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Question about the film "The Big Short"

McMick
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3/6/2016 12:55:40 PM
Posted: 9 months ago
I'm not an economics guy and don't intend to post on this forum again, and I apologize if this is a bad place for this thread, but I have a question which I would like help getting an answer to, as it's been bugging me for some time now.

This whole film is about the housing bubble and one of the assertions made by the film (and indeed, one which is widespread in the mainstream) is that nobody saw the housing bubble coming.

However, I could SWEAR that on the day the Fed dropped the interest rate to 0 percent for the first time after 9/11, which I am guessing was sometime in 2002(?) since I don't remember being angry at Bush yet, that CNN or NBC had some kind of analyst on, an older white gentleman as I recall, who said something to the effect that this would cause a housing bubble, that the housing market would collapse, that the Bush Administration must be aware that it would, and that they were basically kicking the can down the road and would have to figure out how to deal with it later. If that's not predicting, I don't know what the hell the word means.

So, am I the ONLY person who remembers someone saying this on the news back then? Can anyone confirm what I've said? Thanks for any help.
ColeTrain
Posts: 4,325
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3/9/2016 5:06:58 AM
Posted: 9 months ago
At 3/6/2016 12:55:40 PM, McMick wrote:
I'm not an economics guy and don't intend to post on this forum again, and I apologize if this is a bad place for this thread, but I have a question which I would like help getting an answer to, as it's been bugging me for some time now.

This whole film is about the housing bubble and one of the assertions made by the film (and indeed, one which is widespread in the mainstream) is that nobody saw the housing bubble coming.

However, I could SWEAR that on the day the Fed dropped the interest rate to 0 percent for the first time after 9/11, which I am guessing was sometime in 2002(?) since I don't remember being angry at Bush yet, that CNN or NBC had some kind of analyst on, an older white gentleman as I recall, who said something to the effect that this would cause a housing bubble, that the housing market would collapse, that the Bush Administration must be aware that it would, and that they were basically kicking the can down the road and would have to figure out how to deal with it later. If that's not predicting, I don't know what the hell the word means.

So, am I the ONLY person who remembers someone saying this on the news back then? Can anyone confirm what I've said? Thanks for any help.

I'm not too knowledgeable about this, specifically... I'm hoping RI (ResponsiblyIrresponsible) will decide to drop in and give a comment...
"The right to 360 noscope noobs shall not be infringed!!!" -- tajshar2k
"So, to start off, I've never committed suicide." -- Vaarka
"I eat glue." -- brontoraptor
"I mean, at this rate, I'd argue for a ham sandwich presidency." -- ResponsiblyIrresponsible
"Overthrow Assad, heil jihad." -- 16kadams when trolling in hangout
"Hillary Clinton is not my favorite person ... and her campaign is as inspiring as a bowl of cottage cheese." -- YYW
twocupcakes
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3/9/2016 11:57:50 PM
Posted: 9 months ago
At 3/6/2016 12:55:40 PM, McMick wrote:
I'm not an economics guy and don't intend to post on this forum again, and I apologize if this is a bad place for this thread, but I have a question which I would like help getting an answer to, as it's been bugging me for some time now.

This whole film is about the housing bubble and one of the assertions made by the film (and indeed, one which is widespread in the mainstream) is that nobody saw the housing bubble coming.

However, I could SWEAR that on the day the Fed dropped the interest rate to 0 percent for the first time after 9/11, which I am guessing was sometime in 2002(?) since I don't remember being angry at Bush yet, that CNN or NBC had some kind of analyst on, an older white gentleman as I recall, who said something to the effect that this would cause a housing bubble, that the housing market would collapse, that the Bush Administration must be aware that it would, and that they were basically kicking the can down the road and would have to figure out how to deal with it later. If that's not predicting, I don't know what the hell the word means.

So, am I the ONLY person who remembers someone saying this on the news back then? Can anyone confirm what I've said? Thanks for any help.

The film did not make the assertion that no one saw the bubble coming. All of the main characters saw the housing bubble coming. But the film made the assertion that in general the bubble caught everyone by surprise (which it did).

I don't recall this guy saying that on TV, but it def could be true. I would be interested to learn more about other people who predicted the bubble.
Chang29
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3/10/2016 1:21:20 AM
Posted: 9 months ago
There were many that saw both a housing bubble and 2008 crash coming. Main stream macroeconomic thought (Keynesians) never see any crashes or bubbles, simply not part of their models. Whereas, other schools of economic thought have the tools to see bubbles and crashes, but not able to predict timing.

It did not take a highly trained economist or business expert to spot the housing bubble of the 2000s. The ads by mortgages companies and refinancing companies were a huge indicator that something was wrong. Phrases like "cash out equity", "interest only", and "no income verification" demonstrated that something really bad was just ahead.

A problem is that little was learned by the 2008 crash. Far too many think that it was a regulatory failure, and refuse to see the underlining systematic issues with fiat money.
A free market anti-capitalist

If it can be de-centralized, it will be de-centralized.
ResponsiblyIrresponsible
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3/10/2016 5:12:31 PM
Posted: 9 months ago
At 3/6/2016 12:55:40 PM, McMick wrote:
I'm not an economics guy and don't intend to post on this forum again, and I apologize if this is a bad place for this thread, but I have a question which I would like help getting an answer to, as it's been bugging me for some time now.

No need to apologize, dude. That's what this forum -- in fact, website -- is for. At least you're willing to learn, unlike chang, who (wrongly) thinks he knows everything when in reality he's just spewing nonsense.

This whole film is about the housing bubble and one of the assertions made by the film (and indeed, one which is widespread in the mainstream) is that nobody saw the housing bubble coming.

This is a bit trickier than it sounds, and it's the primary reason, to me, that politics and economics shouldn't mix -- because it creates these impressions that not being able to "predict" a bubble is in some way or form incriminating.

