I saw the crisis coming: Why the fed did not.

In 2010 April 3, Michael Burry asked “I saw the crisis coming. Why did not the Fed?” His question was, in a sense, answered in the next two weeks.

In 2005 November, about four months after Michael Burry started betting his business by making big bets against mortgage backed securities, I said of the real estate market, and the easy money mortgages that were propping it up: “Now is the time to panic!”

At that time, among over mortgaged white people speculating in real estate in San Francisco, there was a mad rush to the exits, to get the hell out. In some cases this involved picking up some illegal immigrant from Home Depot, and inducing him with a pile of cash and a bottle of whiskey to sign a pile of papers he could not read , and then presenting him with the keys to a house mortgaged far beyond its worth, thus transferring a million dollar mortgage from a white guy, who it was politically and financially possible to persecute for not paying his mortgage, to a no-hablo-English mestizo with no job and no assets who was immune from getting into trouble for failure to pay, who did not even know that he now had a million dollar mortage, and would not have cared had he known.

The mortgages that Michael Burry was betting would fail rested on that mestizo making his payments, payments he could not possibly make and probably did not even know he was supposed to make. Back in 2005, I figured that this was bound to become noticeable quite soon, and was repeatedly astonished by how long the government managed to delay the day of reckoning with maneuvers ever more extreme and desperate. We all, we white speculators in the Bay area, figured that next week or next month, it would suddenly cease to be possible to unload over mortgaged real estate on no-hablo-English unemployed wetbacks, but it just went on, and on, and on. Similarly, Michael Burry was repeatedly astonished by how it continued to be possible to pretend that the mortgages he had bet against were still good. It just did not stop. Until it did stop.

That which cannot continue, will not.

Greenspan told us 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.

Immediately after making this op ed, Michael Bury was investigated by the FBI, and all his financial activities were audited by the usual alphabet soup.

From which we should conclude that if any of those crack economists had warned of the problems that were to come, and Greenspan had ratted him out for speaking too plainly, that crack economist would have been similarly investigated and audited, and unless squeaky clean, would have gone to jail.

This illustrates the left singularity. Everyone is required to believe in lies and delusion, and the ruling elite required to be more deluded than anyone else. The closer one is to the center of power, the further from reality one must be.

In the beginning of the video, Michael Burry gives a one sentence summary of the cause of the continuing crisis:

when the entitled elect themselves, the party accelerates, and the brutal hangover is inevitable

So, to end the crisis, either have to end democracy altogether, or drastically restrict the franchise.

At fourteen minutes into the video, he tells us what happened when he asked questions that should not be asked, and mentioned facts that should not be mentioned.

In my letters to investors, I described a downturn that would be unprecedented, with no counterpart in the modern era. Wall Street’s risk models would fall all at once, and every single CEO and every single politician would be disastrously wrong.

I put my money where my mouth was. At its peak I was short 8.4 billion dollars worth of subrpime mortgages … and at first we did lose. It was a negative carry trade. Investors, business partners, and even employees questioned strategy. Lawsuits were threatened, our distress was reported in the press, and Wall Street tried to squeeze our short.

I had bet against America, and won.

In 2010 I posted an op-ed in the New York times, posing what I thought was a valid question of the Federal Reserve, Congress and the President:

I saw the crisis coming, why did not the Fed?

Never did any member of Congress, any member of Government for that matter, reach out to me for an open collegial discussion of what went wrong, or what could be done. Rather, within two weeks all six of my defunct funds were audited. The Congressional Financial Crisis Inquiry Commission demanded all my emails and a list of people with whom I had conversed going back to 2003

And a little later the FBI showed up.

A million in legal and accounting costs and thousands of hours wasted, all because I asked questions.

Clearly the chief mission of the Congressional Financial Crisis Inquiry Commission was to conceal, rather than reveal the cause of the crisis – the underlying cause of the crisis being the government giving out easy money to voting blocks, in particular to non Asian minorities, something no one close to power can say, or even think.

