9 ms·

93% of 2006 AAA-rated subprime mortgage-backed securities now rated junk

149 points by mcantelon 17y ago

Alex3917 17y ago
Headline is inaccurate, it's 93% of subprime-backed mortgage securities.
- akronim 17y ago
  Exactly - the majority of AAA bonds would be US/Euro/Sterling government bonds, which are still AAA rated.
  - goatforce5 17y ago
    Greek bonds aren't doing so hot right now: "The ratings agency, Standard & Poor’s, downgraded Greece’s long-term and short-term debt to noninvestment-grade status and cautioned that investors who bought Greek bonds faced dwindling chances of getting their money back if Greece defaulted or went through a debt restructuring. Earlier, S.& P. reduced Portugal’s credit rating and warned that more downgrades were possible." http://www.nytimes.com/2010/04/28/business/28markets.html?src=mv http://www.nytimes.com/2010/04/28/business/28markets.html?sr... There was an NPR Planet Money podcast recently that said if Greece failed, others were likely to follow: http://en.wikipedia.org/wiki/PIIGS http://en.wikipedia.org/wiki/PIIGS http://www.npr.org/blogs/money/2010/02/podcast_yes_greece_could_defau.html http://www.npr.org/blogs/money/2010/02/podcast_yes_greece_co...
- jsm386 17y ago
  Especially ironic/inaccurate given the full context of the quote: And no, that’s not hyperbole: of AAA-rated subprime-mortgage-backed securities issued in 2006, 93 percent - 93 percent! - have now been downgraded to junk status.
- sgoraya 17y ago
  I would highly recommend the book, The big short by Michael Lewis. It really exposes how subprime-backed mortgage securities were developed and the credit default swaps that insured them. The story of Michael Burry, silicon valley founder of Scion Capital, who shorted the subprime market was very interesting.
eavc 17y ago
If anyone is interested in a very clear example of the story behind the stat, I highly recommend this podcast/radio episode: http://www.thisamericanlife.org/radio-archives/episode/405/inside-job http://www.thisamericanlife.org/radio-archives/episode/405/i...
matasar 17y ago
It seems to me that rating agencies should be paid by the institutional investors that buy the bonds, not the banks trying to sell them. That might help the incentives line up better. Am I crazy? Nobody suggests this, and I think I'm missing something crucial here.
- btilly 17y ago
  The problem is that the institutional investors buying the bonds are much smaller, and there is no way to keep the information from leaking. Therefore most of those investors won't be willing to pay for the bonds, and the ones that can pay will be paying less money. That doesn't mean that this model is not viable. But it isn't viable at the kind of margins that the rating agencies would like to remain accustomed to.
  - matasar 17y ago
    Maybe investors could pool resources to start their own rating agency that would be answerable to them, and publish ratings for everyone to use? There has to be a better system.
    - btilly 17y ago
      The problem with that is that the ratings are a public good. Public goods have some counter-intuitive properties. Investors would have every incentive to individually contribute as little to the pool as possible as long as action happened. Economic theory says that one of four things is likely to happen. Those are: 1. The knowledge is worthwhile to a small group (often just one) of investors, who fund it. The memorable phrase for this is "the exploitation of the large by the small." (A practical example of this is OPEC and high oil prices. The complicated negotiations OPEC engages in illustrate the desire of members of the group to contribute as little as possible to provisioning the public good.) 2. An organization exists that investors belong to for some other reason which funds the ratings. (A practical example of this how people belong to AAA for membership benefits, but then AAA lobbies for road improvements.) 3. A coercive organization intervenes and forces the matter. (Virtually all government regulations fall into this category.) 4. The public good is not provisioned. (What happened to investors who wanted trustworthy ratings.) Read The Logic of Collective Action for the classic introduction to this topic.
btilly 17y ago
When people say they will act one way and have financial incentives to act another, expect them to follow the financial incentives. Appropriate regulation can help for a bit. But unfortunately the regulated party has incentives to provide incentives (such as contributions to political campaigns) to gain control of the regulations. This leads to regulatory capture that then renders the regulations ineffective. In a perfect world we'd be forcing the banks right now to write down securities that took a hit, forcing them to declare losses, which would mean that they wouldn't be paying out absurd bonuses. This would absorb the money we gave them from the bailout. In a slightly less perfect world we'd be enacting useful regulations that would avoid this problem returning for a few decades (such as happened during the Great Depression). In the real world we gave the banks a big bailout, have let them mark securities to models of their choice, and they paid themselves big bonuses on their "profits". Of course they are still sitting on lots of toxic securities (like bad CMBS and the junk bonds issued by private equity) that they have not marked down yet. When that blows up we have good odds that they'll ask for another bailout. And the behavior of both parties says that the leadership will try to get it for them. They nearly didn't manage to deliver it last time, and given the public outrage since, they may not be able to deliver it next time. This could lead to interesting times. Interesting times.
