I Got It Wrong…
“…after forty years of studying markets, I got it wrong…”
As time goes on, the one thing that appears to be both a societal and financial markets constant, is our inability to learn from our past mistakes.
Late, a couple of nights ago (10/23/17), while channel surfing, I happened on an economics program intended to explain the financial crisis of 2008.
My apologies for referring to a programming without its name or network. Instead, I had to consider the person who was the primary focal point of the program: Hyman Minsky (see link to The Economist here).
Before reading the information at the link, please understand I viewed this purely from a non-partisan political perspective. I did not dismiss any views or opinions from any speakers or presenters based on their names; or perceptions by others of their politics.
The program itself included speeches from former Fed Chairman Greenspan, current economic gurus (Krugman – he has a Nobel Prize so he must be smart, right?), London School of Economics, and interviews with graduate economics students. The linked article above also cites Greenspan’s successors Bernanke and Yellen. That’s half a century of Fed policy influence.
One comment by Greenspan before a Congressional Committee in addressing the economic collapse is where he says (in effect)…
“…after forty years of studying markets, I got it wrong.”
Interesting.
He said it was basically because for forty years his economic foundational belief in the ability of financial markets to self-correct appeared to be true… until it ceased to be so. Anyway, y’all don’t need economic preaching or theoretical analyses from me. I’m not qualified to offer them.
In addition to lacking a college degree, I am also burdened by common sense.
I’ll leave real analysis to all the experts who got us into the 2008 crisis. The same ones that appear to be determined to repeat it as soon as is humanly possible today.
You know the ones I mean. Those that rely on infallible models, leveraging big data, Ouija boards and blue smoke and chicken bones forecasting.
Mr. Minsky’s hypothesis was that contrary to the neoclassical economists’ belief (not my wording, honest!), markets are not the healthy, self-correcting rational markets we treat them as. Instead, markets are fraught with risks that we simply choose to ignore. Pay attention FNMA!, CoreLogic, alamode and all the other self-serving hucksters.[i]
Because they render financial modeling ‘inelegant’, financial modeling creators simply ignore them! Instead of factoring price-money-risk factors, accurately or even realistically in their models, the economist elects instead to simply eliminate all such risks or hints of irrationality.
Economists are not compensated for showing all the honest variables (even if they knew how to do so). They get paid for showing ‘foolproof’ models designed to support whatever position their employers want. I use the term fool proof though I suspect it should be fool-proved.
When the model is proven to be inaccurate, instead of admitting its worthless, a NEW model is created to predict and ‘adjust’ for the first models’ unreliability. (Apparently no third model is created to account for that versions inaccuracy). But, that’s ok, because it is all based on the science of mathematics at a level far beyond the capability or mere mortals to understand.
Throw in a few warm and fuzzy feel good adjectives and adverbs and voila! Magical ePixieDust capable of replacing all forms of common sense, while giving the promoters and politicians ‘cover’ for making irresponsible decisions.
Minsky wasn’t big on modelling. Oh, he used it, but he was skeptical of it. Nor was he anti-capitalist. He merely identified that the supposition applied to economics today is… wrong. It is an irrational system; or at least a system with irrational related performance risk that should not be factored out of models.
In fairness, maybe the economic model of 40 years ago was rational. Before we ‘leveraged’ so much big data and turned Wall Street Buy-Sell decisions over to state of the art ‘sophisticated’ programming.
One caution he had that was not picked up on during his lifetime, but which gained widespread acceptance post 2008, was that risk is highest when markets appear to be most stable. That is because the lessons of the past are forgotten. Banks posit that if the market is stable, they should be taking more risks. Regulators contend that it is safe to eliminate checks and balances.
Glass Steagall is not needed in their view. They think its ok to commingle high risk investment lending policies with traditionally lower risk longer term property owner occupied investments. The thinking today is commercial banking and retail consumer banking shouldn’t be separate.
