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« How Investors Should Think about Europe | Main | Weighing the Week Ahead: What should we expect from Santa? »

December 16, 2011



You laid it out perfectly in WTWA. I'm looking forward to your further analysis. Thanks for helping me understand a little bit more about an area that has become a bit of a hobby for me.


Angel -- The book sounds quite interesting -- at least for people like us!

It seems to be available from various sources, so I'll try to take a look.

I have a continuing interest in the factors involved, and I am unsatisfied with the popular conclusions. It is almost enough to make me wish that I was back at the U.



TK -- I tried to lay this out a bit more in my WTWA article. For the moment, lets watch Italian bond yields. These are bad, but not the disaster level predicted a couple of weeks ago.

I'll have more in my Europe series, but that is the best I can do right now.

It is the right question -- how to monitor progress when there will not be a single magic plan.


Angel Martin

Jeff, in terms of forecasting policy initiatives in 2008, this book is worth a look. It is long out of print, and would be easy to dismiss as just another failed doomer forecast.

The book was written in the early 1990's with the S&L crisis as a backdrop. There is a long discussion showing that real estate prices could fall, and historically had fallen a lot in some periods. They analysed the financial and economic impact of a 50% fall in real estate prices in the US. Their analysis was that a financial shock of that magnitude would precipitate a downward spiral towards a depression. They forecast that the authorities would go to great lengths to prop things up including: bailing out Fannie and Freddie, quadrupling the deficit, expanding the fed balance sheet hugely with questionable real estate loans, zero interest rates, bank bailouts, reconstituting depression era institutions like the Resolution Finance Corporation...etc.

There is also a revisionist discussion of Hoover's conduct following the 1929 crash, showing how, unconstrained by ideology, he took very aggressive and unexpected actions in the weeks following the crash.

In 2008, as events unfolded, I couldn't help but think how prescient this book was - at least on real estate prices, the gse's, the fed's actions and the actions by the bush administration.

Also, for reasons too lengthy to go into here, other parts of this book convinced me that 2008 and the aftermath were not a rerun of 1929, but more like the mini-depression of 1920-21.


Investors need to learn how to measure progress and risk. It must be a measure, not a binary choice influenced by headlines.

What would be a good measure of progress? What steps, beyond what has already been done, would give you confidence they were making progress?



Angel -- The market usually focuses on what worked the last time. Most of the big betters on the collapse were completely wrong for years, as documented in The Big Short. They were losing investors along with respect. It was only afterward that they were celebrated.

Similarly, no one expected much from the various government actions in 2008-09, but we have learned from the experience. Programs like TARP, TALF, recapitalization, and QE's get attention.

I am trying to say that unlike 2008, this problem is well understood, but the solutions are not. Someone who had a good record on the 2008 solutions would be a good source now, even if the market gave him/her no respect at that time.

Maybe I'm still not explaining it very well, but it is the best I can do at the moment.

Thanks for the question.


Angel Martin

quoting from the article:

"You need to think not about the problem, but about the solution. To do this, let us look for the best source on solutions in 2008. Who accurately predicted the alphabet collection of programs? The determination to avoid disaster? The willingness of doctrinaire Republicans to intervene? The willingness of the Fed and the Bush Administration to stretch the law to aid financial institutions? The extension of this by the Obama Administration to non-banks?

Was there such a source? If so, let me know."

Jeff, i don't really understand this point. If an investor would have known that list in 2008, how would that have helped?

I'd say the opposite, knowing that list might have convinced an investor to hold onto financial stocks, when BKX fell by more than 75% post Lehman.

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