- gaius 17y ago
  which would mean that they wouldn't be paying out absurd bonuses No it wouldn't. Investment banks are huge and diverse businesses. If you're an FX trader, nothing whatsoever to do with mortgage-backed securities, and you've done your job well this year and made excellent profits (which for the bank as a whole offset their losses) then why shouldn't you get a bonus as usual? Of course the loss-making traders shouldn't get bonuses (that is after all the point of the bonus system) but lumping everyone in with them is both inaccurate and counter-productive.
  - joe_bleau 17y ago
    I've wondered this too. As an employee of a small company, I really wish I could use the same argument (and trust me, I've tried). "Hey boss, I'm doing the work of two people, at about a 40% discount to market rates for the average embedded engineer. You don't seem to think I'm average, and there's no question that you're more than happy with my performance. I realize business is off right now and sales suck, but why shouldn't I get a bonus/raise?" "Cause we don't have any more money, and the government won't give us any." I really like my job, but sometimes it's tough not to be jealous of the world of big money and government. I guess my answer to your question might be: "because Joe two floors down blew up, and we wouldn't exist as a company anymore if not for the government bailouts".
david927 17y ago
93% isn't bad luck. 93% is fraud.
- _delirium 17y ago
  Not that I think everything was above-board, but to be fair, these are hugely correlated instruments: it's not reporting 93% of all AAA debt tanked, but 93% of all AAA-rated derivatives of subprime mortgages. Given the subprime-mortgage crash, it's not surprising that everything tied to subprime mortgages uniformly tanked too. The way an AAA-rated derivative of a subprime mortgage could exist to begin with was via "tranching", where debt was sliced up into different buckets of repayment priority, which heightened the correlation. In a minor crash, the AAA securities would do okay, because they'd get the payments from the non-defaulting loans, and the lower-rated tranches would take the losses. But once you go over the threshhold where there isn't enough money to even repay the top tranches, then everything tanks all together. So really, near-0% and near-100% default rates were the likely outcomes.
  - WorkerBee 17y ago
    but to be fair, these are hugely correlated instruments That makes them more risky, not so? How did they get the AAA rating then?
    - andrew1 17y ago
      The bonds would typically be a composite of loans from all over the US. So the argument was made that even if (say) California's housing bubble crashed then only a small fraction of your bond would suffer losses as the loans made in other states would be ok. Thus the banks claimed that these were uncorrelated safe investments and the rating agencies agreed to rate them highly. There is some argument to be made that an awful lot of sophisticated investors didn't recognise before the crash that there was such a high level of correlation, so to some extent we're talking with the benefit of hindsight at this point. With hindsight it seems obvious that these bonds were doomed, but without the benefit of what we now know, how much should the ratings agencies be blamed for not recognising the risks?
asymmetric 17y ago
what does this have to do with news.yc ? it's not even about startups!
- JCThoughtscream 17y ago
  From the FAQ: "On-Topic: Anything that good hackers would find interesting. That includes more than hacking and startups. If you had to reduce it to a sentence, the answer might be: anything that gratifies one's intellectual curiosity. Off-Topic: Most stories about politics, or crime, or sports, unless they're evidence of some interesting new phenomenon. Videos of pratfalls or disasters, or cute animal pictures. If they'd cover it on TV news, it's probably off-topic." This one's a bit of a gray area, as it's heavily political in nature, but the mechanics of loan securities is of both intellectual and personal interest to what I'd imagine is a heck of a lot of HN readers.
- deleted 17y ago
  [deleted]
aac74 17y ago
Krugman fails to mention that this is the corrupt fallout from his cheerleading in 2002 for low interest rates in order to create a housing bubble to fill the void of the .com bubble ! "Alan Greenspan needs to create a housing bubble to replace the Nasdaq bubble." - Krugman 2002 http://www.nytimes.com/2002/08/02/opinion/dubya-s-double-dip.html http://www.nytimes.com/2002/08/02/opinion/dubya-s-double-dip...
- DuncanIdaho 17y ago