No, it's a fact of life: a "bubble" is a shock to the system. People screaming about bubbles -- who were supposedly "right" -- (a) were screaming about them long before the housing bubble came to fruition, and were wrong about 5 of the last two recessions (I'm sure you've heard the phrase "he predicted 5 of the last two downturns!" about people screaming doom and gloom, ready to pounce when they're broken clock is right); (b) misdiagnosed the problem; (c) misdiagnosed the solution to that problem; (d) misdiagnosed the aftermath -- the effect of monetary and fiscal stimulus -- in predicting skyrocketing interest rates and hyperinflation, when the OPPOSITE is the case; and (e) have been wrong about everything they said would happen since.

So, sure, there were people who "predicted" it. But they also predicted 20 recessions that didn't happen. Bear that in mind when you consider whether these people are credible.

However, I could SWEAR that on the day the Fed dropped the interest rate to 0 percent for the first time after 9/11, which I am guessing was sometime in 2002(?) since I don't remember being angry at Bush yet, that CNN or NBC had some kind of analyst on, an older white gentleman as I recall,

They dropped the funds rate to 1 percent in 2003 and 0 percent in 2008, the aftermath of the bubble. So this was probably Peter Schiff or one of his other know-nothing Austrian friends complaining that a 1 percent funds rate would cause a housing bubble.

It's totally reasoning from a price change, but whatever.

who said something to the effect that this would cause a housing bubble,

This is the key problem: it didn't. Monetary policy had nothing to do with it.

that the housing market would collapse

He's been saying the same thing since, lol.

, that the Bush Administration must be aware that it would

By definition we can't predict economic shocks. That's why we call it SHOCKS. Greg Mankiw and Glenn Hubbard are incredibly competent, intelligent people. If this could be predicted, even if the rigor necessary to do was stratospheric (which it would be), those two would have been able to do it. The same goes, and perhaps more so, for Ben Bernanke. They didn't, because they couldn't.

, and that they were basically kicking the can down the road and would have to figure out how to deal with it later.

And tightening already-tight monetary policy -- because low rates mean that money has been tight, not that it is loose -- in the hope of squashing bubble fears caused by low rates and reaching for yield... which would lead to even LOWER rates in the future, which supposedly cause bubbles, all whilst waiting for the mystical market to step in to fix stuff, ISN'T kicking the can down the road?

Austrians are dumb.

If that's not predicting, I don't know what the hell the word means.

They predicted it, but misdiagnosed the cause, the aftermath, the magnitude, etc etc etc. There was no intellectual rigor or solid economic theory behind it. They were just fearmongering and took a moment to attribute any downturn whatsoever to their model of the business cycle, notwithstanding the fact that it was wrong, is wrong, and will always be wrong, and the actual behavior of macroeconomic variables stands in direct CONTRAST to real business cycle theory.

That's why chang regularly complains about "freedom" and "tyranny" and whatever. He has nothing in the way of actual substance to offer.

So, am I the ONLY person who remembers someone saying this on the news back then? Can anyone confirm what I've said? Thanks for any help.

Sure, there were a few.
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ResponsiblyIrresponsible
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3/10/2016 5:12:51 PM
Posted: 9 months ago
At 3/9/2016 5:06:58 AM, ColeTrain wrote:
I'm not too knowledgeable about this, specifically... I'm hoping RI (ResponsiblyIrresponsible) will decide to drop in and give a comment...

You rang?
~ResponsiblyIrresponsible

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dylancatlow
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3/10/2016 5:48:44 PM
Posted: 9 months ago
At 3/10/2016 5:12:31 PM, ResponsiblyIrresponsible wrote:
At 3/6/2016 12:55:40 PM, McMick wrote:

, that the Bush Administration must be aware that it would

By definition we can't predict economic shocks. That's why we call it SHOCKS. Greg Mankiw and Glenn Hubbard are incredibly competent, intelligent people. If this could be predicted, even if the rigor necessary to do was stratospheric (which it would be), those two would have been able to do it. The same goes, and perhaps more so, for Ben Bernanke. They didn't, because they couldn't.

That just begs the question: was it really an economic shock, or were there crucial signals that went unnoticed that would've given us some warning about what was coming.


, and that they were basically kicking the can down the road and would have to figure out how to deal with it later.

And tightening already-tight monetary policy -- because low rates mean that money has been tight, not that it is loose -- in the hope of squashing bubble fears caused by low rates and reaching for yield... which would lead to even LOWER rates in the future, which supposedly cause bubbles, all whilst waiting for the mystical market to step in to fix stuff, ISN'T kicking the can down the road?

Austrians are dumb.

I'm a little confused. So by raising already high interest rates to pacify investors worried about a bubble, the natural rate of interest would fall (presumably because the investors would be less worried about inflation?) which would have the same effect as lowering the rates to begin with? Isn't there a difference between artificially low rates, and low rates backed by market fundamentals?
ResponsiblyIrresponsible
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3/10/2016 7:12:23 PM
Posted: 9 months ago
At 3/10/2016 5:48:44 PM, dylancatlow wrote:
That just begs the question: was it really an economic shock, or were there crucial signals that went unnoticed that would've given us some warning about what was coming.

It's largely a hindsight is 20/20 thing -- there is no perfect indicator of the evolution of, for instance, financial conditions because financial markets are, to put it best, fickle beasts (and stock indices have more exposure to, say, falling oil then the broader U.S. economy, so we'd expect lower oil -- as a positive supply shock -- to bolster underlying fundamentals bu wreak havoc on stocks).

Not to mention, most people who cite bubble paranoia don't actually know what a bubble is. A bubble is a deviation of asset prices from fundamentals. The problem is, no one actually knows the "fundamental" value, so the BOP is on necessarily on the person screaming bubbles.

Now, were NINJA loans a reason to be worried? Yes, absolutely. A lot of people saw a housing collapse coming around 2006ish, but the impact of that wasn't actually that severe -- at least not to take the global economy to its knees. So I'd say it was a shock, but there's no reason not to ensure that the fundamentals of the economy are sound ex ante (strong regs, etc.).

I'm a little confused. So by raising already high interest rates to pacify investors worried about a bubble, the natural rate of interest would fall (presumably because the investors would be less worried about inflation?) which would have the same effect as lowering the rates to begin with?

