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Bookblogging: The final instalment

March 8th, 2010

I’ve finally completed a near-final draft of my book, although some bits, such as the following ‘Reanimation’ section of the chapter on privatisation are still a bit rough.

I’m getting some good comments from readers here, and through more conventional academic channels, which should help me sand down the rough spots a bit. Anyway, thanks to all for the comments I’ve received. It’s made a huge difference to me, and made the production of this book a much less daunting undertaking than laboring alone.

Remember, before pointing out stuff that is missing, that an earlier draft is online here and may be worth reading to see where I’m coming from.

Some zombies can be killed once and for all, and it seems that the global financial crisis may finally have buried the idea of comprehensive privatisation. Throughout the world, the need for governments to act as the ultimate guarantors of economic and financial stability has consigned advocates of a minimal state to the fringes of debate

Even groups on that fringe, such as the Tea Party protestors in the US, are deeply ambivalent, as is evidenced by the famous statement of one such protestor ‘‘keep your government hands off my Medicare’. While most on the right have tried to avoid such obvious self-contradiction, they have, as Paul Krugman has noted, abandoned serious attempts to scrap or privatise the key elements of the welfare state such as Medicare and Social Security.

And what is true in the US is true internationally. The British Conservative party, once the standard bearer for privatisation under Margaret Thatcher, have announced plans to allow public sector workers to set up cooperatives to run services such as primary schools and jobcentres. While some have expressed concern that this might be a backdoor route to privatisation, the central point is that the idea itself can no longer be defended in public, even by the party that did most to popularise it.

Elsewhere in Europe, the crisis has hit hard at the countries and governments that embraced the ideology of comprehensive privatisation most enthusiastically. Iceland, which hosted a triumphal meeting of the ultra-free market Mont Pelerin society only a few years ago, is now trying desperately to avoid national bankruptcy. Ireland is not much better off. The Baltic States are basket cases. Even in cases which seem, at first sight to involve a simple excess of spending over tax revenue, as in Greece, it turns out that a variety of quasi-privatisation measures helped to disguise the problem until it was too late to fix.

With the national exemplars of comprehensive privatisation in disarray, and its advocates in full retreat, it seems unlikely that this zombie idea will return from the grave any time soon.

That does not mean that we will see no more privatisation of government enterprises, nor, unfortunately, that silly and long-refuted arguments will be brought forward to support such measures.

In my own home state of Queensland, for privatisation the government is attempting to sell a range of income-generating assets, and claiming that the proceeds can be used to finance the construction of schools and hospitals. The fact that, unlike the enterprises being sold, the schools and hospitals will not generate profits to service the associated debt seems to have escaped their attention.

Sensible proponents of the mixed economy have never argued that privatisation should be opposed in all cases. As circumstances change, government involvement in some areas of the economy becomes more desirable, in others less so. In cases of the second kind, the appropriate response may well be to privatise existing government enterprises. And, unfortunately, whether or not any particular privatisation is justified, politicians will always be tempted to rely on superficially appealing, but spurious arguments of the kind being put forward in Queensland.

The crucial condition for the stability of a mixed economy is that shifts between the private and public sector should, broadly speaking balance out. Privatisations may take place, but they are balanced by extensions of government activity through the establishment of new public enterprises, the expansion of existing ones or, where private ownership has clearly failed, the nationalisation or renationalisation of private firms.

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  1. March 8th, 2010 at 22:58 | #1

    The Dude has won the Oscar. All bow down and praise his Gnarly Dudeness. Some people say “don’t sweat the small stuff”. But Dudes go one better. They say “don’t sweat the big stuff”.

  2. paul walter
    March 9th, 2010 at 00:46 | #2

    Must admit, in the light of previous unfortunate experiences in trying to decipher what French po-mo philosophers, let alone economists, are talking about in their various tomes, have been relectant/intimidated as to the idea of taking on Quiggin’s book.
    It seems actually quite comprehensible.
    I do note, however, a possible Godwin violation or breach in f/n 2, in the section entitled, “Privatization”, discussing Peter Drucker’ and reprivatization, where it is observed that, ” An earlier usage under the Nazis is noted”.
    I realise that the author was trying contextualise, but the use of the”N” word surely is surely the more problematic; even egregious, for that.
    This is obviously because Godwin was a form of Rightist PC intended to alleviate contextual historical evidence involving analogy, in the discussing of contemporary issues*.
    *F/n 1. It should be recalled that history officially ended in the pronouncement of Fukuyama after the Fall of the Wall; recourse to history is of course thus superfluous. History was only a socialist furphy to sidetrack the Proles away from the tasks allotted them, anyway.
    BTW, where is that article on De Maistre I was going to read- “self examination”, indeed! ( want to bone up for Miranda Devine on Q and A next week).

