5 ms·

2008 didn't happen because house prices were high, it happened because bad mortgages were labeled as good and then financial institutions placed levered bets on

2008 didn't happen because house prices were high, it happened because bad mortgages were labeled as good and then financial institutions placed levered bets on them. Downturns have reasons - Savings and Loans issuing long-term fixed rate loans at low interest rates, investors finally waking up to the shaky financials of dot-coms plus some accounting scandals, and mortgage defaults finally breaking through. If we want to predict the next recession we have to point at a reason not just high prices.

padobson 8y ago
Love this. I can't see a specific bubble yet. As someone in the tech industry, I'm tempted to say startups, but while the latest batch of IPOs seem underwhelming, none of them seem like out-and-out dotcom-style failures. SnapChat, Dropbox, Airbnb and their ilk seem like viable businesses to me.
- lazerpants 8y ago
  Viable, absolutely. Are current valuations correct, though? That's not nearly as easy a question to answer. If in reality Snapchat is worth $8b, not $16b (current market value), then $8b of capital gets destroyed the moment everyone realizes the "true" value. Now, repeat that process over every highly valued and highly leveraged tech company that exists. Many billions of dollars could cease to exist in a short matter of time, which would impact bonds issued by, and loans taken out by, these companies, the bond market more generally, and the stock market.
  - padobson 8y ago
    Maybe, but how much overvaluation is there? $100 billion? $500 billion? There needs to be trillions of dollars of overvaluation and a huge amount of leverage to constitute a financial crisis. I'm open to being wrong, but I don't see that here. Valuations may cut back a bit, but as you say, it's not like these companies are worth nothing, like Bear Stearns and Lehman and most other investment banks in 2008. If there's a market correction in startups, I don't see it necessarily leading to a systemic financial crisis. More like a mild recession.
    - lazerpants 8y ago
      Ah, I don't think there will be a financial crisis like 2008. I do think there will be a retrenchment involving securities and bonds that will cause home prices to move downward or possibly just drift sideways for a long time.
crwalker 8y ago
I appreciate this counterpoint. It's much easier to see a pattern than to understand why it occurs.

padobson 8y ago

Love this. I can't see a specific bubble yet. As someone in the tech industry, I'm tempted to say startups, but while the latest batch of IPOs seem underwhelming, none of them seem like out-and-out dotcom-style failures. SnapChat, Dropbox, Airbnb and their ilk seem like viable businesses to me.

lazerpants 8y ago
Viable, absolutely. Are current valuations correct, though? That's not nearly as easy a question to answer. If in reality Snapchat is worth $8b, not $16b (current market value), then $8b of capital gets destroyed the moment everyone realizes the "true" value. Now, repeat that process over every highly valued and highly leveraged tech company that exists. Many billions of dollars could cease to exist in a short matter of time, which would impact bonds issued by, and loans taken out by, these companies, the bond market more generally, and the stock market.
- padobson 8y ago
  Maybe, but how much overvaluation is there? $100 billion? $500 billion? There needs to be trillions of dollars of overvaluation and a huge amount of leverage to constitute a financial crisis. I'm open to being wrong, but I don't see that here. Valuations may cut back a bit, but as you say, it's not like these companies are worth nothing, like Bear Stearns and Lehman and most other investment banks in 2008. If there's a market correction in startups, I don't see it necessarily leading to a systemic financial crisis. More like a mild recession.
  - lazerpants 8y ago
    Ah, I don't think there will be a financial crisis like 2008. I do think there will be a retrenchment involving securities and bonds that will cause home prices to move downward or possibly just drift sideways for a long time.

crwalker 8y ago

I appreciate this counterpoint. It's much easier to see a pattern than to understand why it occurs.