The Grad Students interviewed had an interesting observation. Each believed that they should be able to explain the economic collapse of 2008 if asked, given their years in college. But, not one could do so based on their collegiate studies…because it is simply not taught.
It’s still too inelegant.
Now I understand how CU came to be adopted despite its obvious short comings; how all the AVMs, and even CoreLogic’s “defective patent riddled appraisal program” that is the ‘core’ of their new e-product promotion came about.
Appraisers, be very wary of reliance on systems you don’t fully understand, just because self-proclaimed or sell out ‘experts’ endorse them.
[i] Pre-2008 Freddie Mac is reported to have claimed their policies protected them against a big market downturn. When asked “how much of downturn?” They replied “13%” …THEIR models simply could not /would not consider any scenario where a greater than 13% loss of RE value could occur.
- The New & Improved Fannie Mae “FRAUDULATOR 2.0” - May 15, 2023
- The Scam of Racial Discrimination by Appraisers - May 10, 2023
- What Is My Incentive? - September 20, 2022
You know what’s lacking; ethics class. It’s a frightening subject for vested interests, because they know those stringent inflexible and fixed ethical standards could break up their monopoly positions. This is the primary reason appraisers are under such overwhelming pressure, but continue to persevere despite the challenges. We may be the strongest group out of all financial sectors, regarding the specific point of having the strongest ethical consideration on average, for every licensed participator. Comparing in this light it’s easy to understand why so many ancillary businesses put pressure on us, and seek to change the approach models, ignoring the ethical principals which drive the methodology and approach. Question; Is there an ethics oversight mechanism for automatic valuation utility programmers? Like if you can’t beat the ethic, supplement the ethical professionals for tech guys whom are not held to a similar standard? Say it isn’t so but that appears to be how it’s shaking out.
Mike
This is a great example of how there are those among we appraisers who participated in the demise of our economy because we were working so hard to put food on the table and keep up with our own financial obligations that we missed what happened to our profession, now in the toilet because we just “gave” it away.
When I look back, the first thing that was a high contributor of the S&L failures was corruption. We had MBAs coming into our profession infusing their economic models by incorporating unrealistic assumptions into our appraisal reports. Back then, we didn’t have to deduct for costs to lease up, absorption of space, and ignored traditional supply and demand principles. After that we had more rules to use such as the aforementioned but before that appraisers (many with the MAI) valued a property as if it was finished and those of us who cleaned up the valuation mess back then appraised skeleton office buildings there was no demand for and properly deducted all costs to complete and lease up, so the values were substantially impacted by new low levels, allowing insiders to purchase these unfinished buildings and profit when things got patched up. Those unrealistic assumptions bit us in the butt.
Next, Wall Street started selling derivitives in a ponzi scheme that affected cities and countries all over the world. Goldman Sachs sold smoke and mirrors to Greece and they still have not recovered from the scam. Meanshile, politically, we got Paulsen at Treasury who was already worth $700 million (like he needs a job) so he could manipulate the policies of the Bush Administration to favor he and his friends who are super rich. Tax policies helped these bring words into our vocabulary such as “Death Tax”, because they want to pass on all their riches to their privilidged children.
Then we got automated valuation, the kiss of death. Eappraiseit was sued by Cuomo and we got HVCC which evolved into blaming the appraisers again on over-valuations. Here’s the problem: computers don’t buy houses, nor do mathematicians and quants; their wives make these decisions. Therefore, when a family needs a home the woman finds one that they can “afford” that is near her husband’s work and where she wants her kids to go to school; parks and shopping nearby, but definitely not in the central city, in the burbs, so homes went way up in the burbs because these people who would spend their last dime not to live in the inner city so their kids were safe was crucial in this family’s decision making. But in general, some people are facinated by gadgets; today it is the cell phone; before that it was the cotton gin, assembly line, and a unified country against aggression and war in Japan and Europe that drove the country to be more technologically adept at producing more planes, weapons and budgets to the military and pentagon, so high tech was used for a good purpose back then and we won WWI and the world was a better place, and Vets got free college and low interest rate loans for buying homes which were produced in record numbers, raising the standard of living. Back then CEOs made maybe 100 times what the average worker made. The real estate business was dominated by women and boring, unglamorous people who showed us homes that were within our reach financially and satisfied our needs on where and how big and which became our own castle, then that wasn’t enough.
