He told you so: The mortgage broker who predicted all this

We are in the eye of a financial storm that evidently took much of America by surprise. Was it inevitable? That's for history to decide. I'll just say this: Many saw the storm coming. It did not appear out of nowhere. Tonight I'll highlight one storm-spotter and ask for your nominations for others.

I've made no secret of my admiration for mortgage broker, Fed watcher and weekly Internet columnist Lou Barnes. Not only did Lou stand on his Internet mountaintop and warn that this would happen, he said it again, and again. I'm not saying he's been right on everything, just that he saw this coming. From his weekly columns:

August 31, 2007: Structured-finance products all over the world are crashing in value or cannot be valued at all. Frequently leveraged, the fall in value is a balance-sheet risk both to investors and their lenders.

Sept. 7, 2007: The credit panic is spreading into a global affair far beyond mere mortgages...This is not a transient emergency, nor a single-firm threat like Long Term Capital Management in ’98; we and the Fed have a systemic problem growing worse.

Nov. 2, 2007: The last 48 hours make it clear that credit losses are systemic and too large to recognize. It is too late for daylight, proper valuation, and workout. It is firewall time, on the way to bailout.

Nov. 16, 2007: This predicament is unique (since the 1930s... heh-heh...): capital is evaporating, and the capital is leveraged.

Dec. 14, 2007: The acute economic problem today is the functional bankruptcy of the Western banking system. Losses in trillions of dollars of weird assets have impaired systemic capital; central banks have kept the system liquid, and undoubtedly will continue to do so, but nobody has an idea how to get the system to make new loans. You have to have capital to do that, and we’re fresh out.

Dec. 21, 2007: We have a wreck in the belly of the financial system: credit losses are so large that if recognized -- written off -- would bankrupt the whole show.

Read more of Lou Barnes' dire -- and accurate -- predictions below.

Feb. 15, 2008: The credit problem has now moved beyond the banks: the markets for securitized credit are seizing-up the way the banks did last fall, and credit starvation is deepening... Everybody wants market-based solutions, but what to do with a market too badly broken to heal itself?

Feb. 22, 2008: The public policy response to the credit crunch here is paralyzed ...  Secretary Paulson insists that this adventure is a normal, cyclical re-pricing of credit; he must know otherwise, but does not know what to do.

March  7, 2008: The Fed has failed. As have the Treasury, Congress, and the White House.

April 18, 2008: the financial system is still too busted to function properly, credit is extremely scarce and expensive, the system is terribly vulnerable.

June 13, 2008: The big end of today’s financial system is insolvent, broke, liquid but without capital, huge losses still to be recognized; credit shortage spreading to small institutions. ... this is NOT like the last time. This is different."

Sept. 12, 2008: The banking system is beyond self-healing, and is in a downward and self-reinforcing spiral, and traditional measures are exhausted

What I've left out of this summary are Lou's frequent calls for a massive government bailout to recapitalize banks and get bad assets off their books so they can lend again. He's been saying for about a year that this is both inevitable and smart. Increasingly, it appears he's right about the former.

But I digress. Please use the comment section to highlight others who saw this coming. Specific links to their writings would be great.

-- Peter Viles

Comments

[waitingforgodot]

Lou Barnes claimed there was no bubble in a 2006 interview on NPR. The dude is clearly smart, but even he has a bit 'o egg on his face.

[Nick]

One should be careful not to intellectually mix perceptiveness with rationally-considered and carefully evaluated guidance on what the various involved agencies should or should not do for maximum long-term public benefit. For example, I know that I was telling people very similar things a couple years ago (as were many other people), but I don't for one second think a government bailout is either necessary or beneficial in the long-term. I expect many people will use the current economic conditions as an excuse or rationale to push more socialism on the country, but we the people would do well to both recognize those attempts, and resist the urge to surrender more control to the government (especially considering their dismal recent record of oversight and regulation of the financial industry). Many people will use claim their social policies would help "fix" the economy, but smart people will see through the lies and distortions to the ugly socialist policies which both created a large part of the current mess (eg: the GSE's), and similar plans which would make the future even more bleak.

[waitingforgodot]

Here's the link below; even smart people get it wrong. Here, Barnes is not only dead wrong, but condescending and dismissive. Gotta love it.

http://www.npr.org/templates/story/story.php?storyId=
5354901

[puckhead]

Lou Barnes is a smart man. On the topic of govt intervention. Has anyone seen Dubya? Is he still the Prez? Did he secretly resign and is hiding out at his ranch in Texas cutting wood and riding his mountain bike? Two hobbies that he should have stuck with instead of trying to become the President. It’s amazing to me that the world is going through a financial crisis and we see plenty of Paulson and Bernanke……………………but we don’t see or hear squat from Dubya. Jeez Dubya, we know that you can’t do #%&*, but at least show that you give a damn. You only have 3 more months until retirement. How about putting in some OT and try to act Presidential? Is that asking too much?

