when the SEC decides to suddenly ban short selling on a certain subset of stocks.
This could be total confirmation bias but I myself was somewhat amazed that everyone seemed to have been so surprised by the crisis. I don’t care all that much about what’s happening in the US (not being from there and all) but I have been clicking through the current New York Times cartoons for the past few years or so. In retrospect it looked to me as though there were constantly crumbling houses in those cartoons (I was always confused by them, it was only later that it made ‘click’), years and months before the bubble burst. If even the cartoonists knew it …
I think the phenomenon you describe does exist and explains a lot of correct predictions. I don't think it is what we have seen in this case though.
If you look at long term indicators of indebtedness it is utterly clear that the US (and some other countries) were at extreme levels in 2007. There was never a dispute about that and it's easy to check. The dispute was about the interpretation of these numbers.
Greenspan and many others argued that the more sophisticated financial system should be able to sustain these levels. He thought that the new securitisation market led to more flexibility and risk tolerance. He turned out to be wrong. This time was not different (see Rogoff on that one).
People who predicted that this time was not different and high levels of debt would lead to a crash were not predicting some freak event. They just followed the conservative assumption that history is going to repeat itself. And it has.
If you look at long term indicators of indebtedness it is utterly clear that the US (and some other countries) were at extreme levels in 2007. There was never a dispute about that and it's easy to check. The dispute was about the interpretation of these numbers.
Greenspan and many others argued that the more sophisticated financial system should be able to sustain these levels. He thought that the new securitisation market led to more flexibility and risk tolerance. He turned out to be wrong. This time was not different (see Rogoff on that one).
People who predicted that this time was not different and high levels of debt would lead to a crash were not predicting some freak event. They just followed the conservative assumption that history is going to repeat itself. And it has.
Saying someone was just a "supremely lucky flipper of coins" always seems like a cop out to me. It's not so much the fact that he was right but the reasons he gives for being right. He gives very good explanations for his reasoning and it was sound. Explain how his reasoning was not sound and then you can make statements about how he was just "super lucky." Otherwise you're just guessing about how lucky he is and that doesn't really help anyone.
A lot of reasons can sound totally justified in retrospect. "The Colts will win the Super Bowl because they have superior talent." "The Saints will win the Super Bowl because the Colts' ego will go to their head." A lot of people take actions and have reasons for them -- when those actions turn out to be right, the reasons are often given undue credibility.
Right. It's the classical data mining problem. What should be done is to take the reasons given and use them as a hypothesis to predict other events. Reinhart and Rogoff have done just that in their book. After reading it I find it very difficult to accept the claim that people predicting this crash were just lucky or that all their reasons are bogus.
And I think you're making a mistake to equate ball games with debt markets. The fortunes in ball games can quickly and unpredictably turn. Debt doesn't work that way. If many people on low income take out mortgages on a teaser rate that goes up two years later to levels they cannot afford unless house prices keep rising at historically exceptional rates so they can remortgage, you know you're going to be in trouble eventually.
And I think you're making a mistake to equate ball games with debt markets. The fortunes in ball games can quickly and unpredictably turn. Debt doesn't work that way. If many people on low income take out mortgages on a teaser rate that goes up two years later to levels they cannot afford unless house prices keep rising at historically exceptional rates so they can remortgage, you know you're going to be in trouble eventually.
If the Colts did indeed have superior talent and then win the super bowl then obviously the reason was justified. If the Colts' ego is obviously making them overconfident and does indeed go to their head and cost them the game then again the reason is justified.
The point is that the reason isn't justified because the person correctly predicted an outcome. The reason is justified because the reason was based on true fact and is demonstrably capable of causing the effect.
Now if the Colts win the super bowl despite having worse talent because the opposing Saints team members all got drunk the night before and were playing with hangovers, then you would be justified in saying the predictor was lucky. It's not enough to say someone could have been lucky and then dismiss them. You should show they were lucky or accept they were correct in their reasoning.
The point is that the reason isn't justified because the person correctly predicted an outcome. The reason is justified because the reason was based on true fact and is demonstrably capable of causing the effect.
Now if the Colts win the super bowl despite having worse talent because the opposing Saints team members all got drunk the night before and were playing with hangovers, then you would be justified in saying the predictor was lucky. It's not enough to say someone could have been lucky and then dismiss them. You should show they were lucky or accept they were correct in their reasoning.
"If the Colts did indeed have superior talent and then win the super bowl then obviously the reason was justified."
It should be pointed out that with Aristotelian logic, that is false. "Previously I said X will happen because of Y, and X happened." is basically "Y implies X; X is true; therefore Y".
Nevertheless, it is true that if a person makes a claim that something will happen for a given reason, gives plausible logical reasons, that we have priors that also indicate the causative connection is sound, and the prediction ultimately comes true, we should not just ignore it. We may not be justified in using Aristotelian logic to conclude with 100% confidence the person's reasoning was correct, but we are justified in taking it into account and concluding that there is some reason to believe this person, who made a prediction contrary to many people's other beliefs, may in fact have something.
After all, if you're not going to listen to people who make accurate predictions with plausible reasons used for their predictions, you can just give up on science right now, because that's all it is.