  Now I don't understand what your motive is - but your quote is taken waaay out of context... Original quote: "The basic point is that the recession of 2001 wasn't a typical postwar slump, brought on when an inflation-fighting Fed raises interest rates and easily ended by a snapback in housing and consumer spending when the Fed brings rates back down again. This was a prewar-style recession, a morning after brought on by irrational exuberance. To fight this recession the Fed needs more than a snapback; it needs soaring household spending to offset moribund business investment. And to do that, as Paul McCulley of Pimco put it, Alan Greenspan needs to create a housing bubble to replace the Nasdaq bubble." Here Krugman basically quotes another source. The way I interpret this quote (and article) is not cheerleading for lower interest rates. The message to me is that whole system is unsustainable and that only move that will be able to perpetuate the lie is to replace one bubble with the next. In this context Krugman's vision has proven prophetic. The whole notion, nothing personal - I have noticed it more than once, that Krugman somehow argued that replacing one bubble with another is good for economy somehow is ridiculous.
  - aac74 17y ago
    The way I read it is that Krugman is quoting someone to support his argument for ultra low interest rates. Krugman like all Keynesians thinks bubble booms are good and recessions are bad. He fails to mention the artificial carry trade in gold that central banks set up in the 90s to push gold prices down and stock prices up. Central banks at this time also promoted derivatives to create the illusion of low inflation by soaking up the price rises due to commodity speculation. He also does not mention the FED money printing in the 30s to artificially support the pound and stop the draw on gold from London. Could this have had something to do with the boom then ??? The moral of the story is don't let the government and central bank 'run' your economy. All they can do is make bad guesses and try and cover up reality. Panama has done without a central bank for a hundred years and look at the state it is in: http://www.costaricapages.com/panama/blog/wp-content/uploads/2008/06/panama-city.jpg http://www.costaricapages.com/panama/blog/wp-content/uploads... Who 'runs' their economy ??? Who prints their money ???
c00p3r 17y ago
This rating agencies are making their money the same way the big business consultants does - by confirming client's illusions and narcissistic views. This is called corruption.
bkmrkr 17y ago
Your title is wrong and misleading
fname 17y ago
If anyone listened to the hearings, they quoted a part from the book, "The Big Short: Inside the Doomsday Machine" which discusses some of what the author thinks were the inner workings. I've been reading through it now and cannot recommend it enough. http://www.amazon.com/Big-Short-Inside-Doomsday-Machine/dp/0393072231 http://www.amazon.com/Big-Short-Inside-Doomsday-Machine/dp/0...
nickpinkston 17y ago
Can someone actually find the source for this 93% figure? I haven't been able to. I just keep seeing the link back to the NYT page. I'd be good to actually see real numbers - not just Krugman's opinion.
ksraines 17y ago
Let's not forget that Krugman was one of the chief advocates of the housing bubble (before it popped) and that his "berating of the raters" should begin with an apology. http://blog.mises.org/10153/krugman-did-cause-the-housing-bubble/ http://blog.mises.org/10153/krugman-did-cause-the-housing-bu...
- tansey 17y ago
  That is bunk. That blog article is pulling a few quotes from 2001. In 2001 we had a recession with high unemployment, and lowering interest rates was sound advice. If you find some quotes from 2004 or beyond where Krugman actually advocates policies that would encourage a housing bubble, then you may have a case.
  - ksraines 17y ago
    Please see my comment above. You are evidently confused about the history of the housing bubble: it was beginning just as Krugman was making these comments and writing the article I link to below. The burden is, in fact, on you to find a link from circa 2004-6 by Krugman calling for restraint of the bubble whose inflation he advocated so fiercely. See above for a more detailed exposition of this point. Anyways, here is another article from 2002. I don't know how you can get any more incriminating: Quoting Krugman: To fight this recession the Fed needs more than a snapback; it needs soaring household spending to offset moribund business investment. And to do that, as Paul McCulley of Pimco put it, Alan Greenspan needs to create a housing bubble to replace the Nasdaq bubble. http://www.nytimes.com/2002/08/02/opinion/dubya-s-double-dip.html http://www.nytimes.com/2002/08/02/opinion/dubya-s-double-dip... BTW, asking for a quote from 2004 calling for the creation of a housing bubble is a bit ridiculous: by then the housing bubble was in full bloom. http://upload.wikimedia.org/wikipedia/en/c/c1/Median_and_Average_Sales_Prices_of_New_Homes_Sold_in_United_States_1963-2008_annual.png http://upload.wikimedia.org/wikipedia/en/c/c1/Median_and_Ave... As you can see, late 2002 (when the above article was written) would have been just at the beginning of the disaster. (sorry for the delayed reply; at work all day.)
- spot 17y ago
  those quotes are all from 2001. that's more than just a little "before it popped". this criticism is worthless.
kevin_morrill 17y ago
Thank god that we have government regulated credit ranking agencies to protect us from this mess and having to use our own judgment when investing. Oh wait... hmmm...

