Non-Lessons Not Learned

The Great Recession began, according to the National Bureau of Economic Research, on December 1, 2007. But it didn’t become Great until September 15, 2008. That’s the day Lehman Brothers filed for bankruptcy and when what might have been a garden variety slowdown became an all-out panic on Wall Lehman HQ David Shankbone Street.

Now that the GR seems to be abating, and on the occasion of the first anniversary of the meltdown, journalists, pundits, and even bloggers have spent a lot of time lately summarizing the lessons we have learned from the experience.

Phillip Moeller at US News & World Report gave us 6 Money Lessons of the Great Recession. The first is that "the experts are often wrong." Apparently many used to think that the term expert meant an omniscient seer of the future. Moeller also tells us that "everything is negotiable."

The problem with lessons like these is not that they are not true, but that they have always been fairly obviously true. If people didn’t catch on before, what makes us think they will now? It would be nice to think that the GR has caused a wave of enlightenment, but there isn’t a lot of evidence of that. People are very forgiving of their experts, and even if they aren’t, they just tend to switch gurus rather than start to think for themselves.

Another of the six is "don’t bank on housing wealth."  That’s a pretty commonly cited lesson. It appears in a slightly different form as "house prices do fall" in Seven Lessons from the Financial Meltdown at MSNBC.

As obvious as it is, this one may actually be a legitimate change in consumer attitudes. At least for a while. What is remarkable is how widespread the lunatic idea that house prices only go up had become in the years before 2007. To be fair, not very many people actually stood up and said out loud that house prices never go down. But just about everybody acted and gave advice as if this was true.

If you were kind and didn’t know any better, you might forgive those people on the grounds that house prices hadn’t gone down before and it’s unfair to blame somebody for not anticipating something so novel. But the idea that houses, of all things, were the Magic Asset that never loses value ought to have been transparently ridiculous.

Moreover, the Case-Shiller 10 City Composite of house prices did go down 5.66% between October 1989 and February 1991. (And it didn’t regain its 1989 high until January 1998, meaning that in inflation-adjusted terms it lost more ground.) That may not be as significant or as upsetting as what we’ve just been through, but it ought to have cleanly exploded any fantasy that houses were the perfect investment. And it’s not like we are talking about something that happened long ago to our grandparents. All middle aged Americans in 2006 ought to have been able to remember a time when house prices went down.

And then there is the common assertion that the GR has brought on a permanent change in consumer attitudes. As the AP tells us, Frugality is the New Normal, by Necessity. Evidence for this seems to be limited to the facts  that a) people are currently spending less and b) they tell pollsters that they expect to spend less from now on, even if things improve. The first of those things is certainly true in all recessions, and probably the second as well. But the New Normal crowd insists that, as the AP article cluelessly states without a shred of irony, "This time it’s different."

I am very doubtful that when the Great Recession becomes a mere memory we will be any wiser or, in practice, any different than we have always been. There will be small changes. The list of the top ten financial firms will have some new names. No doc mortgages probably won’t reappear in our lifetimes. And there will be fewer GM and Chrysler dealers than there were pre-GR. But mostly we are on track to be the same bunch of fools doing the same bunch of foolish things.

I do have some ideas about lessons would ought to, but won’t, learn from the Great Recession. More on that on Monday.

[Photo: David Shankbone. (It's the old Lehman HQ in case you can't tell.)]

No Comments

  • By Neil, September 19, 2009 @ 12:13 pm

    Outstanding article. I always get a kick out of the “this time it’s different” crowd. Whether it’s different because they’re prognosticating the end of life as we know it, or different because this was “clearly” a big enough shock to permanently change behaviour, this crowd of people just have very short memories. I’m young, I only just barely lived through the ’80s recession, and don’t remember much of it. Yet tales of dollar deals (buy a house for a dollar, plus assuming the existing mortgage) and similar were still ingrained in my mind at a young age as a warning.

    The Great Depression was a big enough shock to permanently change the behaviour of those who lived through it. Anything less – and yes, this so-called “great” recession is far, far less – won’t.

  • By kitty, September 20, 2009 @ 8:01 pm

    Great post. Regarding house prices: in the 90s the condo and co-ops prices in Northeast dropped quite drammatically from their 80s heights. Where I live in Northern Westchester, county co-ops that were selling for 80K and 90K in the 80s dropped to as low as 30-40K by mid-90s. Right now they are selling for 150-200K. Some condos that were selling for 150-350K dropped to 90-260K in the 90s. I think right now they are in the range of 260-600K. The drop in current crisis was nowhere near as dramatic as in the 90s.

    I was pretty lucky in making money on the whole thing by 1) waiting for 2 years and commuting when I was transferred from Dutchess county to Westchester county in 1989 2) buying a one bedroom condo in Westchester for 125K in 91 and holding on to it throughout the 90s when the price dropped to around 90K 3) upgrading to a townhouse for 180K and renting out the one bedroom 4) selling a one bedroom in 2004 after my tenants moved out. So I missed the bottom in the 90s a bit, and I sold too early in 2004 (I thought 215K for a one bedroom was ridiculous, I couldn’t believe the price would go to 300K). In hindsight I should’ve waited; also in hindsight I should’ve bought a couple of co-ops for 30K-something… But there are lot of things that are clear in hindsight.

    Whenever I hear “we thought house prices can only go up”, I am wondering if these people were on the moon in the 90s…

  • By Rob Bennett, September 21, 2009 @ 10:37 am

    Apparently many used to think that the term expert meant an omniscient seer of the future.

    I don’t believe that those who today find fault with the investing “experts” think that. They think that “expert” means someone who understands at least the ABCs of a topic. Most of today’s “experts” advocate Passive Investing, which evidences a lack of understanding of the basics. The academic research has been showing for 28 years now that valuations affect long-term returns.

    For so long as Passive Investing remains the dominant model for understanding how stock investing works, an investing “expert” is properly viewed as someone who is skilled at selling stocks, nothing less, nothing more. The industry gave up its intellectual integrity when it failed to change the dominant model when it was discredited by the academic research.

    There is no such thing as an investing “expert” today, in my assessment.


  • By Monevator, September 26, 2009 @ 7:33 am

    The trouble with lots of these lessons is, to paraphrase Keynes, the market can go on making you look like an idiot for a lot longer than you can maintain the belief that you’re not one.

    I’ve been short housing (I rent!) here in the UK since 2004 on the grounds that we were in an unsustainable housing bubble. Even now I’m down on the deal, after the biggest global recession for 70 years.

    I can see an argument that it is be better to go along with the consensus – it’s a bull market! house prices can only go up! – within limits, because politicians will always try to preserve the status quo that affects the most voters.

    Bit of a tangent I appreciate.

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