It should be pointed out that with Aristotelian logic, that is false. "Previously I said X will happen because of Y, and X happened." is basically "Y implies X; X is true; therefore Y".
Nevertheless, it is true that if a person makes a claim that something will happen for a given reason, gives plausible logical reasons, that we have priors that also indicate the causative connection is sound, and the prediction ultimately comes true, we should not just ignore it. We may not be justified in using Aristotelian logic to conclude with 100% confidence the person's reasoning was correct, but we are justified in taking it into account and concluding that there is some reason to believe this person, who made a prediction contrary to many people's other beliefs, may in fact have something.
After all, if you're not going to listen to people who make accurate predictions with plausible reasons used for their predictions, you can just give up on science right now, because that's all it is.
Or you could check out Scion Capital's track record.
"Mr. Greenspan said that he sat through innumerable meetings at the Fed with crack economists, and not one of them warned of the problems that were to come. By Mr. Greenspan’s logic, anyone who might have foreseen the housing bubble would have been invited into the ivory tower, so if all those who were there did not hear it, then no one could have said it.
As a nation, we cannot afford to live with Mr. Greenspan’s way of thinking. The truth is, he should have seen what was coming and offered a sober, apolitical warning. Everyone would have listened; when he talked about the economy, the world hung on every single word."
Instead of expecting Greenspan to see exactly what Burry saw, wouldn't it be better if we didn't have a single point of failure? In the absence of Wall Street's reliance on the Fed, Burry's insurance plays could have further pushed up prices and signaled to everyone else that something was wrong.
As a nation, we cannot afford to live with Mr. Greenspan’s way of thinking. The truth is, he should have seen what was coming and offered a sober, apolitical warning. Everyone would have listened; when he talked about the economy, the world hung on every single word."
Instead of expecting Greenspan to see exactly what Burry saw, wouldn't it be better if we didn't have a single point of failure? In the absence of Wall Street's reliance on the Fed, Burry's insurance plays could have further pushed up prices and signaled to everyone else that something was wrong.
Will a Bursting Bubble Trouble Bernanke?: The Evidence for a Housing Bubble
November 2005, Dean Baker and David Rosnick
http://www.cepr.net/index.php/publications/reports/will-a-bu...
(Baker has papers going back to Oct 2003 on it)
November 2005, Dean Baker and David Rosnick
http://www.cepr.net/index.php/publications/reports/will-a-bu...
(Baker has papers going back to Oct 2003 on it)
"In the absence of Wall Street's reliance on the Fed, Burry's insurance plays could have further pushed up prices and signaled to everyone else that something was wrong."
Can you explain this point further? How did Burry's investments not raise the prices of credit default swaps? What does Wall Street rely on the Fed for that led to that result?
Can you explain this point further? How did Burry's investments not raise the prices of credit default swaps? What does Wall Street rely on the Fed for that led to that result?
This is precisely what needs addressing. CDS are over the counter trades without a central clearinghouse. Therefore little data is available and the counter parties create terms blindly.
This is what they mean when talking about transparency.
This is what they mean when talking about transparency.
For anyone interested in learning more about Michael Burry, I wrote a post using material from an old message board he used to run:
http://streetcapitalist.com/2010/03/24/learning-from-michael...
It is pretty amazing to see how far he has come since then, from a young doctor posting about investing on the internet to going head to head with Greenspan.
http://streetcapitalist.com/2010/03/24/learning-from-michael...
It is pretty amazing to see how far he has come since then, from a young doctor posting about investing on the internet to going head to head with Greenspan.
Most people could have predicted it and many people did. This includes not only people like Mike Burry, George Soros and others that made money out of the whole mess, but also those bastards in Goldman Sachs who after touting and selling housing debt derivatives for the entire bubble ended up being short on housing just when the bubble burst.
Multiple people in academia predicted the crash. Nouriel Roubini (spelling is wrong) Peter Schif, every economist that ever posted on Counterpunch, etc.
And also of course most ordinary people predicted it. If you look at the housing forums on the Internet from about 3 to 4 years ago you will see that most people were sure there would be a crash and only people that were already deeply invested in real estate were trying to think of ever more creative ways to deny it.
So Greenspan's statements speak more about him than the actual reality. He and the Bush government just surrounded themselves with economists from one very narrow school of thought and did not listen to anyone else. It is not that people did not predict the recession, it is that Greenspan would not listen to anyone who predicted it, therefore nobody that he bothered to listen to predicted it.
Multiple people in academia predicted the crash. Nouriel Roubini (spelling is wrong) Peter Schif, every economist that ever posted on Counterpunch, etc.
And also of course most ordinary people predicted it. If you look at the housing forums on the Internet from about 3 to 4 years ago you will see that most people were sure there would be a crash and only people that were already deeply invested in real estate were trying to think of ever more creative ways to deny it.
So Greenspan's statements speak more about him than the actual reality. He and the Bush government just surrounded themselves with economists from one very narrow school of thought and did not listen to anyone else. It is not that people did not predict the recession, it is that Greenspan would not listen to anyone who predicted it, therefore nobody that he bothered to listen to predicted it.
The Fed DID see what was happening. They saw M3 soaring.
So they did the logical thing. They discontinued publishing the M3 statistic in 2006.
Yep, they decided we just need to bury our heads in the sand and the developing crisis would just go away.