149 points by mcantelon 17y ago

Alex3917 17y ago

Headline is inaccurate, it's 93% of subprime-backed mortgage securities.

akronim 17y ago
Exactly - the majority of AAA bonds would be US/Euro/Sterling government bonds, which are still AAA rated.
- goatforce5 17y ago
  Greek bonds aren't doing so hot right now: "The ratings agency, Standard & Poor’s, downgraded Greece’s long-term and short-term debt to noninvestment-grade status and cautioned that investors who bought Greek bonds faced dwindling chances of getting their money back if Greece defaulted or went through a debt restructuring. Earlier, S.& P. reduced Portugal’s credit rating and warned that more downgrades were possible." http://www.nytimes.com/2010/04/28/business/28markets.html?src=mv http://www.nytimes.com/2010/04/28/business/28markets.html?sr... There was an NPR Planet Money podcast recently that said if Greece failed, others were likely to follow: http://en.wikipedia.org/wiki/PIIGS http://en.wikipedia.org/wiki/PIIGS http://www.npr.org/blogs/money/2010/02/podcast_yes_greece_could_defau.html http://www.npr.org/blogs/money/2010/02/podcast_yes_greece_co...
jsm386 17y ago
Especially ironic/inaccurate given the full context of the quote: And no, that’s not hyperbole: of AAA-rated subprime-mortgage-backed securities issued in 2006, 93 percent - 93 percent! - have now been downgraded to junk status.
sgoraya 17y ago
I would highly recommend the book, The big short by Michael Lewis. It really exposes how subprime-backed mortgage securities were developed and the credit default swaps that insured them. The story of Michael Burry, silicon valley founder of Scion Capital, who shorted the subprime market was very interesting.

eavc 17y ago

If anyone is interested in a very clear example of the story behind the stat, I highly recommend this podcast/radio episode: http://www.thisamericanlife.org/radio-archives/episode/405/inside-job http://www.thisamericanlife.org/radio-archives/episode/405/i...