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Only one thing in this video will surprise anyone who reads this blog.  It will all be old news to you except for the startling fact, appearing at 14 minutes into the video, that if someone is sufficiently a member of the establishment that he is entitled to give New York Times op eds, speaking plainly about the crisis will get him in very big trouble.  I thought that the elite were pre-approved, that no one got into the elite who was inclined to rock  the boat.  Evidently, on the contrary, the closer you are to power, the more you have to watch your step, much as the outer party in Orwell’s “1984″ had even less political freedom than the proles, and inner party even less than the outer party.  They don’t rock the boat because they are scared spitless.

This has the effect of making piety, hypocrisy, and the bare faced endorsement of transparent lies high status, because it is what high status people do.  High status people act scared spitless, so everyone else acts as if they were scared spitless, without the need for the direct repression and violence needed to make everyone else actually scared spitless.

It is an efficient use of repression, but means that the elite is further out of contact with reality than anyone else, thus that they are never going to realize that franchise has to be restricted, or else democracy ended.  The change is going to have to come from outside the present elite, after the crisis becomes so severe that it becomes impossible to continue on the present course, and simultaneously impossible to change course.

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18 Responses to “I saw the crisis coming: Why the fed did not.”

  1. Johnny Caustic says:

    Truly fascinating. It’s always seemed odd to me that one sometimes hears truth from nobodies but never from somebodies, though you’d think the former would have less protection. But I guess the somebodies are more threatening to the other somebodies.

    Sorry to change the subject, but I have a request. You’d said several times in past posts that old books have a lot of truth you can’t find in modern books. Can you please list a few of your favorite pre-1910 books? You’re obviously very good at digging up revelations (e.g. your eye-opening Darwin/Lamarck post); I think it would make a great post. Thanks.

    • jim says:

      There are no old books that present an exposition of the worldview of the time, because the worldview of the times is taken for granted. So one is only going to pick up on the older worldview, the worldview of older times, if one reads a lot of old books for other reasons, unrelated to understanding the older worldview. For example Garnet’s military adventures are just simply good clean bloody fun. (Garnet is a progressive, but of course, progressives of his day are not all that progressive by our standards. As one reads this and that, the older worldview slowly seeps it, unnoticed.

      Froude’s writings come close to an exposition, since he is writing to defend the colonialists against the predecessors of today’s progressives – the imperialists. Similarly Carlyle, who is self consciously reactionary, a man out of his time, looking back to the good old days of the restoration, before we had all this anti slavery and poor relief nonsense. Munshi Abdulla’s book comes close to exposition, since he is describing and explaining the colonialists for the benefit of his fellow easterners.

      But on the whole, one gets more information by accident and unawares, from those that do not intend to impart it, and are unaware of imparting it.

      • Johnny Caustic says:

        Thanks for the response.

      • Jehu says:

        If you want a good exposition of the world view of the Middle Ages, I suggest ‘The Discarded Image’ by CS Lewis. It was his last book and is from his ‘day job’ as a literary critic.
        For other eras, you’re largely on your own as Jim indicates.

  2. Bruce G Charlton says:

    That is a brilliant bit of noticing and analysis IMHO.

    The fascinating thing about the current suicidal lunacy is that the only thing that would be required to end it is the only thing that – for reasons such as you describe – does not happen: that the elites would speak honestly.

    It does not happen because they would all have to do it at the same time – because the system is set-up so that any individual dissenters or small groups are picked off.

    This situation has, of course, happened in the past with crazy/ evil monarchs and dictators. But what is truly weird, and unprecedented, is that modern Leftism does the same without any individual as the focus – which makes the whole thing deniable and invisible hence indefinitely sustainable (until it ends).

    “The change is going to have to come from outside the present elite, after the crisis becomes so severe that it becomes impossible to continue on the present, and simultaneously impossible to change course.”