[arun]

...CR (blog calculatedrisk)

...Nouriel Roubini (NYU)

...Jon Lansner (oc register)

...Rich Toscano (blog Piggington)

...David Streitfeld (ex-LATimes)

...half the blogosphere, it would seem...

...Any Chinese or Indian-born dudes working in the US

...the Economist (prescient, if premature in '04)

...old Polonius ("neither a borrower nor a lender be")

...Dad (for quoting old Polonius)

...thank you all!

[srla]

Any conversation about economists who recognized the bubble and foresaw the consequences of its collapse really has to begin with Dean Baker of CEPR. He accurately called a bubble way back in 2002 - the year when housing prices first began to dramatically diverge from trend levels for the first time ever. That same year (6 years ago!) he warned about the potential collapse of Fannie and Freddie.

Here is just one of many research papers he wrote on the subject that year:

http://www.cepr.net/documents/publications/
housing_2002_08.pdf

Paul Krugman wrote a post in his NYT blog back in March agreeing with Dean that almost all economists who foresaw the current collapse are, inexplicably, STILL being largely ignored (including, to some degree, Nobel laureate Nouriel Roubini):

http://krugman.blogs.nytimes.com/2008/03/15/
the-few-the-proud-the-ignored/

It really is both perplexing and somewhat depressing that the major news outlets continue to ignore the few people who actually have the ability to understand the macro economy. Instead these same news outlets keep quoting the same people who are continually perplexed by each successive turn of events.

With the current state of reporting, is it any wonder the print media is teetering on the verge of oblivion?

[srla]

I also poked around a bit on Lou Barnes' blog, and I must say that I am far less impressed than you are, Peter.

As recently as December of 2005, here is what he had to say about housing:

" A slowdown in housing is inevitable because of rate hikes, the sudden disutility of ARMs, and the compounding of prices beyond purchasing power. However, it’s way too early to guess at the damage that will be done at the housing/economy border, and the housing bubble thus far exists only in the minds of envious stock brokers. "

You can read all of the post here: http://www.boulderwest.com/news/1722.html

He went on to say that "The rising prices of homes has been a cause of economic growth, but also an effect of a healthy economy and the immense increase in household financial wealth since 1990. I suspect more effect than cause, and a more resilient economy than bond-market bettors currently think. "

The rising price of homes was due to the "immense increase in household wealth since 1990"? Huh? What statistics was this guy looking at? Rising home value aside, household wealth was stagnating at best since 2000.

But from where I stand, Lou's analysis was far off the mark very late in the game. I'm really not exactly inclined to listen to Lou's proposed solutions given his apparent inability to comprehend much of what was really going on during the height of the bubble.

[Numb]

Nouriel Roubini, of course. Link to his Dr. Doom interview.

[Mousebender]

In Barnes's September 12, 2008 article he states:

"Housing must bottom, and it will require cheap credit."

Does he mean housing sales or housing prices? For either, he misses the point. A housing bottom will require market-clearing prices. Prices have to reach levels that are affordable (through the entire term of the mortgage, not just the teaser period) for prospective home buyers.

[dwr]

Before you give him the "Visionary of the century" award, do you have any quotes of his from 2006, or even 2005?

[Chris]

lou barnes is the guy who saved me from buying an overpriced house and after reading his stuff pulling out of the stock market one year ago! My wife and I thank him!

Another guy that is hilarious and along the same lines as Lou is Mike Morgan. You can find his viciously accurate and hilarious rants here

http://realestateandhousing2.blogspot.com/

he writes about twice a week.

[sunsetbeachguy]

I love the blogosphere.

Nice work posters, good takedowns of high & mighty Lou.

[Buy Houses Now!]

The market is frozen because investors are walking around a party filled with "Weekend At Bernie's" corpses, being stood up by the Fed and tricky accounting, along with living banks, and have no way of telling the difference between the two. So they are waiting it out.

Open up the balance sheets, mark them to market, let the bad banks fail, let the good ones survive, and new ones sprout up. As far as deposits, stop the Fed's reversal of the 23A 10% rule this week that now permits banks to use as much depositor funds as they want to bail out their investment units--that's criminally negligent.

Anyway a large number of people saw this coming, including Noriel Roubini, Peter Schiff, Stan Kurland, Angelo Mozilo, and mrmmortgage.blogspot.com, to name a few off the top of my head. As far as the exact timing, I think only industry insiders like Kurland and Mozilo had access to ramping delinquency data when they started making moves in late 2006.