But did it?
http://www.shadowstats.com/alternate_data/money-supply-chart...
So they did the logical thing. They discontinued publishing the M3 statistic in 2006.
Yep, they decided we just need to bury our heads in the sand and the developing crisis would just go away.
But did it?
http://www.shadowstats.com/alternate_data/money-supply-chart...
Dear God.
There will always be a distribution of opinions and therefore people with "foresight".
The real challenge is to design a system with more stability.
My opinion is that while we have had many putative capitalists in charge of regulating markets, we have very little understanding of what it takes for markets to function well. One thing missing from the debate is an interest in reducing informational asymmetries. If I have two bags of apples one paper and one see-through plastic, you are going to buy the plastic bag (environmental issues aside).
Our financial markets don't work very well, because financial accounting is the opaque paper bag.
The real challenge is to design a system with more stability.
My opinion is that while we have had many putative capitalists in charge of regulating markets, we have very little understanding of what it takes for markets to function well. One thing missing from the debate is an interest in reducing informational asymmetries. If I have two bags of apples one paper and one see-through plastic, you are going to buy the plastic bag (environmental issues aside).
Our financial markets don't work very well, because financial accounting is the opaque paper bag.
The problem is, there are always a lot of people seeing a crash coming. The difficult part is telling if they are right or just being crackpots.
By definition, the people involved in the bubble believes the situation is sustainable. They HAVE to.
Its a herd phenomena, with a real price rise enforcing the belief in the trajectory of those price increases.
But at some point, despite all efforts to recruit more people into the bubbly market, price increases slow then stall and beliefs change and the down trend inevitably begins.
The naysayers, the non-believers, those darn negative people who don't buy in and reinforce the bubble but actively try to save their friends, will always be swimming against the tide.
The difficult part is distinguishing between social proof and actual facts.
The fact is that most of us are followers and that will always be the case. That's how we're wired. If it weren't, societies wouldn't even be possible.
The best we can hope for is to keep the use of force out of the equation. We were all forced to take on the risks of all that lending, something we would not have done voluntarily.
Now we are on the hook for it and some day we will realize how truly costly it has been.
Til then, feel free to think of me as a crackpot.
Its a herd phenomena, with a real price rise enforcing the belief in the trajectory of those price increases.
But at some point, despite all efforts to recruit more people into the bubbly market, price increases slow then stall and beliefs change and the down trend inevitably begins.
The naysayers, the non-believers, those darn negative people who don't buy in and reinforce the bubble but actively try to save their friends, will always be swimming against the tide.
The difficult part is distinguishing between social proof and actual facts.
The fact is that most of us are followers and that will always be the case. That's how we're wired. If it weren't, societies wouldn't even be possible.
The best we can hope for is to keep the use of force out of the equation. We were all forced to take on the risks of all that lending, something we would not have done voluntarily.
Now we are on the hook for it and some day we will realize how truly costly it has been.
Til then, feel free to think of me as a crackpot.
1.) 'Crackpots' labeling is an easy way for corporate mass media to label the truth tellers to discourage you from researching further
(If you look at 2005-2007 CNBC interviews, they called alot of these people 'crackpots')
2.) Most of the time these 'truth tellers' are way early in their calls. It's up you to look at the numbers/charts and figure out when the said phenomenom should occur.
Unfortunately there are also real crackpots, and they all claim to be marginalized by the establishment. If I have to look at the numbers and charts and figure it out myself, then I would rather also find the data myself. Then I avoid getting data that is doctored or otherwise deceiving.
That said, it is often worth paying attention to those who are a little bit outside the mainstream. That goes especially in economics, which is far from an exact science, and is full of political agendas.
That said, it is often worth paying attention to those who are a little bit outside the mainstream. That goes especially in economics, which is far from an exact science, and is full of political agendas.
Agreed; you put it better than I did :)
1) 'Crackpot' labeling is also an easy way to label the crackpots, to discourage you from wasting your life either believing nonsense or trying to argue against it. It is not worth my time to do independent research on the question of whether the Americans actually landed on the moon.
2) You know what they say about broken clocks and being right. Someone who is always predicting a collapse will successfully predict any collapse.
2) You know what they say about broken clocks and being right. Someone who is always predicting a collapse will successfully predict any collapse.
Many of the people predicting this collapse were "new players" to the market, not people always predicting collapses. Take the guy who runs seattlebubble.com. He's an ordinary guy who wanted to buy a house, realized prices were really high compared to his expectations, and started digging deeper. He hadn't predicted any past collapses of anything, he just realized that housing costs were unsustainably high and called it. Many of the other bubble-predictors were in the same boat.
The guys always predicting collapses are crackpots. The normal people who called this bubble because they realized house prices had jumped without corresponding changes in income or demographics, but only changes in bank lending standards, were not crackpots.
The guys always predicting collapses are crackpots. The normal people who called this bubble because they realized house prices had jumped without corresponding changes in income or demographics, but only changes in bank lending standards, were not crackpots.
Give it 10 years, and when the LHC spawns a dimensional rift connecting us to Xen, I guarantee at least one man will come forward and say, "I can't believe nobody else saw it coming". He will be treated like a prophet, when in reality he was just a lucky alarmist.
Either that, or he will be me- a lucky satirist.