  3. Hal9000
    March 9th, 2010 at 08:33 | #3

    It reads fine, Prof Q.

    A couple of suggestions. First, I’m wondering whether it’s worth pursuing the line suggested by your remarks about Greece, namely the use of privatisation to obscure the real state of public finances. Perhaps an instance from Greece would suffice.

    Second, the sentence

    In my own home state of Queensland, for privatisation the government is attempting to sell a range of income-generating assets, and claiming that the proceeds can be used to finance the construction of schools and hospitals.

    looks to have been the victim of cutting and pasting. Perhaps something along the lines of

    In my own home state of Queensland, for privatisation the government is attempting to sell a range of income-generating assets, and claiming that the proceeds can be used are needed to finance the construction of schools and hospitals.

  4. Grim
    March 9th, 2010 at 13:15 | #4

    Hopefully it will be a ‘best seller’ and outdo even Plimer. :-) But I look forward to the day when you have chapter headings like “What Are the Rules of the Game ? (the last chapter of Joan Robinson’s charmer).

    And one day, when considering the mystery of repeated and apparently causeless reanimation, you may want to consider the possibility of ‘archosis’. After all, how long ago does something have to be in order to be ‘ancient and ineradicable’ ?

  5. gerard
    March 9th, 2010 at 14:20 | #5

    I’d also like to see some more detail or references about the Greek situation.

  6. John Street
    March 9th, 2010 at 19:36 | #6

    I have re-read your earlier draft JQ and was looking for something delicious. Like: “The plans of the current Australian government to build a National Broadband Network which would eventually be sold back to private industry seem too timid. Instead, a case could be made to borrow money (gasp!), to buy back the dominant telco (Telstra) at say $3 per share (hmmmm?!), and to fillet out the backbone and local loop to provide the start for a government-owned supplier of wholesale telecommunications services including, where justified, really fast internet (1Gb/sec anyone?). Maybe retail services could still be private, if it proves true that a level playing field at the wholesale level allows genuine retail competition to develop.”
    But can’t find anything like that. You seem to stop short at: “where private ownership has clearly failed, the nationalisation or renationalisation of private firms”.

    There still seems to be a couple of typos in the draft like: “most economists generally to focus ” and “investments have been entirely unrelated to related”.

  7. Rickstersherpa
    March 10th, 2010 at 13:16 | #7

    Brad DeLong sent out an idea from J.S. Mill to use for your book on Zombie Economics quoting Cicero (some Zombie ideas are really long undead!)

    Sound familiar? John Stuart Mill

    John Stuart Mill (1844), “Review of Thomas Tooke, ‘An Inquiry into the Currency Principle’ and Robert Torrens, ‘An Inquiry into the Practical Working of the Proposed Arrangements for the Renewal of the Charter of the Bank of England, and the Regulation of the Currency,” Westminster Review 41 (June), 579-98: “What was affirmed by Cicero of all things with which philosophy is conversant, may be asserted without scruple of the subject of [macroeconomics]–that there is no opinion so absurd as not to have been maintained by some person of reputation. There even appears to be on this subject a peculiar tenacity of error–a perpetual principle of resuscitation in slain absurdity…”

    John Quiggin needs to grab this and use it on the back cover for his Zombie Economics…

  8. Alice
    March 12th, 2010 at 09:46 | #8

    I pinched this from ABOM aka kamaisking but could resist posting the link

  9. March 17th, 2010 at 07:44 | #9

    [Accidentally posted on Monday Message Board]

    I just wanted to set the record straight and refute Pr Q’s Keysnian triumphalism, which is certainly unjustified in the case of Australia.

    Pr Q’s argument that the Rudd government’s fiscal stimulus saved the Aus economy from the GFC is only partially true, and not a very big part of the truth. The Australian economy did not really suffer much in the way of ill-effects from the GFC. Therefore the fiscal stimulus did not really mitigate its ill-effects.

    In reality, the Howard governments factoral policies regulating the fundamentals of the housing market and the RBA/APRA’s financial management of credit issuing and interest rates played the major role in insulating us from an economic downturn.

