Early warning on housing bubble

Michael Burry saw the housing bubble forming as early as 2003 and became very concerned about it in 2005. He bought up lots and lots of credit-default swaps and bet that the market would collapse, well, just about the time that it did collapse. He made lots and lots of money off of his foresight, but regrets that Federal Reserve Chairman Alan Greenspan was so completely oblivious to the growing bubble.

Very interestingly, he points out that “the F.B.I. reported that its mortgage fraud caseload increased fivefold from 2001 to 2004.” Seems to me that should have set off major alarm bells in the upper reaches of the financial sector. Unfortunately, Paul Krugman is precisely correct in saying that Senator Chris Dodds’ (D-CT) proposed financial regulatory reform bill is far too dependent upon regulators being sensible. The housing bubble very clearly showed a real lack of sensible thinking on the part of those very same regulators (And yes, Krugman was one of those who saw the housing bubble many years before it burst). Krugman also tells us why Greenspan never saw the bubble:

Greenspan’s whole defense now is that nobody saw it. But there were an awful lot of nobodies — Dean Baker, Bob Shiller, Calculated Risk, and yes, yours truly. What’s probably true is that nobody Greenspan talked to regularly saw it. And you know why? Because Greenspan insulated himself from people who told him what he didn’t want to hear.

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