[Chris]

For all you Barnes Bashers -

In 2004 house prices were sickeningly high but everybody said buy buy buy
In 2005 house prices were bizarre and ridiculous but every lender said I can get you financing
In 2006 house prices were absolutely psychotic but "there isn't a housing bubble"! is what I heard

My point is things were terribly out of whack and any rational person would have a tough time predicting the actions of completely insane buyer, bank and appraiser.

Like I said in an earlier post Barnes kept me from making some terrible financial mistakes.

[praetorian]

Back in 2005, when *NO ONE* was talking about the bubble at all because we were right in the heart of it, the only two places I could find commentary saying that things were screwy were:

http://patrick.net/housing/crash.html

and

http://thehousingbubbleblog.com/index.html

Patrick and Ben, two average joes, not pro economists or real estate shills, nailed it and sang it loud and clear years before any of the "experts" did.

Cheers,
prat

[depresso]

Is this a joke? I don't see any predictions there. He was just describing current and past events.
There are other people who really saw all this coming and made correct public predictions before august 2007.

Calculated Risk
Mish
Roubini
LewRockwell

etc,etc...

[LA-renter]

Yes, this is kinda unrelated, but...

I see on the LAT Business page that Bush is speaking to his masses... on Wall Street:

"President Bush said Thursday that he shares Americans' concerns and the government will act aggressively to avert a deepening crisis."

Hmm... the fundamentals were sound when home prices were bubbling and I could not afford to buy a house without lying... and prices on basic food stuff were inflating faster than my paycheck...

[MarkW]

The reason most people ignore Economists are:

1. They can say anything, be completely wrong, and it doesn't matter. They don't loose there job or reputation. They just keep spouting off their view forever, and someone from the press is always ready to send it off to readers.

2. At any point in time, you can always find an Economist somewhere that will tell you what you "want" to hear. No matter how crazy it is.

[desmo]

Would you like an interview Pete? I sold my house in 2005 and have rented.

[mbob]

Lou was late to the party.

Marc Faber
Charlie Minter
Nouriel Roubini

started making noise half a decade ago. They are routinely marginalized, dismissed, ridiculed as nutbags.

Now that the right's financial wisdom has delivered us into a mess that will take a generation to cure, where are the right-wing slime-slingers with their derisive hoots?

[WaitingInOC]

I would second the nominees that Arun mentioned (particularly CR, Roubini, Toscano, and The Economist), and also add:

Christopher Thornburg (they muted him while at UCLA, but he clearly understood what was going on and got his point across)

Bill Fleckenstein (coined the term housing ATM)

Ben Jones (founder of the Housing Bubble Blog)

Meredith Whitney (her calls have been correct for longer than Barnes)

Lou Barnes accurately saw the writing on the wall AFTER the credit crunch last August, but he clearly DID NOT see the housing bubble during 2005 or 2006 (let alone earlier, as some did). Better late than never, I guess, but Lou wasn't helping people avoid buying a house at the peak. So, if you're looking for nominations, I think that any of these people are much more deserving than Lou since they saw the problem a LOT earlier.

[Bubblewatcher]

Christopher Thornberg has been dead right about this catatastrophe for the past three years. As has Paul Krugman. Unfortunately, up until late 2007 the media (print and tv) has preferred to feature idiots like Yun and Learah when they need a parrot to prattle on about how bubbles are for bathtubs and everything is contained.

Thank heavens for the blogosphere -- Ben Jones of Housing Bubble Blog, Piggington and Patrick over at Patrick.net all come to mind.

[will soper]

I've got a guy for you. Turns out he's a former mortgage broker guy too.

His name is Steve Christ ane he beat Lou Barnes on this one by a year. He writes for WealthDaily .com

He called it in 2006 and has nailed it ever since.

He's written tons of articles on.

Here's one from 2006....check out the end

http://www.wealthdaily.com/articles/wealth-building-investments/241

Of course, there are many more than this.

[MyLessThanPrimeBeef]

What does Lou have to say about the Big Bang machine?

The geniuses are going to start collisions next week.

Even if it's only one in a quadrillion or one in a google, sorry, googol, chances that the world could end, should they still try it?

If I am not mistaken, science is all about accidental or unintented discoveries and learning from failures so you can modify and improve your hypothesis. How are we going to learn from this potential failure if we will all be dead?

The question is relevant because this is the same kind of arrogance that created the current financial crisis.

When geniuses appear, we dunces need to be in a confederacy to defend ourselves.

[Fourth Generation]

Nick why trying to obfuscate the truth with name calling of socialism of some future government. We already are socializing left and right under a supposedly free market-capitalistic-conservative "regime". And it will do well for you to remember that is not the government the one with socialistic instincts but the ideological conservative Republicans who are overseen this socialization of risk to the benefit of the wealthy. It cannot go worse than present policies of state owned finance banks and insurance. So Nick cut it off will you.