Wednesday, January 13, 2010

Financial Crisis Inquiry Committee

First of all I recommend looking at the picture in the WSJ of the four CEOs with their hands up taking an oath to be truthful. Is this the most board, lackadaisical set of oath postures you have ever seen? If you were taking an oath to tell the truth would you want to look a bit shaper and crisper and seem a little less board than say Lloyd Blankfein? Lloyd looks like he thinks he is operating a hand puppet. B of A's Moynihan looks like he has the stop sign on. Morgan Stanley's Mack seems to be waving as you would to some youngsters, arm bent, less than shoulder high. Only Dimon seems to be somewhat serious in his posture for the oath.

See link below for picture


I think body language matters

Blankfein was careful in this responses never to commit to anything. That sort of caution is a bit too cagey for me. I thought you were supposed to go to these sorts of hearings prepared.

Blankfein also was repeating the phrase about the 100 year s storm and being prepared for it. He cautioned about setting the whole financial system to be prepared for such an unlikely event.

It's an interesting tact on his part but it's wrong and the analogy is wrong too. It was a 100 years' flood not an uncontrollable, rogue, storm. Moreover, the financial firms were operating the sluice way and doing so in such a fashion that they mismanaged the dam's flood waters and wound up having to let the flood gates open full bore, imperiling everyone. This was no exogenous event. This was an event in which market participants laid their own ground work and they could have seen it coming if they had been paying attention instead of telling everyone that everything was fine. Fine it was not. Blank they were; fine it wasn't.

Jamie Dimon said that in their various stress tests or scenarios he did not consider that house prices might fall.

Really?

Now Alan Greenspan set the stage for such idiocy by saying that house prices never had fallen on a national basis in the US. As a 'stylized fact' Greenspan was right. But he was also so far off the true mark. It's a bit like saying Jack the Ripper was a nice guy because he never shot anyone. So he stabbed and sliced them? He didn't shoot anyone.

When Greenspan first made his now infamous statement on house prices I was immediately incensed. What and idiot I thought. Since the 1960s there have been several recessions and some of them deep (notably 1973 and then 1980 and 1981). But house prices had not fallen. Still the reason for that seemed quite clear to me: inflation. Inflation cooked in those recessions and real house prices did fall on a national level. Greenspan has glommed onto the WRONG statistic. I wrote several papers pointing that out. But he had the bully pulpit and most of Wall Street was a like a bobble head doll on his dashboard nodding even when the Great One hit a speed bump. No one was critical of G- Span and being critical of him did not get you much attention - far from it.

Nonetheless I wrote that we have seen real house price declines (house prices that rose more slowly than inflation). I extrapolated from this and argued that with inflation now low that meant we were more at risk than ever to a nationwide decline in NOMINAL house prices. No one listened.

This was simple economics but no one seemed to see it. It makes me wonder just how the street used economists. This cross-industry-wide mistake on house prices suggests that economists either were not used, were bullied, or were incredibly stupid in applying and thinking about what was going on in housing. It is hard for me to see how you could have been an economist specializing in that data and not catching on to that simple point about prices declining let alone carrying that train of thought to a broader and deeper conclusion based upon the ongoing lending recklessness. But apparently nobody did. That is Mr Dimon's version.

Dimon's assertion that house price declines were not even considered suggests strongly that no serious thinking about any negative consequences was in train: stressless-stress tests.

On balance the testimonies of these CEOs was not very reassuring. Moreover, they hardly come off looking like the smartest guys in the room as you might have expected of Corporate Titans paid the way these guys have been.





1 comment:

daniel said...

This is a great post Dmitry. I just had one of the ‘Doh!’ moments and ran back to correct my own site before publishing my comment. You see my own comment form did not match what I’m about to advise. I get less comments than you, so never noticed any problem. I’ve changed it now anyway so here goes.


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