    The GFC signalled an amazing revolution in the mechanism of economic downturns, inverting the normal relationship between the economy and property. Once upon a time in the age of industrialisation a credit crisis would cause a recession which would then cause an property collapse. Now, in the age of financialisation a collapse in property prices causes a credit crisis which causes a recession.

    But Australia never really suffered a property crash, mostly because the fundamentals of the Australian property market were sound, as indicated by the low non-performance ratio and the Australian banks sky-high international ratings in the lead-up and aftermath of GFC.

    What saved Australia was primarily Howard’s factoral and RBA/APRA financial policy, followed by Rudd’s fiscal stimulus as a distant third. The most important safeguard of the Australian economy was the underlying strength in our property market, and therefore our banks balance sheets, caused by extraordinary confluence of factoral conditions:

    – high demand for housing: housing users increased by record immigration of students and skilled workers plus influx of capital mainly from Asian property investors;

    – low supply of housing: housing stock limited by skills shortage (tradies down mines, land zoning restrictions on height and urban sprawl)

    The market fundamentals on housing pushed up rent which more or less tracked the rising trend in prices. The rent acted to service debt on residential investment property which turned most of our mortgages into blue-chip rather than sub-prime.

    As I said, in the US case it was Austrians who posited the causes, Keynsians who prescribed the cures.

    So its way past time for Pr Q to himself come clean on this issue. There are no grounds for Keynsian triumphalism in the analysis of the sub-prime crisis in the US case when the record shows that Austrian economists, following a more or less Hayekian approach to credit inflation, did correctly predict the housing bubble, property crash, credit crisis and economic recession. This can be proved by examining the predictions of Ron Paul and Peter Schiff.

    Their predictions were far closer to the truth than those generated by Pr Q’s model. Whats more their predictions were based on largely true assumptions, namely that it was the combination of reckless expansion by financial suppliers of credit and high riskiness by political demanders of credit that caused the credit crisis.

    It would be interesting to compare the fundamentals of the AUS housing market to the fundamentals of the US housing market. However that job must be left to commenters with more liberal commenting privileges than I now possess. NTTIAWWT!

  10. March 17th, 2010 at 12:55 | #10

    [cross-posted from Monday Message Board]
    GFC: PREDICTIONS, CONTRADICTIONS AND VINDICATION

    gerard#3

    Jack Strocchi is right not to give primary credit to the Rudd government’s fiscal stimulus for Australia’s relatively smooth sailing.
    Primary credit should, in fact, go to Communist China, for the undertaking the biggest fiscal stimulus in the history of Keynesianism.

    First off, we need to bring some accountability to the social scientific process. Every claim I make is backed up by a check of my predictive record, which in this area of late is much better than average. What is gerard’s predictive record in this field, and for that matter, what is Pr Q’s? Nothing much to shout about otherwise we would have already heard it.

    My main criticism of Pr Q’s analysis of the GFC is that he did not pay sufficient attention to the micro-economic fundamentals of the property markets in both the US and AUS. A comparison of these would have been instructive about the sources of risk involved in the massive escalation in property prices through the noughties.

    The GFC inverted the normal economic order, which usually makes the economy the driver of property values not vice-versa. This occurred with a vengenance in AUS yet we managed to avoid a crash. Whereas it was much less evident in the US yet they crashed the worst of all. What was the difference in our property fundamentals?

    Primary credit for staving off the GFC, at least in so far as it impacted AUS, should not go to the PRC’s fiscal stimulus, welcome though it was. AUS survived the credit through a combination of good luck (proximity to Asia and good relations with PRC) and good management (Howard-Costello, Macfarlane-Stevens, Rudd-Swan in that order).

    The major domestic management credit goes to Howard’s factoral policies, basically through the nineties attracting high input of labour (immigration) and capital (investment) from Asia. Plus APRA/RBA financial regulatory agencies did a pretty good job managing the financial sector, curbing its more reckless and profligate tendencies through tighter capital adequacy ratios, better quality control on lending portfolios, a limit on oligopolistic securitization and finally a series of welcome interest rate cuts.

    Howard-Costello also deserve significant credit for leaving the fiscal balance in reasonably good (in the black) shape. Could have done better, particularly with regressive tax policy. But all things considered not too shabby compared with OECD levels benchmarks.