CEOs make thousands of times what the average worker makes now. I know each employee is competing with eachother to hold their job because there are 10 others nipping at their butts for their job. Oil, military budgets and fear tactics made us fear losing our position in the world, then they got even more greedy, and we see realtors’ glamour photos on their business cards and the most successful ones are in “clubs” that are dominating the market and the brokers are making a mint, just supervising their agents and they got so greedy they realized the higher the price, the higher the commission – a way to try to catch-up with the earnings of their broker. It served the high income earners to turn their home into an investment as opposed to a home because they didn’t have to worry how to pay for it – appreciation was serving them because when taxes were cut by Reagan, laws were changed allowing accellerated depreciation, and lobbyists were writing legislation as the congress got lazy, but we were too busy working to get ahead while some of our peers where getting more money to sell out our profession to yet another computer program that dazzled people with its speed and they swore it was as accurate as a qualified appraiser. By then, Fannie and Freddie were bailed out at the cost of many homeowner’s “fake” equity that these AVMs created out of the air, but wow, they sure thought computers would solve all our problems!
Fast forward to Greenspan when the (you know what) hit the fan in 2008. I was appraising a home (palace) in Bel Air, CA that cost $125,000,000 to build and which was nearly 50,000 square feet with every luxury and bling that would make a king happy. I watched CSPAN working at home and all the bank presidents and Greenspan got up and swore they didn’t have a clue the crash was going to happen, and we thought they were the “smart” guys in the room, but they didn’t have any interest in protecting people’s equity, retirement funds or any of our “little” assets because they were in denial of their role, and that trickle down doesn’t work in reality, but it is still believed in by some who are still denying any role in the fiasco that nearly crashed the world economy, so Bush and Paulsen bailed out the banks (Goldman Sachs changed from an investment company to a bank to avoid responsibility), Fannie and Freddie and homes sunk back to levels that were affordable, but only within reach of the well-off. Now we have them renting out SFRs and prices way up, so unless you are a magician at the computer and can fill out the forms with your hands tied behind your back with regulations on our work, because some people dazzled by computers think this is the way to keep us honest. Nobody wants an honest opinion of value because they just sell them on the secondary market, so you see a new servicer each year as they sell your loan in the ponzi scheme that has helped turn the American dream into a high rent nightmare, but the quants did the most damage selling derivitives which is a smoke and mirrors project that makes greed look like you made smart investment decisions while your broker is advising short sales to screw the other guy before he goes broke or get’s caught with his hand in the till.
We all know the assumptions that each real estate transaction is fair and equitable based on law has an effect on the ultimate home price we are willing to spend. We have a pretty solid definition of market value that we all understand, but one thing they didn’t put in there: This is that someone from Iran, and more recently China who made a bundle wants to own a home in the USA where we are free to speak what we want, and people die every day for our Bill of Rights and principles, but people who have cash (like monopoly money) can outspend us because they need a place to go if China jails them for something that they said, and they know the danger of speaking out because they saw their neighbors taken away and imprisoned.
As long as we have free speech here, there will be a big demand for homes so people can grow families in a safe place, or safer than where they may have come from. If we don’t protect our country from income inequalities and threats to our core values, then we will deserve to live in a dictatorship that is like the Phillipines where the bounty hunters who think someone is doing or selling drugs is paid by the government to kill them. While we think we have “checks and balances” it is all about money in this world, and letting quants design software for appraisal ignores the fact that real people will live in that house and their kids will get the education in that neighborhood that will allow us to continue being Americans.