matasar 17y ago

It seems to me that rating agencies should be paid by the institutional investors that buy the bonds, not the banks trying to sell them. That might help the incentives line up better. Am I crazy? Nobody suggests this, and I think I'm missing something crucial here.

btilly 17y ago
The problem is that the institutional investors buying the bonds are much smaller, and there is no way to keep the information from leaking. Therefore most of those investors won't be willing to pay for the bonds, and the ones that can pay will be paying less money. That doesn't mean that this model is not viable. But it isn't viable at the kind of margins that the rating agencies would like to remain accustomed to.
- matasar 17y ago
  Maybe investors could pool resources to start their own rating agency that would be answerable to them, and publish ratings for everyone to use? There has to be a better system.
  - btilly 17y ago
    The problem with that is that the ratings are a public good. Public goods have some counter-intuitive properties. Investors would have every incentive to individually contribute as little to the pool as possible as long as action happened. Economic theory says that one of four things is likely to happen. Those are: 1. The knowledge is worthwhile to a small group (often just one) of investors, who fund it. The memorable phrase for this is "the exploitation of the large by the small." (A practical example of this is OPEC and high oil prices. The complicated negotiations OPEC engages in illustrate the desire of members of the group to contribute as little as possible to provisioning the public good.) 2. An organization exists that investors belong to for some other reason which funds the ratings. (A practical example of this how people belong to AAA for membership benefits, but then AAA lobbies for road improvements.) 3. A coercive organization intervenes and forces the matter. (Virtually all government regulations fall into this category.) 4. The public good is not provisioned. (What happened to investors who wanted trustworthy ratings.) Read The Logic of Collective Action for the classic introduction to this topic.

btilly 17y ago

When people say they will act one way and have financial incentives to act another, expect them to follow the financial incentives. Appropriate regulation can help for a bit. But unfortunately the regulated party has incentives to provide incentives (such as contributions to political campaigns) to gain control of the regulations. This leads to regulatory capture that then renders the regulations ineffective. In a perfect world we'd be forcing the banks right now to write down securities that took a hit, forcing them to declare losses, which would mean that they wouldn't be paying out absurd bonuses. This would absorb the money we gave them from the bailout. In a slightly less perfect world we'd be enacting useful regulations that would avoid this problem returning for a few decades (such as happened during the Great Depression). In the real world we gave the banks a big bailout, have let them mark securities to models of their choice, and they paid themselves big bonuses on their "profits". Of course they are still sitting on lots of toxic securities (like bad CMBS and the junk bonds issued by private equity) that they have not marked down yet. When that blows up we have good odds that they'll ask for another bailout. And the behavior of both parties says that the leadership will try to get it for them. They nearly didn't manage to deliver it last time, and given the public outrage since, they may not be able to deliver it next time. This could lead to interesting times. Interesting times.

gaius 17y ago
which would mean that they wouldn't be paying out absurd bonuses No it wouldn't. Investment banks are huge and diverse businesses. If you're an FX trader, nothing whatsoever to do with mortgage-backed securities, and you've done your job well this year and made excellent profits (which for the bank as a whole offset their losses) then why shouldn't you get a bonus as usual? Of course the loss-making traders shouldn't get bonuses (that is after all the point of the bonus system) but lumping everyone in with them is both inaccurate and counter-productive.
- joe_bleau 17y ago
  I've wondered this too. As an employee of a small company, I really wish I could use the same argument (and trust me, I've tried). "Hey boss, I'm doing the work of two people, at about a 40% discount to market rates for the average embedded engineer. You don't seem to think I'm average, and there's no question that you're more than happy with my performance. I realize business is off right now and sales suck, but why shouldn't I get a bonus/raise?" "Cause we don't have any more money, and the government won't give us any." I really like my job, but sometimes it's tough not to be jealous of the world of big money and government. I guess my answer to your question might be: "because Joe two floors down blew up, and we wouldn't exist as a company anymore if not for the government bailouts".

david927 17y ago

93% isn't bad luck. 93% is fraud.