That isn't the argument I'm making at all. You're overthinking this, Dylan, lol.

First, I don't know what a "high" interest rate is; I've argued continuously that unless there's a benchmark, that's a meaningless term, though the benchmark I use for the stance of policy in the short term is the short-run r* (or the spread between that and the real funds rate, adjusting for credit spreads) and the distance between the level of the real funds rate and the projected long-run value for the evolution of monetary policy (i.e., if we're getting closer to r*, that means policy has been sufficiently loose so as to sustain a series of rate increases, which is on balance a good sign and should be reflected in higher long-term rates -- which I've made the case are expansionary).

So it's not whether rates were already too high or too low -- that's a meaningless argument without a benchmark. But most projections of the long-run funds rate at the time, and where we actually ended up in September 2007 after 17 consecutive rate hikes was about 5.25 (i.e., right before they started slashing the funds rate violently, eventually to zero). So that the funds rate even fell to zero suggests that policy was at one point too tight, because had it been higher and NGDP growth sustained, there wouldn't have been a need for such a considerable cut in the funds rate to begin with.

But let's replace "already high" with "too tight" in your question -- and correct me if I'm misunderstanding your point here.

I'm not really sure whether the intention would be to pacify investors -- I mean, if the Fed signals that it suggests there's a bubble, that's a great way to encourage fire sales because financial markets are freaking nuts -- so much genuine concern over frothy financial markets. There is a pervasive school of thought that central banks should intervene to pop bubbles (or "lean" on them, or whatever). I'm not one of them.

As for the natural rate -- yes, that would fall, though the effect wouldn't be the same as lowering rates. I mean, lowering rates on a given day is more expansionary then if they were higher, but the question is WHY they're moving up or down -- the Fed can say "screw the markets" like they did in May-June and long rate shot up. That was obviously a really, really bad sign -- but when long rates fall on, say, horrid data and a flight to the US, that's not something to cheer, either, though it's better than if markets thought the Fed would just say, "Screw you, we aren't going to do anything about it because we think prices should magically adjust instead and we abhor distortions," or whatever.

But there is a way to construe my argument in terms of the natural rate. Tightening reduces the natural rate -- tighter financial conditions (including lower inflation expectations, yeah), lower expected productivity growth, a heightened desire to save rather than consume, etc. -- so rates will have to stay lower for a longer time. Investors aren't "reaching for yield" because of "easy money," because easy money eventually leads to a rise in nominal rates consistent with improving underlying fundamentals. It's a function of, physically, a lack of yield -- so why not buy risky stuff, says the novice, dbag investor. That lack of a yield is a function of excessively tight monetary policy -- because, again, tight money keeps equilibrium rates down and thus the path of future rates down.

Isn't there a difference between artificially low rates, and low rates backed by market fundamentals?

I mean, what's a low rate? Again, we need a benchmark.

Low relative to the natural rate, in which case money is "easy"? Sure. That's a function of weak market fundamentals that merited such a low interest rate. Artificially low rates.... that's something I shy away from, because (a) most people who use it (read: Austrians) don't know what they're talking about, and want to have their cake and eat it too (rates are artificially low, but the economy sucks -- which means a low wicksellian rate and thus a NEED for low rates; and there's bubbles in asset prices, but the economy sucks... which, again, means that rates should be low to correspond to a lower natural rate, and lower rates bid up asset prices. It's circular gibberish) and (b) it doesn't actually exist.

I mean, the closest thing to an "artificial interest rate" is what I described earlier: the Fed saying "screw you markets, fundamentals will not determine interest rates, we will." I often argue that the Fed doesn't "set" interest rates because they follow fundamentals and, particularly, the natural rate, but technically they control the base and thus the current short-term nominal rate and the path of future rates, including nominal rates. So could they "artificially" affect rates? I mean, I guess... but the only definition of "artificial" is "not in line with the Wicksellian neutral rate." Regardless, the Fed is going to set the base and thus control short-term rates, which drive long-term rates. So in this sense there really isn't a such thing as artificial rate.

Now, maybe you're getting to something else -- structurally lower interest rates as a function of permanently weaker underlying fundamentals that had sapped the economy's potential output. That is obviously a much, much more interesting discussion -- and perhaps the only actual case where there could be "reaching for yield" behavior as sort of a new normal.
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ColeTrain
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3/10/2016 8:28:45 PM
Posted: 9 months ago
At 3/10/2016 5:12:51 PM, ResponsiblyIrresponsible wrote:
At 3/9/2016 5:06:58 AM, ColeTrain wrote:
I'm not too knowledgeable about this, specifically... I'm hoping RI (ResponsiblyIrresponsible) will decide to drop in and give a comment...

You rang?

Yes. He was asking about a housing bubble, so I was hoping you'd come by to give a comment. :)

Also, you should check out my thread. Please? ;)
"The right to 360 noscope noobs shall not be infringed!!!" -- tajshar2k
"So, to start off, I've never committed suicide." -- Vaarka
"I eat glue." -- brontoraptor
"I mean, at this rate, I'd argue for a ham sandwich presidency." -- ResponsiblyIrresponsible
"Overthrow Assad, heil jihad." -- 16kadams when trolling in hangout
"Hillary Clinton is not my favorite person ... and her campaign is as inspiring as a bowl of cottage cheese." -- YYW
ResponsiblyIrresponsible
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3/10/2016 8:35:59 PM
Posted: 9 months ago
At 3/10/2016 8:28:45 PM, ColeTrain wrote:
At 3/10/2016 5:12:51 PM, ResponsiblyIrresponsible wrote:
At 3/9/2016 5:06:58 AM, ColeTrain wrote:
I'm not too knowledgeable about this, specifically... I'm hoping RI (ResponsiblyIrresponsible) will decide to drop in and give a comment...

You rang?