    The key fact to keep in mind with the GFC is that it depended on the liquidity, and therefore solvency of the banks. So long as AUS banks cash flow was positive and asset base was solid with a small ratio of non-performing loans then there would be no credit crisis and therefore no recession.

    In late 2008 the AUS banks showed great resilience, with all four of the big banks climbing into the global top 20. This was well before the announcement of the PRC’s fiscal stimulus. In FEB 09 I quoted the Australian on the key role of our solvent banks in averting the GFC:

    THE crisis in the financial system catapulted all four majors into the ranks of the top 20 global banks for the first time. Although shares in the Big Four banks have collapsed more than 50 per cent in the past year, with new multi-year lows struck on Friday, they have stood up far better than their UK and US counterparts…..Australia’s four largest banks, which have retained their AA rating, are now considered some of the biggest in the world

    Remarkably, all four Australian banks now rank ahead of past giants such as Citigroup and Morgan Stanley in the US, Barclays in Britain and Deutsche Bank in Germany. Despite pressure on their funding and bad-loan books, they remain highly profitable while banks overseas seek government handouts, are nationalised or allowed to collapse.

    So by the end of 2008 our banks were ready to ride out the GFC without the prop of fiscal stimulus to either our domestic or internationally traded economy. Mainly on the basis of having a solid portfolio of mortgage assets.

    Of course one reason our banks were liquid and solvent was because the RBA had cut interest rates by more than half in the lead up and immediate aftermath of the GFC. If AUS was on the verge of a classic Keynsian depression this would not have worked due to liquidity entrapment.

    But it did work. The RBA’s long loosening bias in interest rate levels, cutting the base rate from about 7% in MAR 2008 to 3% in DEC 2008 proved a great boost to householder budgets and banks balance sheets. A 4% cut on 1 trillion dollars in mortgage debt equals $40 billion stimulus pumped into the economy well before the worst of the GFC hit and targetted right at its most vulnerable sector, namely bank cash flows. (Timely, Targetted and Temporary). And interest rates have stayed pretty low since then. This financial stimulus dwarfs Rudd-Swan’s domestic fiscal stimulus.

    Of course Pr Q steadfastly refuses to give Howard-Costello any credit despite the fact that his own economic models predicted that AUS would be amongst the worst sufferers from the GFC. Whereas the US, with a relativel smaller property bubble, should have come off much less scathed. He puts our good record down to Costello’s “luck”, which as Jack Nicklaus once observed in another context, seemed to improve with more practice.

    Pr Q’s Keynsian models were deficient as far as AUS political economy is concerned (we did not fall into a liquidity trap or have a balance of payments crisis as he predicted). Yet he wants to publish a book patting his models on the back whilst ignoring the contribution of Howard-Costello’s prudent management of AUS’s fisc. I’m sorry, but that just does not cut it with me at any rate. I strictly monitor my predictions, patting myself on the back or beating my self around the head and shoulders as the case may be. I do not think Pr Q is being a sufficiently harsh judge of himself.

    I should add that my model of the property-fiduciary-economy nexus was more or less the same as Pr Q’s until 2008. Although I called the US property bubble half-heartedly through the second half of the noughties it did not appear to be as bad as the AUS property bubble. Therefore through the second half of the noughties. I expected AUS to crash faster and further than the US.

    Back then I was wrong, at least about the US and AUS property markets.

    It was only in 2007-08 when I started to look seriously at the fundamentals of both markets that I saw there were significant micro-economic differences between the two jurisdictions that were not detected by the dominant macro-economic orientation of neo-classical economics. The US, relative to AUS, has much more liveable land – it is four times less densely populated than the EU. But  it also had much larger marginal pool of more credit-risky borrowers which made lending dodgier. AUS has relatively less liveable land and a much larger marginal pool of more credit-worthy borrowers/servicers. The devil is in those details.

    That is why in 2008 I turned from being a strong bear on AUS property to being weak bear and even mildly bullish. (In 2010 I finally re-entered the property market after being absent for the better part of the decade.) Looking back I am reasonably proud of my anti-bearish 23 OCT 2008 prediction, made at the height of the panic:

    Like Pr Q I expect the asset price bubble to burst. But only a recession will do it since institutional forces are tending to boost debt based asset inflation. Owner resistance to liquidation pressure is impressive.

    At the moment a recession appears to be odds-off. Although a slow down in Asian growth and a rise in global interest rates might cause property market capitulation.