Either that, or he will be me- a lucky satirist.
I think this is actually an argument for more accessible markets. Retail investing was not offering vehicles to the average investor who wanted to invest believing that house prices would fall. I wondered to many professional and non-professional investors how t invest against the housing market to no avail. If people had understood how to "bet" against house prices then I am confident the bubble would have deflated more gently and earlier. The easiest retail position to take is a "long" purchase of an investment instrument. What is needed is the knowledge of and retail accessibility to bubble-deflating investments.
How far should this go? Anyone should be able to own and even construct derivatives. Such a market would bring along a host of educational material and means to understand the provenance of your derivatives and the counter-party risk. Obviously this accessibility and transparency would benefit professional derivative investors as the pool of clients, information, transparency, and alternative parties and views with which to trade expands.
But this is impossible as long as the notion of "qualified investor" exists. If Greenspan and traditional economics has any hope of being correct then what is needed is to enlarge the pool of "qualified investors" to simply everyone. We need not more regulation but less but for the requirement that the prospectus be accurate, intelligible, and anyone that sells "investments" must do business with anyone has the purchase price.
Taleb says market-based black swans are becoming more common. The question is: are they common enough to make a profitable business out of suppressing them?
How far should this go? Anyone should be able to own and even construct derivatives. Such a market would bring along a host of educational material and means to understand the provenance of your derivatives and the counter-party risk. Obviously this accessibility and transparency would benefit professional derivative investors as the pool of clients, information, transparency, and alternative parties and views with which to trade expands.
But this is impossible as long as the notion of "qualified investor" exists. If Greenspan and traditional economics has any hope of being correct then what is needed is to enlarge the pool of "qualified investors" to simply everyone. We need not more regulation but less but for the requirement that the prospectus be accurate, intelligible, and anyone that sells "investments" must do business with anyone has the purchase price.
Taleb says market-based black swans are becoming more common. The question is: are they common enough to make a profitable business out of suppressing them?
A very insightful comment.
I like to say that if Greenspan had replaced his famous "irrational exuberance" comment with one citing "incredible short selling opportunities for insightful investors" things would have turned out much better.
I like to say that if Greenspan had replaced his famous "irrational exuberance" comment with one citing "incredible short selling opportunities for insightful investors" things would have turned out much better.
The only time Greenspan could have meaningfully intervened was back in 2002 or earlier, and even then intervention would have caused enough pain to have the media deem it a "crisis" in itself.
Notably he did speak up about Fannie and Freddie in the early 2000s but was silenced by the GOP's drive to make war -- nobody wanted the economy cooled at all when gas prices were already creeping up.
So what's the man to do now? He could admit all that about the war and cast serious doubt on the Fed's independence and the US financial system, or he could insist that the boom/bust was a complete and total mystery.
In his last book he goes to great pains to marvel at seemingly impossible "risk adjusted rates of return" throughout a variety of markets, but concludes that in the case of housing it's still "froth" and not a bubble. Since the bubble hadn't become obvious at the time of the book's publication, what else would he say?
But more practically, we should all realize that if housing prices had dipped about 1-2% less than they did, most of the damage would not have occurred. Our institutions (banks, etc.) were calibrated to handle some amount of systemic risk, but not as much as it turned out they should have.
Hindsight is 20/20 and Burry may have been extra prescient, but like any bettor he could have been wrong. Since he had no additional information than the rest of the market, we can conclude that the rest were all sheep (or idiots) or that there was actually some -- gasp -- chance going on.
The difference is that the majority of people, institutions, etc., misjudged just how much calamity would be caused by price deviations that they calculated to be highly improbable.
Notably he did speak up about Fannie and Freddie in the early 2000s but was silenced by the GOP's drive to make war -- nobody wanted the economy cooled at all when gas prices were already creeping up.
So what's the man to do now? He could admit all that about the war and cast serious doubt on the Fed's independence and the US financial system, or he could insist that the boom/bust was a complete and total mystery.
In his last book he goes to great pains to marvel at seemingly impossible "risk adjusted rates of return" throughout a variety of markets, but concludes that in the case of housing it's still "froth" and not a bubble. Since the bubble hadn't become obvious at the time of the book's publication, what else would he say?
But more practically, we should all realize that if housing prices had dipped about 1-2% less than they did, most of the damage would not have occurred. Our institutions (banks, etc.) were calibrated to handle some amount of systemic risk, but not as much as it turned out they should have.
Hindsight is 20/20 and Burry may have been extra prescient, but like any bettor he could have been wrong. Since he had no additional information than the rest of the market, we can conclude that the rest were all sheep (or idiots) or that there was actually some -- gasp -- chance going on.
The difference is that the majority of people, institutions, etc., misjudged just how much calamity would be caused by price deviations that they calculated to be highly improbable.
> Notably he did speak up about Fannie and Freddie in the early 2000s but was silenced by the GOP's drive to make war
Wrong. Fannie and Freddie were protected by Dems, not Repubs. Mccain got his teeth kicked in over this one.
Interestingly enough, Fannie and Freddie execs during that time were largely Dems, most of whom who landed in the Obama administration. While at Fannie and Freddie, they took out millions.