Yes. He was asking about a housing bubble, so I was hoping you'd come by to give a comment. :)

Also, you should check out my thread. Please? ;)

Eh, I'm sort of sleep-deprived right now, but we'll see, lol
~ResponsiblyIrresponsible

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ColeTrain
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3/10/2016 8:37:12 PM
Posted: 9 months ago
At 3/10/2016 8:35:59 PM, ResponsiblyIrresponsible wrote:
At 3/10/2016 8:28:45 PM, ColeTrain wrote:
At 3/10/2016 5:12:51 PM, ResponsiblyIrresponsible wrote:
At 3/9/2016 5:06:58 AM, ColeTrain wrote:
I'm not too knowledgeable about this, specifically... I'm hoping RI (ResponsiblyIrresponsible) will decide to drop in and give a comment...

You rang?

Yes. He was asking about a housing bubble, so I was hoping you'd come by to give a comment. :)

Also, you should check out my thread. Please? ;)

Eh, I'm sort of sleep-deprived right now, but we'll see, lol

Oh, fine. :P
Take a nap, then respond. ;)
"The right to 360 noscope noobs shall not be infringed!!!" -- tajshar2k
"So, to start off, I've never committed suicide." -- Vaarka
"I eat glue." -- brontoraptor
"I mean, at this rate, I'd argue for a ham sandwich presidency." -- ResponsiblyIrresponsible
"Overthrow Assad, heil jihad." -- 16kadams when trolling in hangout
"Hillary Clinton is not my favorite person ... and her campaign is as inspiring as a bowl of cottage cheese." -- YYW
McMick
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3/12/2016 9:16:32 AM
Posted: 9 months ago
OK so if I look up "interest rate" in Wikipedia they have this historical chart:

https://en.wikipedia.org...

And you can see that in 2002 the interest rate plunged to below 3 percent (I said 0 percent but I must have been mistaken. I know they kept going lower and lower over time like some Interest Rate Limbo). I *think* this is what they were talking about in the news. I got the impression from the guy in the interview that this interest rate directly affected the interest rate of home mortgages, which in turn would fuel the housing boom in question. Before my eyes glaze over, can someone explain to me in caveman terms if I'm missing something here?

In the film, only one guy actually figured out and predicted what would happen, then his idea got spread around to the other characters. Yet back in 2002 this guy was on saying there would be a housing bubble. If they could predict it, why weren't they looking for it?
ResponsiblyIrresponsible
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3/12/2016 5:56:55 PM
Posted: 9 months ago
At 3/12/2016 9:16:32 AM, McMick wrote:
OK so if I look up "interest rate" in Wikipedia they have this historical chart:

https://en.wikipedia.org...

And you can see that in 2002 the interest rate plunged to below 3 percent (I said 0 percent but I must have been mistaken.

They were at 1 percent in 2003, which was widely considered a "floor" on par with the zero-rate bound in 2008, but obviously they trended lower in the aftermath of the financial crisis.

I know they kept going lower and lower over time like some Interest Rate Limbo). I *think* this is what they were talking about in the news.

Sure, I wouldn't be surprised. A lot of people think it's a larger deal than it actually is, lol.

I got the impression from the guy in the interview that this interest rate directly affected the interest rate of home mortgages, which in turn would fuel the housing boom in question.

Sure -- I'm sure Peter Schiff made that argument, but he's dead wrong.

Look at this graph, for instance (truncated for characters): http://tinyurl.com...

This is a plot of the federal funds rate versus the 30-year mortgage. The mechanism, sure, is that a cut in the funds rate is passed through to other overnight interest rates and then to an array of other short rates and, finally, to long-term rates. The 10-year Treasury is a reference rate for mortgage interest rates, so it is conceivable that a cut in the funds rate would translate to lower mortgage rates -- in some sense that was the motivation behind QE, though obviously the mechanism was different: passthrough from a reduction in the funds rate to outright purchases of MBS securities.

So, yeah, you can see in the years leading up to the first gray bar (recession in 01-02) that mortgages rates followed the funds rate downward. They trended downward until about 2003 and then flat-lined, even as the fed funds rate was raised 17 consecutive times.

Why was that? Because of the so-called "Greenspan Conundrum": basically, there was a giant global savings glut at the time from China and a few other countries, and it had to go somewhere. U.S. T-bonds happen to be a great safe haven, so they flocked there and held down our interest rates, so the 10-year stayed low and thus the 30-year relatively low even as the funds rate, in theory, should apply upward pressure.

But was this the reason for the housing bubble? No, not even close, and I touched on this briefly in my last post. Actual mortgage interest rates were far less important than underwriting standards, which were virtually nonexistent at the time. You could even look, for instance, at credit spreads at the time -- some of which were something like Libor + 110 bps. Actual, underlying mortgage rates were arguably too high vis-a-vis the actual credit risk. The problem was: (a) the lack of lending standards (i.e., the so-called "NINJA loans" where people were, sometimes quite literally, promised free money at a teaser, adjustable rate that would spike later on, without having to provide any proof of an income or put any money down) and (b) the way in which banks disguised these subprime mortgages by pooling them together with other mortgages that weren't of a much better credit risk so as to make the entire basket appear like a much better credit risk (which was called a collateralized debt obligation). This was the same time that they were physically betting against them via credit default swaps: basically, they need not physically own the security, but they could pay a premium such that, if the mortgage holders defaulted on their debts, they'd get paid.

So the issue was entirely lack of regulation, fussing about with financial instruments that very few people actually understood, and incredibly reckless behavior on the part of Wall Street. It had nothing to do whatsoever with Fed policy. Ben Bernanke has talked about this extensively, as well: if you looked, for instance, at real-estate prices around the world, they saw the same massive jump, but with much higher interest rates.

Before my eyes glaze over, can someone explain to me in caveman terms if I'm missing something here?

I think the above covers it.

In the film, only one guy actually figured out and predicted what would happen, then his idea got spread around to the other characters.