    Even then the govt and populace will throw everything at the property market to keep a high floor on prices. More home grants, tax breaks, bail-outs, raids on super, infrastrucure splurges – you name it.

    The Great Australian Dream will not go down without a fight. Neighbours Home and Away last stand.

    Undoubtedly some credit for mitigating the GFC should go to the CCP of the PRC. But my OCT 2008 prediction was made independent of that policy

    In MAR 2009 I gave upper bound worst-case predictions of the severity of the GFC on AUS, stating that metro property prices would not fall more than 10% and unemployment would not rise above 10%. I foolishly neglected lower bound best-case predictions which would have made my record look much better:

    over the next 12 months:

    – unemployment rate NGT 8%
    – metro property prices falls NGT 10% off their 2006 peak

    That does not rule out a mild recession. Something like 2001. Not nearly as bad as 1991 or 1983 though.

    I predicted that the the GFC’s flow on to the PRC that AUS would manage the hit to our Terms of  Trade through currency depreciation, given the likelihood of a successful PRC recovery policy:

    We may be in for a second round of AUD devaluations once our short-term mineral contracts get re-negotiated. Same deal once the roll-over of short-term debt hits sometime this quarter. It is unlikely that we will continue to borrow so much with a higher interest rate.

    Overall our declining AUD has served us well in the past. We scraped through the Asia crisis in 1998 courtesy of a big devaluation. It will serve the same function this year by making our minerals more saleable. Another reason for optimism.

    There has been a hit to out ToT and our currency has come off its record highs. I predict it will eventually settle a little lower against the basket of tradeable currencies.

    In FEB 09 also predicted that the PRC would not be greatly hamstrung by the GFC, mainly because it would switch from a coastal export growth oriented strategy to a hinterland domestic catch-up strategy:

    I also predict that the PRC will engineer a relatively soft-landing for its largely-export driven economy. Unemployment in export related industries will rise but the largely state-run economy will turn to internal development, largely in the peasant hinterlands. This will have the added benefit of politically pacifying unrest in the hinterland.

    I was right and Pr Q was wrong on the PRC. But we are not seeing much action regarding error correction on this score.

    One thing for sure, to get to the bottom of the GFC we need to understand what were the characteristics of housing finance in the US that made it much more vulnerable to property crash off a much lower level. I have already made my view clear on this and thats enough said by me. I will give one hint: the CRA was heavily implicated, but indirectly, since it only directly regulated banks under the definition of the Act.

    Most of the sub-prime mortgage action in the US property market was being driven by non-banks such as Washington Mutual and Countrywide, who were part of the ”shadow banking system”. However non-banks still needed federal authorisation and guarantees and FMx2 co-operation to issue mortgages and sell securities. So they had to play ball by CRA rules if they wanted to get big and get ahead.  These non-bank financial institutions were indirectly subject to CRA oversight and intervention. What was it about their portfolios that made them so subject to crash and burn?

    Just askin’.

  11. March 20th, 2010 at 11:54 | #11

    Well deathly silence greeted that monumental comment. So perhaps a Shorter Strocchi is in order.

    One has to look at both sides of the economic equation, financial supply and political demand. To summarise the problem: the US through the noughties had:

    1. Too little regulation of the financial supply of credit eg repeal Glass-Steagall Act in 1999
    2. Too much regulation of the political demand for credit eg CRA, FMx2, HUD, Bush Ownership Society

    The key deficiencies with Pr Q’s approach are his dismissal of Austrian theory of credit suppliers, which has a better record in predicting real estate boom bust cycles than other theories. And his suspicious silence over the sub-prime credit demanders.

    1. Theory of financial suppliers of credit:
    Pr Q ignores or traduces the Austrian credit theory of the business cycle, which was derived from observation of real estate speculations (cf Hayek) and whose proponents gave the first and most accurate predictions of the sub-prime crisis, financial crisis and recession (cf Peter Schiff and Ron Paul)

    Pr Q did NOT put his finger on US real estate bubble as the big problem. He was much more concerned with US deficits, both fiscal and trade, as a source of geo-economic instability. Plus the usual, well justified, skepticism about equity valuations with guys like Magdoff pumping up prices.