Oh, and during this time, Fannie and Freddie were lying about the mortages in their portfolios, which threw off everyone's risk evaluation. (Their portfolios contained far more subprime than they admitted to.)
If Fannie and Freddie weren't politically connected GSEs, folks would be in jail.
Wrong. Fannie and Freddie were protected by Dems, not Repubs. Mccain got his teeth kicked in over this one.
Interestingly enough, Fannie and Freddie execs during that time were largely Dems, most of whom who landed in the Obama administration. While at Fannie and Freddie, they took out millions.
Oh, and during this time, Fannie and Freddie were lying about the mortages in their portfolios, which threw off everyone's risk evaluation. (Their portfolios contained far more subprime than they admitted to.)
If Fannie and Freddie weren't politically connected GSEs, folks would be in jail.
Everything you say is accurate except the insinuation that Democrats are mostly at fault. George W. Bush was in office for the worst of it, and he spent his political capital trying to convince people that a war was necessary.
He spent 99% of his political capital on war and at best 1% on everything else. He was far from powerless, having control of both houses of congress. The fact is he was perfectly fine with the GSEs being someone else's problem so nobody would get distracted away from the "war".
Incidentally the GSEs were taken off government books in order to make the budget look better so we could "afford" the Vietnam war.
He spent 99% of his political capital on war and at best 1% on everything else. He was far from powerless, having control of both houses of congress. The fact is he was perfectly fine with the GSEs being someone else's problem so nobody would get distracted away from the "war".
Incidentally the GSEs were taken off government books in order to make the budget look better so we could "afford" the Vietnam war.
> Everything you say is accurate except the insinuation that Democrats are mostly at fault. George W. Bush was in office for the worst of it
In this matter, Bush's sins are sins of omission - as you point out, he didn't do anything. Dems did something, but what they did was wrong. For example, they actively protected Fannie and Freddie. Those are sins of comission.
Note that Bush didn't change the regulatory structure - he went with what Clinton left him. Again - omission vs comission.
It's the difference between manslaughter and murder.
And, that's ignoring ACORN's role. Among other things, they picketed banks that didn't make enough loans to folks who couldn't afford them. They tried to intervene with regulators. And so on.
Yes, Bush might have been able to keep this from happening, but he would have been fighting Dems the whole way.
He didn't fight. They pushed bad policies. There is a difference.
And, I note that Barney Frank is still in office and Gorelick, among others, are in the Obama administration.
Bush? Not in office.
In this matter, Bush's sins are sins of omission - as you point out, he didn't do anything. Dems did something, but what they did was wrong. For example, they actively protected Fannie and Freddie. Those are sins of comission.
Note that Bush didn't change the regulatory structure - he went with what Clinton left him. Again - omission vs comission.
It's the difference between manslaughter and murder.
And, that's ignoring ACORN's role. Among other things, they picketed banks that didn't make enough loans to folks who couldn't afford them. They tried to intervene with regulators. And so on.
Yes, Bush might have been able to keep this from happening, but he would have been fighting Dems the whole way.
He didn't fight. They pushed bad policies. There is a difference.
And, I note that Barney Frank is still in office and Gorelick, among others, are in the Obama administration.
Bush? Not in office.
It was in Bush's clear interest make the economy appear to be strong in spite of the war and the resulting extremely high gas prices. The only way he could do this was by creating a bunch of paper wealth for average Americans via a housing bubble.
That we were in a period of historically exceptional housing price growth was obvious to everyone at the time. I heard many people claiming to be the next Warren Buffet b/c their house had appreciated 20% in the past year.
The question we need to ask is, why were there initial calls to attend to the GSEs in 1999, 2000, 2001 but none after? I'd argue that it's because a) the extent of the problem was realized and those in power figured they'd let another president deal with it, b) those in power wanted to focus on their own agenda which didn't involve cleaning up the GSEs, or c) both.
That we were in a period of historically exceptional housing price growth was obvious to everyone at the time. I heard many people claiming to be the next Warren Buffet b/c their house had appreciated 20% in the past year.
The question we need to ask is, why were there initial calls to attend to the GSEs in 1999, 2000, 2001 but none after? I'd argue that it's because a) the extent of the problem was realized and those in power figured they'd let another president deal with it, b) those in power wanted to focus on their own agenda which didn't involve cleaning up the GSEs, or c) both.
> It was in Bush's clear interest make the economy appear to be strong in spite of the war and the resulting extremely high gas prices.
Yet he did nothing, except that he did (see below), and what he did was counter to the above claim.
> The question we need to ask is, why were there initial calls to attend to the GSEs in 1999, 2000, 2001 but none after? I'd argue that it's because a) the extent of the problem was realized and those in power figured they'd let another president deal with it, b) those in power wanted to focus on their own agenda which didn't involve cleaning up the GSEs, or c) both.
You're forgetting Bush's bid in 2003 and McCain's bid in 2005. (The 2005 bill was actually considered in 2006.) So much for the "none after" theory. (Google "2005 mccain fannie freddie")
The evidence suggests that neither of the above theories was a major factor, that the driving factor was that every effort to deal with GSEs showed that it was an unwinnable fight. The populists wanted folks to get mortgages even if they couldn't afford them.