In some cases, people were probably genuinely ignorant -- though that isn't to say that Peter Schiff is any better. Again, he'd been predicting collapse virtually every single year, and just so happened to get a lucky on his dartboard. He was wrong on the cause of the crisis, he was wrong on the nature, he was wrong on the aftermath, he was wrong on the policy response, etc. These aren't just tiny issues -- his entire understanding of the financial crisis was total and complete hogwash. He blamed easy money, when in reality it was TIGHT money and loose REGULATION (which, ironically, are two things he wants) that exacerbated the crisis in mid-to-late 2008.

Yet back in 2002 this guy was on saying there would be a housing bubble. If they could predict it, why weren't they looking for it?

We couldn't -- or, I should say, a few people predicted that there were some imbalances in the housing market, but no one could have predicted the magnitude of the losses or even the global reach. But, in large part, that's because no one could have predicted the inadequacy of the policy response in the earlier years, probably because they were too busy listening to Peter Schiff's mindless "it's all easy money!" rants.
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twocupcakes
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3/12/2016 11:54:24 PM
Posted: 9 months ago
At 3/10/2016 1:21:20 AM, Chang29 wrote:
There were many that saw both a housing bubble and 2008 crash coming. Main stream macroeconomic thought (Keynesians) never see any crashes or bubbles, simply not part of their models. Whereas, other schools of economic thought have the tools to see bubbles and crashes, but not able to predict timing.

It did not take a highly trained economist or business expert to spot the housing bubble of the 2000s. The ads by mortgages companies and refinancing companies were a huge indicator that something was wrong. Phrases like "cash out equity", "interest only", and "no income verification" demonstrated that something really bad was just ahead.

A problem is that little was learned by the 2008 crash. Far too many think that it was a regulatory failure, and refuse to see the underlining systematic issues with fiat money.

This is not true. Keynesian economics models include bubbles and crashes.
Chang29
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3/13/2016 3:14:44 PM
Posted: 9 months ago
At 3/12/2016 11:54:24 PM, twocupcakes wrote:
At 3/10/2016 1:21:20 AM, Chang29 wrote:
There were many that saw both a housing bubble and 2008 crash coming. Main stream macroeconomic thought (Keynesians) never see any crashes or bubbles, simply not part of their models. Whereas, other schools of economic thought have the tools to see bubbles and crashes, but not able to predict timing.

It did not take a highly trained economist or business expert to spot the housing bubble of the 2000s. The ads by mortgages companies and refinancing companies were a huge indicator that something was wrong. Phrases like "cash out equity", "interest only", and "no income verification" demonstrated that something really bad was just ahead.

A problem is that little was learned by the 2008 crash. Far too many think that it was a regulatory failure, and refuse to see the underlining systematic issues with fiat money.

This is not true. Keynesian economics models include bubbles and crashes.

What Keynesian model predicts downturns?

Keynesians have no such tool that can predict. They can only blame animal spirits, greed, or lack of regulation, none of which are the root cause of any downturn.
A free market anti-capitalist

If it can be de-centralized, it will be de-centralized.
twocupcakes
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3/13/2016 3:47:00 PM
Posted: 9 months ago
At 3/13/2016 3:14:44 PM, Chang29 wrote:
At 3/12/2016 11:54:24 PM, twocupcakes wrote:
At 3/10/2016 1:21:20 AM, Chang29 wrote:
There were many that saw both a housing bubble and 2008 crash coming. Main stream macroeconomic thought (Keynesians) never see any crashes or bubbles, simply not part of their models. Whereas, other schools of economic thought have the tools to see bubbles and crashes, but not able to predict timing.

It did not take a highly trained economist or business expert to spot the housing bubble of the 2000s. The ads by mortgages companies and refinancing companies were a huge indicator that something was wrong. Phrases like "cash out equity", "interest only", and "no income verification" demonstrated that something really bad was just ahead.

A problem is that little was learned by the 2008 crash. Far too many think that it was a regulatory failure, and refuse to see the underlining systematic issues with fiat money.

This is not true. Keynesian economics models include bubbles and crashes.

What Keynesian model predicts downturns?

Keynesians have no such tool that can predict. They can only blame animal spirits, greed, or lack of regulation, none of which are the root cause of any downturn.

No one has a model that can predict the future. But, the Keynsian model explains recessions.

https://en.wikipedia.org...
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3/13/2016 4:03:13 PM
Posted: 9 months ago
At 3/13/2016 3:47:00 PM, twocupcakes wrote:
At 3/13/2016 3:14:44 PM, Chang29 wrote:
At 3/12/2016 11:54:24 PM, twocupcakes wrote:
At 3/10/2016 1:21:20 AM, Chang29 wrote:
There were many that saw both a housing bubble and 2008 crash coming. Main stream macroeconomic thought (Keynesians) never see any crashes or bubbles, simply not part of their models. Whereas, other schools of economic thought have the tools to see bubbles and crashes, but not able to predict timing.

It did not take a highly trained economist or business expert to spot the housing bubble of the 2000s. The ads by mortgages companies and refinancing companies were a huge indicator that something was wrong. Phrases like "cash out equity", "interest only", and "no income verification" demonstrated that something really bad was just ahead.

A problem is that little was learned by the 2008 crash. Far too many think that it was a regulatory failure, and refuse to see the underlining systematic issues with fiat money.

This is not true. Keynesian economics models include bubbles and crashes.

What Keynesian model predicts downturns?

Keynesians have no such tool that can predict. They can only blame animal spirits, greed, or lack of regulation, none of which are the root cause of any downturn.

No one has a model that can predict the future. But, the Keynsian model explains recessions.

https://en.wikipedia.org...

As I said, Keynesians have no model to predict recessions. Therefore, their hindsight explanations of recessions are always incorrect.
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3/13/2016 4:13:18 PM
Posted: 9 months ago
At 3/13/2016 4:03:13 PM, Chang29 wrote:
As I said, Keynesians have no model to predict recessions. Therefore, their hindsight explanations of recessions are always incorrect.

Total and complete hogwash!

The Hicksian AD-AS model twocupcakes linked to is a pretty good starting point, especially if combined with a Wicksel S = I graph because implicit in that model is downward nominal wage rigidity: movements in demand impact output in the short run, or at least until prices adjust. The speed of that adjustment is obviously a contentious subject.