We are weak as an organization because our own peers sold us a bag of tricks that paid off their mortgage and got new cars, vacations and educations for their kids, but to hell with that profession, it is too much work! The only way to do an appraisal, any appraisal for any purpose, is hard work, guided by ethics. It is time to pay attention to the younger generation who walks across the street while glued to their cell phone watching a movie or other entertainment and getting hit by a car and smashed like a bug. It is really hard to work when your hands are tied behind your back with over-regulation of our industry in favor of a third-party AMC who doesn’t even disclose their fee to the appraiser whose back they are breaking gets paid! While we complain a lot, we are willing to do less for the other appraiser because he is the “competition”. When most new housing is built for the upper and upper-middle class, more average income people without inheritances or tax advantages, slick brokers or scams that will now be arbitrated are at risk of becoming homeless, and we see that happening and have for years. There is less incentive to bring housing to the market that is affordable in light of our capitalistic system, but fear of socialism need not drive us to illogical conclusions such as the one facing us now, that is; figure out how to automate the appraisal process and survive in the face of a fix that was designed by people dazzled by new tech, and the users of our services who expect us to be as quick and “accurate” as a computer.
This model is dead and we know it, but how do we kill it? This is a turning point in our careers which I can is not that much longer for me, maybe ten more years, but if we don’t put oxygen on the face of our peers and stick together, we will all have to work until we die, just to live a meager income to afford a one bedroom shack that costs over half a million bucks, or rent a tent. Many of our fellow citizens are living in RVs and trailer parks, camping, or parking on city streets because we can’t afford a decent home. Who cares? I do, and I tell people who say regression analysis is the support for your appraised value is pure bunk, and when computers start buying homes, then I will agree that AVMs should replace people who are trained and professional.
Should we change the definition of market value to include a clause that deals with accuracy, or is your money on the human element? There is no shortage of appraisers, and now that McDonald’s is taking orders from your cell phone, they will need less workers to give you that unhealthy burger, so don’t think about flipping burgers because they are all being cooked by machines, then dumped in cardboard, and they taste like it!
Wow.
I don’t recall reading this many different topical opinions and agreeing with them so fervently, in a very long time. I’m not being facetious when I say this, but you have largely summed up whats wrong with the country as well as our profession. I remember all the bad commercial paper being liquidated by RTC. IF followed in spirit, FIRREA would have prevented the repeat in 2008-though that was really more like the greatest theft in history, than a problem that could have been much more easily resolved without the necessity of the collapse.
Isn’t it interesting how BOTH parties rely on former Goldman Sachs employees for their Treasury Secretaries? (up until current that is).
Only question now is what do we do about it all? AI could be a huge part of the solution, but they a re still focused on being part of the problem (alternative standards). ASA is trying, and AGA is trying; along with a few of the more active state coalitions. Colombia Society also still adheres to traditional ethical standards as far as I know.
Nicely said Mr Ford.
To quote Newt Gingrich – these people are Intellectual – yet Idiots…..
Hello again!
While I am very opinionated about politics, I watch a lot of CSPAN and listen to NPR and read a lot of books.
We appraisers are micro-economists while trying to explain the trends. Using realtor information is an exercise in figuring out how the advertised “cream puff” or “rustic character” of a home clues appraisers into the angle that the realtor marketed the property. None of them say “this is a dump”, they call it a fixer, but we know some problems can’t be fixed, hence we have functional and external obsolescence as well as physical deterioration which can only be cured by replacing and remodeling, but slap some paint on it and call it a fixer.
If anyone thinks the current administration occupying the white house is not surrounded by Goldman Sachs, then I have a bridge I want to sell you, even though it is on the list of infrastructure improvements that will never get done because our military industrial complex gobbles up 57% of the annual budget so they can have more gadgets to wage war on any country with oil.