FWIW, during their brief tenure in the senate, Senators Obama and Clinton got more money from Fannie and Freddie than the chairmen of the relevant committees. In fact, their totals (over their entire tenure) were approaching the totals of those chairmen, even though the chairmen had been getting such donations for decades longer.
Yet he did nothing, except that he did (see below), and what he did was counter to the above claim.
> The question we need to ask is, why were there initial calls to attend to the GSEs in 1999, 2000, 2001 but none after? I'd argue that it's because a) the extent of the problem was realized and those in power figured they'd let another president deal with it, b) those in power wanted to focus on their own agenda which didn't involve cleaning up the GSEs, or c) both.
You're forgetting Bush's bid in 2003 and McCain's bid in 2005. (The 2005 bill was actually considered in 2006.) So much for the "none after" theory. (Google "2005 mccain fannie freddie")
The evidence suggests that neither of the above theories was a major factor, that the driving factor was that every effort to deal with GSEs showed that it was an unwinnable fight. The populists wanted folks to get mortgages even if they couldn't afford them.
FWIW, during their brief tenure in the senate, Senators Obama and Clinton got more money from Fannie and Freddie than the chairmen of the relevant committees. In fact, their totals (over their entire tenure) were approaching the totals of those chairmen, even though the chairmen had been getting such donations for decades longer.
I don't give campaign promises much weight in this discussion. You are correct that both McCain and Bush paid lip service to the idea, but Bush, the guy who could do something about it, didn't do anything.
You can try to argue that Bush -- the guy who had control of both houses of congress and was able to sell an unpopular war -- was politically powerless do do anything, but that's just not persuasive. He decided not to make it a major issue... and he benefited tremendously from that decision... America felt rich while we waged a very expensive war and paid $5 per gallon for gas.
To use an analogy, maybe it was a Democrat who lit the cigarette and fell asleep, but it was Bush who saw the smoke, mentioned that a fire might start and then completely ignored it until it became a blazing inferno.
(I am not a member of either party so I am not intending to absolve Democrats of their share of the blame... but in this case I think most of it rests firmly on Bush's shoulders).
By the way, this was right before Mankiw got fired:
http://www.marketwatch.com/story/bush-adviser-warns-of-fanni...
You can try to argue that Bush -- the guy who had control of both houses of congress and was able to sell an unpopular war -- was politically powerless do do anything, but that's just not persuasive. He decided not to make it a major issue... and he benefited tremendously from that decision... America felt rich while we waged a very expensive war and paid $5 per gallon for gas.
To use an analogy, maybe it was a Democrat who lit the cigarette and fell asleep, but it was Bush who saw the smoke, mentioned that a fire might start and then completely ignored it until it became a blazing inferno.
(I am not a member of either party so I am not intending to absolve Democrats of their share of the blame... but in this case I think most of it rests firmly on Bush's shoulders).
By the way, this was right before Mankiw got fired:
http://www.marketwatch.com/story/bush-adviser-warns-of-fanni...
> I don't give campaign promises much weight in this discussion.
Huh? 03 wasn't campaign season. And Mccain wasn't running for re-election every time he went after Fannie and Freddie.
I'm not claiming that Repubs, notably Bush and McCain, did a lot - I'm pointing out that they did do what you claimed that they didn't do. And, that they weren't pushing the other way, as Dems were.
As I've written before - manslaughter vs murder.
> You can try to argue that Bush -- the guy who had control of both houses of congress and was able to sell an unpopular war -- was politically powerless do do anything, but that's just not persuasive.
I'm not claiming that he was powerless. I'm claiming that he didn't care that much.
However, there's a huge difference between that and throwing gas on the fire.
> To use an analogy, maybe it was a Democrat who lit the cigarette and fell asleep
Except that that's not what happened. Dems insisted on pouring gas on the fire and fought anyone who tried to intervene.
Bush didn't fight back much. That's wrong, but it's not nearly as wrong as actively pushing bad policy.
> He decided not to make it a major issue
true
> and he benefited tremendously from that decision
false.
He didn't take a hit for trying to deal with it, but that's not the same as benefitting. And, Dems did benefit from it.
Huh? 03 wasn't campaign season. And Mccain wasn't running for re-election every time he went after Fannie and Freddie.
I'm not claiming that Repubs, notably Bush and McCain, did a lot - I'm pointing out that they did do what you claimed that they didn't do. And, that they weren't pushing the other way, as Dems were.
As I've written before - manslaughter vs murder.
> You can try to argue that Bush -- the guy who had control of both houses of congress and was able to sell an unpopular war -- was politically powerless do do anything, but that's just not persuasive.
I'm not claiming that he was powerless. I'm claiming that he didn't care that much.
However, there's a huge difference between that and throwing gas on the fire.
> To use an analogy, maybe it was a Democrat who lit the cigarette and fell asleep
Except that that's not what happened. Dems insisted on pouring gas on the fire and fought anyone who tried to intervene.
Bush didn't fight back much. That's wrong, but it's not nearly as wrong as actively pushing bad policy.
> He decided not to make it a major issue
true
> and he benefited tremendously from that decision
false.
He didn't take a hit for trying to deal with it, but that's not the same as benefitting. And, Dems did benefit from it.
I don't think we share enough common ground to reach agreement. I am surprised you don't see how Bush benefited from deciding to ignore the GSE's misconduct.