Here's a better and more sophisticated model, though:

https://en.wikipedia.org...

It's called a DSGE model. The focus is to explain macroeconomic disequilibria through the lens of so-called "microfoundations" -- so, for instance, sticky nominal wages might explain the inability of markets to clear, and that's effectively the chief NK innovation.

But you posted earlier that these models can't explain "bubbles": again, nonsense! It is true that a simplifying assumption in macro modeling is often EMH (efficient markets hypothesis) and it's hard to readily relax that assumption without the numbers getting all whacky. But that term in the name, "stochastic," is what you should be focusing on: a stochastic process is just a random shock buffeting the economy that will tend to push the economy out of equilibrium.

So, no, Keynesian models can absolutely explain recessions, and do a far better job at it than Austrian voodoo. Not to mention, John Maynard Keynes himself was a critic of unfettered market capitalism. There's an excerpt in the General Theory drawing on Shakespeare's Tempest, for instance (which is usually presented in undergraduate principles class), where he argues that government ought to step in to steer the damn ship. Minsky is another great example, and he and Keynes were effectively in agreement on everything.

(I should note that Minsky's view of financial turbulence, as distinct from the Stiglitzian view that it's essentially all about inequality, is far, far more convincing, and far less ostensibly ideologically driven.)
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3/13/2016 4:14:03 PM
Posted: 9 months ago
At 3/13/2016 4:03:13 PM, Chang29 wrote:
At 3/13/2016 3:47:00 PM, twocupcakes wrote:
At 3/13/2016 3:14:44 PM, Chang29 wrote:
At 3/12/2016 11:54:24 PM, twocupcakes wrote:
At 3/10/2016 1:21:20 AM, Chang29 wrote:
There were many that saw both a housing bubble and 2008 crash coming. Main stream macroeconomic thought (Keynesians) never see any crashes or bubbles, simply not part of their models. Whereas, other schools of economic thought have the tools to see bubbles and crashes, but not able to predict timing.

It did not take a highly trained economist or business expert to spot the housing bubble of the 2000s. The ads by mortgages companies and refinancing companies were a huge indicator that something was wrong. Phrases like "cash out equity", "interest only", and "no income verification" demonstrated that something really bad was just ahead.

A problem is that little was learned by the 2008 crash. Far too many think that it was a regulatory failure, and refuse to see the underlining systematic issues with fiat money.

This is not true. Keynesian economics models include bubbles and crashes.

What Keynesian model predicts downturns?

Keynesians have no such tool that can predict. They can only blame animal spirits, greed, or lack of regulation, none of which are the root cause of any downturn.

No one has a model that can predict the future. But, the Keynsian model explains recessions.

https://en.wikipedia.org...

As I said, Keynesians have no model to predict recessions. Therefore, their hindsight explanations of recessions are always incorrect.

NO ONE IN THE WORLD HAS A MODEL THAT PREDICTS RECESSIONS.
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3/13/2016 4:17:12 PM
Posted: 9 months ago
At 3/13/2016 4:14:03 PM, twocupcakes wrote:
NO ONE IN THE WORLD HAS A MODEL THAT PREDICTS RECESSIONS.

Eh, at least not perfectly, lol. Forecasting models are limited, but it's plausible to forecast, for instance, a period of prolonged contraction, barring a significant policy response.

The best model probably contains market-based forecasts. I'd recommend looking at the slope of the yield curve -- steep is good, inverted spells forthcoming disaster -- but that's hardly "Keynesian." Keynes would just say, look at NGDP and unemployment, but that gets us into the whole "nowcasting" issue.
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3/13/2016 4:17:28 PM
Posted: 9 months ago
At 3/13/2016 4:14:03 PM, twocupcakes wrote:
At 3/13/2016 4:03:13 PM, Chang29 wrote:
At 3/13/2016 3:47:00 PM, twocupcakes wrote:
At 3/13/2016 3:14:44 PM, Chang29 wrote:
At 3/12/2016 11:54:24 PM, twocupcakes wrote:
At 3/10/2016 1:21:20 AM, Chang29 wrote:
There were many that saw both a housing bubble and 2008 crash coming. Main stream macroeconomic thought (Keynesians) never see any crashes or bubbles, simply not part of their models. Whereas, other schools of economic thought have the tools to see bubbles and crashes, but not able to predict timing.

It did not take a highly trained economist or business expert to spot the housing bubble of the 2000s. The ads by mortgages companies and refinancing companies were a huge indicator that something was wrong. Phrases like "cash out equity", "interest only", and "no income verification" demonstrated that something really bad was just ahead.

A problem is that little was learned by the 2008 crash. Far too many think that it was a regulatory failure, and refuse to see the underlining systematic issues with fiat money.

This is not true. Keynesian economics models include bubbles and crashes.

What Keynesian model predicts downturns?

Keynesians have no such tool that can predict. They can only blame animal spirits, greed, or lack of regulation, none of which are the root cause of any downturn.

No one has a model that can predict the future. But, the Keynsian model explains recessions.

https://en.wikipedia.org...

As I said, Keynesians have no model to predict recessions. Therefore, their hindsight explanations of recessions are always incorrect.

NO ONE IN THE WORLD HAS A MODEL THAT PREDICTS RECESSIONS.

But, yet many people can do it, as the movie demonstrated.
A free market anti-capitalist

If it can be de-centralized, it will be de-centralized.
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3/13/2016 4:18:14 PM
Posted: 9 months ago
At 3/13/2016 4:17:28 PM, Chang29 wrote:
But, yet many people can do it, as the movie demonstrated.