Anyone who quotes Gingrich doesn’t realize he was hounded out of office for corruption. After his “make-over” and people forgot he dumped his wife who was dying of cancer for clarissa (who is now ambassador to the Vatican), appointed by the occupant of the white house because newt raised money and helped get the idiot into office. As far as I am concerned, the swamp just answers to more megabillionaires like koch brothers and mercer who are the wealthy fananatic religious cult that has changed lies into truth with their magic money wand.Look what betsy is doing to our education system (wants public money to pay for private, religious elementary and secondary schools) and see how price got his job (he sues the EPA) and now we are being governed by the most self-interested, greedy and unethical cabinet because the alt-right media convinced a bunch of uneducated yahoos that they were going to get their $80K per year coal jobs back.
Where is the outrage when our profession has been debased by our peers and the political wind? Sorry, I know everyone is doing their best to stay in business while we are now paying exhorbitant fees to the MLS and they have created phony designations that the public has no idea are not credible, and they do evaluations for nothing because that is just what they are worth!
“now we are being governed by the most self-interested, greedy and unethical cabinet because the alt-right media convinced a bunch of uneducated yahoos that they were going to get their $80K per year coal jobs back.”
Wow Deborah nice going insulting half of America! BTW, NPR is known for its liberal editorial bias. Just sayin’
Let’s keep it clean and keep politics bashing out of here. There is never a good reason to insult those with different political views. This sort of political hatred has divided our county. We are, by our very nature, opinionated people and rarely come together for the greater good. Adding political hatred in the discussion is not helpful and only fuels division.
Wantobey – a good reminder to me too. We are all human and inject our own biases. It shows we care, but your reminder is also timely. Thank you.
BTW – I overlooked any partisan aspects and looked to the totality of the post, and THAT my friend was outstanding (imho).
Great article Mike! You are dead on. You should patent the term “fool-prooved”.
Big data is worthless…especially when interpreted by “big tools”. Didn’t big data say Hillary would be president?
Related CoreLogic: Home Prices Up 7%; 34% of Markets ‘Overvalued’
Great posts all.
Confession; I had to look it up. “As financial securities become increasingly complex, demand has grown steadily for people who not only understand the complex mathematical models that price these securities, but who are able to enhance them to generate profits and reduce risk. These individuals are known as quantitative analysts, or simply “quants.”
I urge all to do the same-not to find out what it means. I just posted that! Rather, to see all the related posts about it. Especially the one about the three 20 year old quants degree of influence on Wall Street.
The most amazing part to me is that the CEOs of the companies hiring these clowns kept their jobs.
It just shows that having a scapegoat on Wall Street is priceless. Having common sense…not so much.
Shame on Deborah – shes side tracking me from a report I should be writing. Actually, God Bless! Thank you.
https://www.bloomberg.com/news/articles/2017-03-20/quants-are-spiking-the-punch-bowl-at-wall-street-s-high-iq-party
Final paragraph in linked Bloomberg article pretty well sums it up…FUNDAMENTAL LONG TERM strategies work best. Quant driven investments ‘decay’ rate is ever increasing as their return rate decreases.
Well Duhhhhh! Appears they over looked the definition of Fair Market Value completely in all their “value added” shenanigans! Especially the part about an orderly market with informed participants.
Fully one third of Wall Streets assets are in the hands of extremely short term financial ambushers. Since it is all Big Data driven with NO fundamentals anymore, the software spots weaknesses to take advantage of so quickly that those very opportunities simply dry up and disappear (decay).
Once there was a ‘rule’ on Wall Street that the principle investment was to be protected at all costs. Losing the return on the investment was bad, but losing the underlying asset or principle invested was far worse (catastrophic). Now, the sheople nominally ‘in charge’ no longer know how to do that.
So rather than seeking to trade in productive companies intrinsic value, they instead nibble away at the edges for quick, short term profiteering.
Another work to look up is “G-A-M-B-L-E.