I agreed in couple of messages that Bush benefited so it's disheartening to see you claim otherwise repeatedly. Do you find that misrepresenting what other people say is helpful in reaching agreement?
Lots of people benefited, but that doesn't make them as culpable as folks who pushed and defended the GSE's misconduct.
Plus, Bush did make some attempt to try to rein in the GSEs. Yes, he could have done more, but again, that distinguishes him from folks who opposed those efforts.
Surely you're not arguing that "Bush was a disaster on the war" implies "everything bad that happened is completely Bush's fault"?
Lots of people benefited, but that doesn't make them as culpable as folks who pushed and defended the GSE's misconduct.
Plus, Bush did make some attempt to try to rein in the GSEs. Yes, he could have done more, but again, that distinguishes him from folks who opposed those efforts.
Surely you're not arguing that "Bush was a disaster on the war" implies "everything bad that happened is completely Bush's fault"?
There is plenty of blame to go around, but one of the biggest mistakes leading up to the financial crisis was significantly lowering the amount of cash reserves the investment banks needed to keep on hand. That happened on Bush's watch with Republicans in charge of every branch of government.
And the revoking of Glass-Steagall under Clinton? That was introduced by Republicans in both the House and Senate, with the Senate vote being almost entirely on party lines. Yes, Clinton signed it, but it was a Republican bill.
And the revoking of Glass-Steagall under Clinton? That was introduced by Republicans in both the House and Senate, with the Senate vote being almost entirely on party lines. Yes, Clinton signed it, but it was a Republican bill.
As for the issue of reserves, I think if you make the argument you are making you have to state what you think the optimal reserve requirement is.
If the recent crisis had been a bit smaller, existing reserve levels would have been fine.
If the crisis had been a bit bigger, then it's not certain whether even the previous reserve requirements would have been sufficient.
The only way you get 100% security is to have a 100% reserve requirement. Anything less is gambling.
So if you critique the lowering of reserve rates you are obligated to state what sort of odds you think are more reasonable.
If the recent crisis had been a bit smaller, existing reserve levels would have been fine.
If the crisis had been a bit bigger, then it's not certain whether even the previous reserve requirements would have been sufficient.
The only way you get 100% security is to have a 100% reserve requirement. Anything less is gambling.
So if you critique the lowering of reserve rates you are obligated to state what sort of odds you think are more reasonable.
> And the revoking of Glass-Steagall under Clinton?
Irrelevant because it didn't have any effect on the crisis.
In fact, it allowed some transactions that had some hope of slowing things down.
Note that the non-regulated institutions did better, as did the non-regulated arms of regulated institutions.
AIG was regulated up the wazoo.
Irrelevant because it didn't have any effect on the crisis.
In fact, it allowed some transactions that had some hope of slowing things down.
Note that the non-regulated institutions did better, as did the non-regulated arms of regulated institutions.
AIG was regulated up the wazoo.
Some of the "too big to fail" issues we saw was definitely because companies got into multiple lines of business that Glass-Steagall would have prevented.
> Some of the "too big to fail" issues we saw was definitely because companies got into multiple lines of business that Glass-Steagall would have prevented.
Those "other lines of biz" provided some diversification that gave them some chance of survival. It also made it possible for banks to save some of the trading firms.
You clearly disagree, so let's have names.
Those "other lines of biz" provided some diversification that gave them some chance of survival. It also made it possible for banks to save some of the trading firms.
You clearly disagree, so let's have names.
Check out "Peter Schiff was right" video:
http://www.youtube.com/watch?v=2I0QN-FYkpw
Now, talk about "nobody could have predicted this" (c) Obama
Now, talk about "nobody could have predicted this" (c) Obama
Yes, Peter Schiff was probably the most prolific person on warning about the impending crisis. However, despite how smart he is, when the crisis finally came, his portfolios (precious metals,short US$) got hit very hard, for a short period of time.
If this article piqued your interest, please PLEASE read The Big Short by Michael Lewis, in which he tells the entire, fascinating story of Michael Burry, the one-eyed genius with Asburger's who fought against the entire Wall Street establishment.
http://www.amazon.com/dp/0393072231
http://www.amazon.com/dp/0393072231
Previously featured on ycombinator, with a link to an excerpt about Michael Burry from The Big Short.
http://news.ycombinator.com/item?id=1160552
http://news.ycombinator.com/item?id=1160552
It was pretty obvious, I think. And I will remark that the NY Times at least once wrote up the people doing interest-only mortgages as bold financial innovators.
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I saw it coming too. (But I only put my money in a shorting mutual fund. Didn't have the great vision, this guy did. Still, I avoided the losses most experienced.)
If I could see it, anyone could have. I'm not particularly smart or well-connected.
If I could see it, anyone could have. I'm not particularly smart or well-connected.
I started seriously worrying about the crash back in 2004 [1], and while I was wrong about a lot of details (not least, ahem, the result of the 2004 US presidential election), I was bang-on about the underlying problem. What eventually surprised me was just how long the bubble was able to continue inflating before it finally popped.
[1] http://www3.sympatico.ca/taylormcgreal/thecomingcrash.html
[1] http://www3.sympatico.ca/taylormcgreal/thecomingcrash.html
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The relationship between Wall Street and Washington blurred the lines too much. As a regulator, its tough to recognize a fundamental flaw in the investing practices of the firms that these people used to work for.