Only when they predicted 10 of the last 2 recessions, lol.
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twocupcakes
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3/13/2016 4:20:12 PM
Posted: 9 months ago
At 3/13/2016 4:17:28 PM, Chang29 wrote:
At 3/13/2016 4:14:03 PM, twocupcakes wrote:
At 3/13/2016 4:03:13 PM, Chang29 wrote:
At 3/13/2016 3:47:00 PM, twocupcakes wrote:
At 3/13/2016 3:14:44 PM, Chang29 wrote:
At 3/12/2016 11:54:24 PM, twocupcakes wrote:
At 3/10/2016 1:21:20 AM, Chang29 wrote:
There were many that saw both a housing bubble and 2008 crash coming. Main stream macroeconomic thought (Keynesians) never see any crashes or bubbles, simply not part of their models. Whereas, other schools of economic thought have the tools to see bubbles and crashes, but not able to predict timing.

It did not take a highly trained economist or business expert to spot the housing bubble of the 2000s. The ads by mortgages companies and refinancing companies were a huge indicator that something was wrong. Phrases like "cash out equity", "interest only", and "no income verification" demonstrated that something really bad was just ahead.

A problem is that little was learned by the 2008 crash. Far too many think that it was a regulatory failure, and refuse to see the underlining systematic issues with fiat money.

This is not true. Keynesian economics models include bubbles and crashes.

What Keynesian model predicts downturns?

Keynesians have no such tool that can predict. They can only blame animal spirits, greed, or lack of regulation, none of which are the root cause of any downturn.

No one has a model that can predict the future. But, the Keynsian model explains recessions.

https://en.wikipedia.org...

As I said, Keynesians have no model to predict recessions. Therefore, their hindsight explanations of recessions are always incorrect.

NO ONE IN THE WORLD HAS A MODEL THAT PREDICTS RECESSIONS.

But, yet many people can do it, as the movie demonstrated.

A very select few predicted the recession, as shown in the movie.

The people who predicted it did not use a model to do it.
Chang29
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3/13/2016 4:32:04 PM
Posted: 9 months ago
At 3/13/2016 4:20:12 PM, twocupcakes wrote:
At 3/13/2016 4:17:28 PM, Chang29 wrote:
At 3/13/2016 4:14:03 PM, twocupcakes wrote:
At 3/13/2016 4:03:13 PM, Chang29 wrote:
At 3/13/2016 3:47:00 PM, twocupcakes wrote:
At 3/13/2016 3:14:44 PM, Chang29 wrote:
At 3/12/2016 11:54:24 PM, twocupcakes wrote:
At 3/10/2016 1:21:20 AM, Chang29 wrote:
There were many that saw both a housing bubble and 2008 crash coming. Main stream macroeconomic thought (Keynesians) never see any crashes or bubbles, simply not part of their models. Whereas, other schools of economic thought have the tools to see bubbles and crashes, but not able to predict timing.

It did not take a highly trained economist or business expert to spot the housing bubble of the 2000s. The ads by mortgages companies and refinancing companies were a huge indicator that something was wrong. Phrases like "cash out equity", "interest only", and "no income verification" demonstrated that something really bad was just ahead.

A problem is that little was learned by the 2008 crash. Far too many think that it was a regulatory failure, and refuse to see the underlining systematic issues with fiat money.

This is not true. Keynesian economics models include bubbles and crashes.

What Keynesian model predicts downturns?

Keynesians have no such tool that can predict. They can only blame animal spirits, greed, or lack of regulation, none of which are the root cause of any downturn.

No one has a model that can predict the future. But, the Keynsian model explains recessions.

https://en.wikipedia.org...

As I said, Keynesians have no model to predict recessions. Therefore, their hindsight explanations of recessions are always incorrect.

NO ONE IN THE WORLD HAS A MODEL THAT PREDICTS RECESSIONS.

But, yet many people can do it, as the movie demonstrated.

A very select few predicted the recession, as shown in the movie.

The people who predicted it did not use a model to do it.

Right, they were able to see artificial financial conditions that markets would correct, and place themselves in position to profit.

Keynesians provide the artificial conditions and the air supply for bubbles.
A free market anti-capitalist

If it can be de-centralized, it will be de-centralized.
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3/13/2016 4:52:45 PM
Posted: 9 months ago
At 3/13/2016 4:32:04 PM, Chang29 wrote:
At 3/13/2016 4:20:12 PM, twocupcakes wrote:
At 3/13/2016 4:17:28 PM, Chang29 wrote:
At 3/13/2016 4:14:03 PM, twocupcakes wrote:
At 3/13/2016 4:03:13 PM, Chang29 wrote:
At 3/13/2016 3:47:00 PM, twocupcakes wrote:
At 3/13/2016 3:14:44 PM, Chang29 wrote:
At 3/12/2016 11:54:24 PM, twocupcakes wrote:
At 3/10/2016 1:21:20 AM, Chang29 wrote:
There were many that saw both a housing bubble and 2008 crash coming. Main stream macroeconomic thought (Keynesians) never see any crashes or bubbles, simply not part of their models. Whereas, other schools of economic thought have the tools to see bubbles and crashes, but not able to predict timing.

It did not take a highly trained economist or business expert to spot the housing bubble of the 2000s. The ads by mortgages companies and refinancing companies were a huge indicator that something was wrong. Phrases like "cash out equity", "interest only", and "no income verification" demonstrated that something really bad was just ahead.

A problem is that little was learned by the 2008 crash. Far too many think that it was a regulatory failure, and refuse to see the underlining systematic issues with fiat money.

This is not true. Keynesian economics models include bubbles and crashes.

What Keynesian model predicts downturns?

Keynesians have no such tool that can predict. They can only blame animal spirits, greed, or lack of regulation, none of which are the root cause of any downturn.

No one has a model that can predict the future. But, the Keynsian model explains recessions.

https://en.wikipedia.org...

As I said, Keynesians have no model to predict recessions. Therefore, their hindsight explanations of recessions are always incorrect.

NO ONE IN THE WORLD HAS A MODEL THAT PREDICTS RECESSIONS.

But, yet many people can do it, as the movie demonstrated.

A very select few predicted the recession, as shown in the movie.

The people who predicted it did not use a model to do it.

Right, they were able to see artificial financial conditions that markets would correct, and place themselves in position to profit.

Keynesians provide the artificial conditions and the air supply for bubbles.