_delirium 17y ago
Not that I think everything was above-board, but to be fair, these are hugely correlated instruments: it's not reporting 93% of all AAA debt tanked, but 93% of all AAA-rated derivatives of subprime mortgages. Given the subprime-mortgage crash, it's not surprising that everything tied to subprime mortgages uniformly tanked too. The way an AAA-rated derivative of a subprime mortgage could exist to begin with was via "tranching", where debt was sliced up into different buckets of repayment priority, which heightened the correlation. In a minor crash, the AAA securities would do okay, because they'd get the payments from the non-defaulting loans, and the lower-rated tranches would take the losses. But once you go over the threshhold where there isn't enough money to even repay the top tranches, then everything tanks all together. So really, near-0% and near-100% default rates were the likely outcomes.
- WorkerBee 17y ago
  but to be fair, these are hugely correlated instruments That makes them more risky, not so? How did they get the AAA rating then?
  - andrew1 17y ago
    The bonds would typically be a composite of loans from all over the US. So the argument was made that even if (say) California's housing bubble crashed then only a small fraction of your bond would suffer losses as the loans made in other states would be ok. Thus the banks claimed that these were uncorrelated safe investments and the rating agencies agreed to rate them highly. There is some argument to be made that an awful lot of sophisticated investors didn't recognise before the crash that there was such a high level of correlation, so to some extent we're talking with the benefit of hindsight at this point. With hindsight it seems obvious that these bonds were doomed, but without the benefit of what we now know, how much should the ratings agencies be blamed for not recognising the risks?

asymmetric 17y ago

what does this have to do with news.yc ? it's not even about startups!

JCThoughtscream 17y ago
From the FAQ: "On-Topic: Anything that good hackers would find interesting. That includes more than hacking and startups. If you had to reduce it to a sentence, the answer might be: anything that gratifies one's intellectual curiosity. Off-Topic: Most stories about politics, or crime, or sports, unless they're evidence of some interesting new phenomenon. Videos of pratfalls or disasters, or cute animal pictures. If they'd cover it on TV news, it's probably off-topic." This one's a bit of a gray area, as it's heavily political in nature, but the mechanics of loan securities is of both intellectual and personal interest to what I'd imagine is a heck of a lot of HN readers.
deleted 17y ago
[deleted]

aac74 17y ago

Krugman fails to mention that this is the corrupt fallout from his cheerleading in 2002 for low interest rates in order to create a housing bubble to fill the void of the .com bubble ! "Alan Greenspan needs to create a housing bubble to replace the Nasdaq bubble." - Krugman 2002 http://www.nytimes.com/2002/08/02/opinion/dubya-s-double-dip.html http://www.nytimes.com/2002/08/02/opinion/dubya-s-double-dip...

DuncanIdaho 17y ago
Now I don't understand what your motive is - but your quote is taken waaay out of context... Original quote: "The basic point is that the recession of 2001 wasn't a typical postwar slump, brought on when an inflation-fighting Fed raises interest rates and easily ended by a snapback in housing and consumer spending when the Fed brings rates back down again. This was a prewar-style recession, a morning after brought on by irrational exuberance. To fight this recession the Fed needs more than a snapback; it needs soaring household spending to offset moribund business investment. And to do that, as Paul McCulley of Pimco put it, Alan Greenspan needs to create a housing bubble to replace the Nasdaq bubble." Here Krugman basically quotes another source. The way I interpret this quote (and article) is not cheerleading for lower interest rates. The message to me is that whole system is unsustainable and that only move that will be able to perpetuate the lie is to replace one bubble with the next. In this context Krugman's vision has proven prophetic. The whole notion, nothing personal - I have noticed it more than once, that Krugman somehow argued that replacing one bubble with another is good for economy somehow is ridiculous.
- aac74 17y ago
  The way I read it is that Krugman is quoting someone to support his argument for ultra low interest rates. Krugman like all Keynesians thinks bubble booms are good and recessions are bad. He fails to mention the artificial carry trade in gold that central banks set up in the 90s to push gold prices down and stock prices up. Central banks at this time also promoted derivatives to create the illusion of low inflation by soaking up the price rises due to commodity speculation. He also does not mention the FED money printing in the 30s to artificially support the pound and stop the draw on gold from London. Could this have had something to do with the boom then ??? The moral of the story is don't let the government and central bank 'run' your economy. All they can do is make bad guesses and try and cover up reality. Panama has done without a central bank for a hundred years and look at the state it is in: http://www.costaricapages.com/panama/blog/wp-content/uploads/2008/06/panama-city.jpg http://www.costaricapages.com/panama/blog/wp-content/uploads... Who 'runs' their economy ??? Who prints their money ???