    Indeed. So it would either be an anti-intellectual takeover from within the nation, or a takeover by elites from without. Or both, because the other factor is that there would be a break-up – with current nation-states fracturing. And that combination would probably mean civil war.

    Horrible prospect.

    • jim says:

      This situation has, of course, happened in the past with crazy/ evil monarchs and dictators. But what is truly weird, and unprecedented, is that modern Leftism does the same without any individual as the focus – which makes the whole thing deniable and invisible hence indefinitely sustainable (until it ends).

      Sooner or later a crazy and/or evil King is replaced by a reasonable and competent King, whereupon the problem is solved. Leftism, however, promises each of its adherents a small bite sized chunk of political power over other people, thus is prone to the various problems of the madness of crowds and the evil of mobs, which ailments are made immensely worse by political power, for political power enables the insane to silence the sane, and the evil to silence the good.

      • Bruce G Charlton says:

        Indeed.

        It is an interesting question how the present system was created and is sustained.

        This is easy to understand for selfish and self-gratifying cruel despots, but for a loose and un-self-aware elite of short-termist and stupid poseurs obsessed with kindness and peace, it is tricky – surely they lack the insight and strategic self-denial to keep things going?

        Unless, that is, one accepts the reality of purposive and strategic evil (the devil, demons, that kind of thing – dedicated to destruction of The Good) at which point everything seems to fall into place…

        • Bill says:

          Or it is an emergent equilibrium phenomenon, consciously designed by nobody, which arose because it met the needs of the elite.

        • jim says:

          for a loose and un-self-aware elite of short-termist and stupid poseurs obsessed with kindness and peace, it is tricky – surely they lack the insight and strategic self-denial to keep things going?

          Unless, that is, one accepts the reality of purposive and strategic evil (the devil, demons, that kind of thing – dedicated to destruction of The Good)

          Objective: Build a conspiracy, and a coalition of conspiracies to take power. Get as many important and influential people helping in the conspiracies as possible. How to incentivise one’s fellows?

          Answer: A political program that maximizes the power of the political apparatus over people’s lives, and divides that power into small bite sized chunks, and disperses it amongst each of the conspiracies, and each conspiracy disperses it amongst members of the conspiracy.

          Thus, for example, to build something the creator needs approvals from all sorts of government bureaucracies, each of which outsources the approving business to “consultants” (whose background is typically from elite academia), and the creator has to pay each of these consultants several thousand dollars, and if any one of the many groups to which these many consultants belong conceives a serious dislike for the creator, approval will not be forthcoming.

          Having carried through this program successfully, and attained power, one then encounters the problem that collective rationality is harder than individual rationality. Since leftism is high status, each conspiracy, and each conspirator, tries to out left each of the others, with the result that pretty soon this sinister and highly successful coalition of very clever conspiracies of very smart people is stupid, crazy, and suicidally self destructive.

          And here we are.

        • Occupant says:

          It is important to realize that collective delusion is real. At one time, not long ago, anyone who was anyone believed that socialism was the wave of the future. But many a ~bien pensant~ are unable or unwilling to examine why this was because they themselves or the people they admire were active participants in the delusion. For a collective delusion that might be easier for a contemporary progressive to examine, think Freudianism.

  3. Bill says:

    It was obvious further back than 2002. I got my first mortgage in 1997 and knew nothing about the mortgage market before that. During the course of several conversations with my mortgage broker, I was absolutely gobsmacked at the way the system worked. The mortgage broker was an independent contractor who worked with but not for many banks. Mortgage brokers are just voices on the phone, presences in fax/email to the banks—they are literally guys sitting in their living room in their underwear. The banks made the loans, taking the mortgage broker’s word for everything. The banks then immediately sold the loans to be packaged as mortgage backed securities, the packagers and eventual buyers taking the banks’ word for everything. Once the mortgages were packaged and gone, the banks and brokers had only small, theoretical liability if they went bad. Any non-retard who bothered to understand the system as it existed in 1997 and as it had existed before that knew that it eventually was going to explode if it was not radically changed. The incentives to lie were just too great and the safeguards against lying were just too weak—amounting to a theoretical possibility of being prosecuted some day.