    2. Empirics of political demanders of credit:
    Pr Q ignores or does not properly explain the mounting evidence that the US government, through its various legislative and executive instruments, acted to draw more credit out of the financial system on behalf of its various political sponsors and constituents. Initially and mainly concentrated in the sub-prime area of the mortgage market, traditionally “red-lined” out of the demand for credit.

    The CRA was only the first of many such movers. Obviously FMx2 were politically connected and acted to guarantee more risky sub-prime loans. But the biggest action came from non-banks (Counturywide Washington Mutual) who, whilst not banks under direct CRA audit, nonetheless acted according to the CRA agenda, without proper CRA oversight.

    And finally the Bush White House itself which was determined to use cheap credit to spread its “ownership society” agenda down to lower ranks of the SES in an attempt to win certain demographics.

    I cannot see how Pr Q’s neo Kenysian theories past muster when his own predictive record is weaker than the Austrian theory which he spends most time criticising.

    And I cannot see how Pr Q’s empirical observations are adequate given that he ignores the great elephant in the living room: the US political systems concerted effort to demand more credit on behalf of risky sub-prime mortgage borrowers.

    Its as if all the smoking guns in this department have been flushed down a memory hole.

  12. jquiggin
    March 20th, 2010 at 12:25 | #12

    Can you confirm your claims regarding Ron Paul? This
    http://ronpaulquotes.com/concordance.html
    concordance of his newsletter from 1996 onwards doesn’t even contain the word “bubble”.

    I’m sure you can find occasional quotes from him, mentioning the bubble, but that doesn’t prove anything. And it seems to me the same is true of Peter Schiff. If the predictions quoted here http://en.wikipedia.org/wiki/Peter_Schiff were his best efforts, colour me unimpressed.

    Compared to Paul and Schiff, I’ve been more willing to admit that the crisis emerged in a way rather different than I expected, and less keen to cherry-pick past statements to make myself look more prescient. But if I wanted to, it’s easy enough to play this game

    Here’s something I wrote in 2002, which seems pretty much spot-on:
    http://johnquiggin.com/index.php/archives/2002/08/27/the-great-home-equity-fallacy/

    “A continued solid gain in prices of existing homes — a proxy for housing wealth– suggests that rising home equity will continue to buffer any weakness in equity wealth and sustain household spending,” said Maury Harris, chief economist at UBS Warburg.”
    Exactly, the same argument has been pushed by Alan Greenspan.
    In economic terms this simply doesn’t stand up. As the name suggests, households live in houses. The services of the housing stock are consumed by households, and any increase in the value of housing for one household is a loss for others. The only way the household sector as a whole can gain from rising house prices is to sell to immigrants or for non-residential use.
    It follows that a consumption boom based on rising home prices is, in the words of the Bible, a house built on sand.
    (This argument needs to be qualified by the special features of the US mortgage market, discussed below* Arguably, it’s not households who are in trouble but the institutions who lend to them. But the boom is just as unsound either way).

    A reference in turn to this post

    http://johnquiggin.com/index.php/archives/2002/08/23/scary-stories-3/

    One of least-known disaster scenarios for the US economy arises from the peculiar structure of US mortgage contracts. Unlike Australian mortgages which have either a variable interest rate or a fixed rate and fixed term, US contracts typically have a fixed rate, but allow early repayment without penalty. In effect, this means interest rates are variable but only downward, since householders can refinance whenever rates fall. They are doing this in droves right now for 30-year and 15-year terms, producing A New Refinancing Boom in Mortgages
    For those who like the jargon of finance markets, US mortgages are like fixed-rate contracts with a bundled put option – comparing the terms with Australian mortgages this option appears to be free, but it’s very valuable to the borrower and potentially very costly to the lender.
    If US long-term interest rates rise significantly, lenders will be stuck with a lot of long-term mortgages at low rates while they have to finance their activities at the high rates. They will have to bear the difference. Thanks to the securitisation of mortgages it’s unclear who will bear this loss, but the loss is potentially massive. It was precisely this feature of US mortgage arrangements that generated the S&L crisis two decades ago, but no lessons seem to have been learned. Although interest rates aren’t likely to vary as much as they did in the 1980s, the ease of refinancing means that the volume of the problem could be huge even for a rise of a few percentage points in the longterm bond rate.

    To sum up, I had seen all the possible routes to the bursting of the bubble at least as early as anyone else. I thought a sovereign debt crisis was the most likely route. Rightness or wrongness on this kind of judgement is more a matter of luck/historical contingency than theoretical superiority.

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