c00p3r 17y ago

This rating agencies are making their money the same way the big business consultants does - by confirming client's illusions and narcissistic views. This is called corruption.

bkmrkr 17y ago

Your title is wrong and misleading

fname 17y ago

If anyone listened to the hearings, they quoted a part from the book, "The Big Short: Inside the Doomsday Machine" which discusses some of what the author thinks were the inner workings. I've been reading through it now and cannot recommend it enough. http://www.amazon.com/Big-Short-Inside-Doomsday-Machine/dp/0393072231 http://www.amazon.com/Big-Short-Inside-Doomsday-Machine/dp/0...

nickpinkston 17y ago

Can someone actually find the source for this 93% figure? I haven't been able to. I just keep seeing the link back to the NYT page. I'd be good to actually see real numbers - not just Krugman's opinion.

ksraines 17y ago

Let's not forget that Krugman was one of the chief advocates of the housing bubble (before it popped) and that his "berating of the raters" should begin with an apology. http://blog.mises.org/10153/krugman-did-cause-the-housing-bubble/ http://blog.mises.org/10153/krugman-did-cause-the-housing-bu...

tansey 17y ago
That is bunk. That blog article is pulling a few quotes from 2001. In 2001 we had a recession with high unemployment, and lowering interest rates was sound advice. If you find some quotes from 2004 or beyond where Krugman actually advocates policies that would encourage a housing bubble, then you may have a case.
- ksraines 17y ago
  Please see my comment above. You are evidently confused about the history of the housing bubble: it was beginning just as Krugman was making these comments and writing the article I link to below. The burden is, in fact, on you to find a link from circa 2004-6 by Krugman calling for restraint of the bubble whose inflation he advocated so fiercely. See above for a more detailed exposition of this point. Anyways, here is another article from 2002. I don't know how you can get any more incriminating: Quoting Krugman: To fight this recession the Fed needs more than a snapback; it needs soaring household spending to offset moribund business investment. And to do that, as Paul McCulley of Pimco put it, Alan Greenspan needs to create a housing bubble to replace the Nasdaq bubble. http://www.nytimes.com/2002/08/02/opinion/dubya-s-double-dip.html http://www.nytimes.com/2002/08/02/opinion/dubya-s-double-dip... BTW, asking for a quote from 2004 calling for the creation of a housing bubble is a bit ridiculous: by then the housing bubble was in full bloom. http://upload.wikimedia.org/wikipedia/en/c/c1/Median_and_Average_Sales_Prices_of_New_Homes_Sold_in_United_States_1963-2008_annual.png http://upload.wikimedia.org/wikipedia/en/c/c1/Median_and_Ave... As you can see, late 2002 (when the above article was written) would have been just at the beginning of the disaster. (sorry for the delayed reply; at work all day.)
spot 17y ago
those quotes are all from 2001. that's more than just a little "before it popped". this criticism is worthless.

kevin_morrill 17y ago

Thank god that we have government regulated credit ranking agencies to protect us from this mess and having to use our own judgment when investing. Oh wait... hmmm...