Bernanke is partly to blame for the recession for not raising interest rates to keep the bubble at play. But, I feel you have little understanding of what keynsian economics is.
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3/13/2016 4:54:40 PM
Posted: 9 months ago
At 3/13/2016 4:52:45 PM, twocupcakes wrote:
Bernanke is partly to blame for the recession for not raising interest rates to keep the bubble at play. But, I feel you have little understanding of what keynsian economics is.

Blehhhhhhhhh, lol.

I was on the same page as you until you wrote this. This just wasn't the case. There is zero evidence at all that monetary policy was responsible for the housing bubble -- and, for that matter, leaning on bubbles is a really untested, generally reckless policy.
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3/13/2016 5:00:57 PM
Posted: 9 months ago
Actually, I shouldn't even say "untested." The Fed tried in 1929-1931, and it led to the Great Depression.

Tightening monetary policy to lean on bubbles is a really, really bad idea that tends to make the problem a whole lot worse.
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twocupcakes
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3/13/2016 5:46:31 PM
Posted: 9 months ago
At 3/13/2016 4:54:40 PM, ResponsiblyIrresponsible wrote:
At 3/13/2016 4:52:45 PM, twocupcakes wrote:
Bernanke is partly to blame for the recession for not raising interest rates to keep the bubble at play. But, I feel you have little understanding of what keynsian economics is.

Blehhhhhhhhh, lol.

I was on the same page as you until you wrote this. This just wasn't the case. There is zero evidence at all that monetary policy was responsible for the housing bubble -- and, for that matter, leaning on bubbles is a really untested, generally reckless policy.

I said "partly responsible" (there were other factors). But, raising interest rates is a way to stop an asset bubble before it gets too big. You do not think that the fed should have raised rates to stop the housing bubble?
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3/13/2016 6:10:27 PM
Posted: 9 months ago
At 3/13/2016 5:46:31 PM, twocupcakes wrote:
I said "partly responsible" (there were other factors).

It wasn't even partly responsible. "Partly" responsible would imply that it either (a) created the bubble and (b) should have responded to it, preemptively, so as to ward off its effects. Neither are the case.

For instance, there's a great paper out of the San Francisco Fed on this. There are two conclusions: (a) you'd need a crystal ball to actually detect asset bubbles (because the "fundamental values" of assets are unobservable) and (b) it would have required raising the funds rate something like 8 percentage points. There's also work out of the Bank of England (I can get links, if you're interested) finding that unexpected monetary tightening actually INCREASES inflows into shadow-banking assets.

But the main argument is that bubbles cannot be detected, and interest rates are an incredibly blunt tool that impact not only disequilibria in the target asset markets, but will pose general-equilibrium effects -- i.e., slow down employment and inflation on a broader scale. The Fed tried to lean against the stock market bubble in the late 1920s, for instance, and that likely caused the Depression to be as bad as it was, in the same way that easing policy far too late in 2008 made the Great Recession far worse.

But, raising interest rates is a way to stop an asset bubble before it gets too big.

I guess you could let air out of the bubble, but by the time it's actually detectable, it's probably way too late, and the right policy prescription is to let it run its course and signal a commitment to easing policy to keep NGDP on track -- that would, at the very least, prevent the aftermath of the bubble from getting materially worse.

You do not think that the fed should have raised rates to stop the housing bubble?

Naw, but I think we could've had tighter regulation in the lead-up to prevent the bubble from being created. Dodd-Frank goes a long way at accomplishing that.
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Chang29
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3/14/2016 12:27:37 AM
Posted: 9 months ago
At 3/13/2016 4:52:45 PM, twocupcakes wrote:
At 3/13/2016 4:32:04 PM, Chang29 wrote:
At 3/13/2016 4:20:12 PM, twocupcakes wrote:
At 3/13/2016 4:17:28 PM, Chang29 wrote:
At 3/13/2016 4:14:03 PM, twocupcakes wrote:
At 3/13/2016 4:03:13 PM, Chang29 wrote:
At 3/13/2016 3:47:00 PM, twocupcakes wrote:
At 3/13/2016 3:14:44 PM, Chang29 wrote:
At 3/12/2016 11:54:24 PM, twocupcakes wrote:
At 3/10/2016 1:21:20 AM, Chang29 wrote:
There were many that saw both a housing bubble and 2008 crash coming. Main stream macroeconomic thought (Keynesians) never see any crashes or bubbles, simply not part of their models. Whereas, other schools of economic thought have the tools to see bubbles and crashes, but not able to predict timing.

It did not take a highly trained economist or business expert to spot the housing bubble of the 2000s. The ads by mortgages companies and refinancing companies were a huge indicator that something was wrong. Phrases like "cash out equity", "interest only", and "no income verification" demonstrated that something really bad was just ahead.

A problem is that little was learned by the 2008 crash. Far too many think that it was a regulatory failure, and refuse to see the underlining systematic issues with fiat money.

This is not true. Keynesian economics models include bubbles and crashes.

What Keynesian model predicts downturns?

Keynesians have no such tool that can predict. They can only blame animal spirits, greed, or lack of regulation, none of which are the root cause of any downturn.

No one has a model that can predict the future. But, the Keynsian model explains recessions.

https://en.wikipedia.org...

As I said, Keynesians have no model to predict recessions. Therefore, their hindsight explanations of recessions are always incorrect.

NO ONE IN THE WORLD HAS A MODEL THAT PREDICTS RECESSIONS.

But, yet many people can do it, as the movie demonstrated.

A very select few predicted the recession, as shown in the movie.

The people who predicted it did not use a model to do it.

Right, they were able to see artificial financial conditions that markets would correct, and place themselves in position to profit.

Keynesians provide the artificial conditions and the air supply for bubbles.

Bernanke is partly to blame for the recession for not raising interest rates to keep the bubble at play. But, I feel you have little understanding of what keynsian economics is.

Bernanke followed his Keynesian training, thus no blame should be directed his way. The Keynesian system worked as designed. The 2008 crash had great results for those that desired more power.
A free market anti-capitalist

If it can be de-centralized, it will be de-centralized.