The "good old boy" network was reluctant to admit that they all screwed up.
The "good old boy" network was reluctant to admit that they all screwed up.
Well, you don't see what you wouldn't want to see even if it's right in front of your face. And that works collectively in a society as well.
No matter how many people are yelling "soon, we're toast!", you won't hear it if you don't want to imagine such an outcome in the first place.
Boom.
No matter how many people are yelling "soon, we're toast!", you won't hear it if you don't want to imagine such an outcome in the first place.
Boom.
A couple years back, I remember reading an article that argued that housing was way overpriced because the rents were only about half the value of the house. They should be in line with each other.
What do you mean they didn't see it coming?
The Fed engineers this stuff.
The Fed engineers this stuff.
Audit the fed: http://www.auditthefed.com/
Whereas: Congress, the Federal Reserve, and the U.S. Treasury have put the American taxpayer on the hook for over $12 trillion in bailouts and loans; and
Whereas: Federal Reserve Chairman Ben Bernanke recently refused to tell Congress who has received trillions in these funds from the Federal Reserve; and
Whereas: Allowing the Fed to operate our nation's monetary system in almost complete secrecy leads to abuse, inflation, and a lower quality of life for every American
Whereas: Congress, the Federal Reserve, and the U.S. Treasury have put the American taxpayer on the hook for over $12 trillion in bailouts and loans; and
Whereas: Federal Reserve Chairman Ben Bernanke recently refused to tell Congress who has received trillions in these funds from the Federal Reserve; and
Whereas: Allowing the Fed to operate our nation's monetary system in almost complete secrecy leads to abuse, inflation, and a lower quality of life for every American
Audit the Congress: the AIG bailout was about $180 billion of which about half has already been paid back by the company selling off pieces of itself and the rest might be paid back within 5 years. AIG is cleaning itself up, all of the investment banks have repaid their bailout money, and so have most of the large banks. The estimated cost of the Fannie/Freddie "conservatorship" is $291 billion as of late 2009 and another $389 billion over the next 10 years, almost as much as the war in Iraq up to this point. Guess what, these "companies" are not being unwound, but are actually increasing the size of their mortgage books because cheap housing is still a policy goal.
It is a fucking conspiracy. fed is run by the banks, banks didn't want fed to intervene bc they were making big bonuses and it was good for the people there. duh.
This is an obvious case of corruption of our government. No one was regulating because they didn't want to regulate it.
This is why there needs to be things like campaign finance reform and people should seriously go to jail without chance of being pardoned for these types of crimes.
Willful ignorance of this shit should have been considered aiding & abetting theft.
But no, no one will go to jail because the rich and powerful never go to jail. They didn't get rich and powerful by not being corrupt.
This is an obvious case of corruption of our government. No one was regulating because they didn't want to regulate it.
This is why there needs to be things like campaign finance reform and people should seriously go to jail without chance of being pardoned for these types of crimes.
Willful ignorance of this shit should have been considered aiding & abetting theft.
But no, no one will go to jail because the rich and powerful never go to jail. They didn't get rich and powerful by not being corrupt.
Yes, there is always some conspiracy, but calling it a conspiracy is not nearly enough to actually explain the situation and your gut reaction is lowering the quality of conversation. Also the threat of jail is not enough to fix the problem.
go fuck yourself guy who down-voted me, you are part of the willful ignorance.
Greenspan was a goddamned Rayndian. Stephen Friedman had super strong ties to goldman sachs, In fact, almost everyone high up in the fed has ties to banking in one form or another. None of the people involved are even interested fair in regulation.
I don't understand why this is controversial. it is a fucking conspiracy and I'm calling it as it is.
Would my post have been better if I had suggested execution, or is the real reason it is downvoted because it is unpopular to call something a conspiracy?
we all tell ourselves these fairy tales about how the world is fair and there are no conspiracies and closed door deals between those in power, but it is all a lie.
Greenspan was a goddamned Rayndian. Stephen Friedman had super strong ties to goldman sachs, In fact, almost everyone high up in the fed has ties to banking in one form or another. None of the people involved are even interested fair in regulation.
I don't understand why this is controversial. it is a fucking conspiracy and I'm calling it as it is.
Would my post have been better if I had suggested execution, or is the real reason it is downvoted because it is unpopular to call something a conspiracy?
we all tell ourselves these fairy tales about how the world is fair and there are no conspiracies and closed door deals between those in power, but it is all a lie.
Dude. What in the history of Hacker News would make you possibly believe that a post starting with "It's a fucking conspiracy" in earnest would do anything except get brutally downvoted?
That is: One possible answer to the question in the title is: "Because actually the available information didn't make it clear what would happen and when; you thought it did, but actually you just got lucky."
Whether that's actually the case here is of course difficult to tell. On the one hand, hindsight bias (http://en.wikipedia.org/wiki/Hindsight_bias) makes it likely that it won't feel like it is, even if it is. On the other hand, uh, it does indeed feel like the crisis was pretty predictable. (But I bet that most people who are now saying "well, that was hardly surprising" failed, just as FWIW I failed, to short the market heavily or anything. Not-being-surprised is cheap.)