    In retrospect, I am glad that I made no effort to profit from this piece of induction. I would have shorted WaMu, Countrywide, Freddie, and Fannie way too early. I would have gone broke. It would never have occurred to me that it could go on so long. The level of insanity was truly breathtaking. By 2005, all you had to do was read the prospectuses of the mortgage backed securities to see that 1) they were going to immediately explode, but 2) they were rated as good as FedGov debt. Insane.

    It is an efficient use of repression,

    Yes. It is the USSR in the Brezhnev era.

    but means that the elite is further out of contact with reality than anyone else, thus that they are never going to realize that franchise has to be restricted, or else democracy ended. The change is going to have to come from outside the present elite, after the crisis becomes so severe that it becomes impossible to continue on the present course, and simultaneously impossible to change course.

    I don’t think this follows, though. Most of the elite is opaque to me, but the parts I can see have lots of smart guys capable of critical thought. So, rather than them being out of touch with reality, it seems more like what Timur Kuran calls “preference falsification.” They, at least many of them, know what’s up but know they have to toe the line. So they do. Everybody (who matters) knows who Steve Sailer is, what he thinks, and the evidence for his views (at least in outline).

    If a Gorbachev came along, much of the elite could turn on a dime without much intellectual effort. The Soviet elite had no real problem abandoning Marxism/Leninism because they all knew that it was bullshit by the 60s or 70s. The thing is, though, our elite saw what happened to Gorbachev. Things quickly spun out of his control, and he became a nobody virtually overnight. The elite think they are morally superior to, say, Steve Sailer and Pat Buchanan, and the prospect of guys like that eclipsing them in some new intellectual and political order is both too awful to contemplate and a live possibility.

    Some political entrepreneur needs to find a way for the elite to back down in such a way that they don’t lose power or their ability to endlessly morally preen. Lots of them are itching to dump NAMs, blacks especially, but don’t see any way to do that. On optimistic days, I think the Mexodus is about giving the elite this way to back down. They can replace blacks with browns as their designated mascots or they can just declare multiculturalism a success, and the US can become like Mexico or Brazil.

    • JZ says:

      You forgot to put success in scare quotes.

    • jim says:

      Some political entrepreneur needs to find a way for the elite to back down in such a way that they don’t lose power or their ability to endlessly morally preen.

      An orderly retreat under fire is the most difficult maneuver to pull off, even for a well disciplined force with unity of command such as the Communist Party of the Soviet Union. For this lot …

  4. Alrenous says:

    Doubly efficient repression, because you don’t have to threaten physical violence on the elite. They have properties and interests and careers and such. They have something to lose.

    -

    More importantly, I think, is that these status norms wreck personal relationships. Politics will always kind of suck. Between this and the liar championships, it’s amazing that anyone can hold down a friendship, let alone a marriage.

    Trust is expensive, so I usually advocate working out how to use less of it.

    Trust is also enormously valuable. Indeed trust is wealth in and of itself, regardless of its huge instrumental value.

    Immigrants? Trust among citizens and neighbours? Fuck immigration. Following the current status norms make trust impossible between individuals.

    You cannot meaningfully have a society without trust. Without a society…well, do you know a way to have a civilization? I sure don’t. And if you could, what’s the point?

    • Alrenous says:

      Some of it is also because the elites decide post-facto whether to deliver sanctions, based on what in fact threatened their interests. It’s impossible to figure out beforehand all the things which will need punishing, and so just as impossible to vet beforehand. For example, Muslims. When did they discover that they wanted to pretend to be buddies with Muslims? How would they know before that to vet for Islamophilia?

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