Academic policy advocacy, in the words of my nemesis Peter Griffin, really grinds my gears.. in many ways; to the point that I have conniption fits a healthy majority of the time that I read academic articles.
One way is when a well-known, or at least well-credentialed academic brandishes his credentials, mixed in with a lot of terminology that even financial cognoscenti are unsure of, and throws in some Minsky citations and citations of himself, to finally come up with an argument that is virtually unfalsifiable–just because of the time and information costs of rebutting it–but almost certainly wrong. Such is the case with Charles Calomiris’ VoxEU article, “Not Yet a Minsky Moment.” The article is itself a defense of a very long paper Calomiris wrote about two months ago, which basically argued that the August financial crisis was over (whoops).
Anyway, after a long series of paragraphs (which read like this: “e.g. i.e. ABCP CDO LSS MBS ABS AAA leveragingsuper-seniorAAA commercial paper”) , Calomiris gets to his set of amazingly falsifiable “Reasons to be cheerful”:
1. Housing prices may not be falling by as much as some economists say they are.
Too much weight is being attached to the Case-Shiller index as a measure of the value of the US housing stock. Stanley Longhofer and I, along with many others, have noted (Calomiris and Longhofer 2007) that the Case-Shiller index has important flaws.
If Case-Shiller were designed to measure the entire value of US housing, they’d measure it. Since they want it to be a leading indicator, not a complete index, it’s not supposed to be perfectly representative.
2. Although the inventory of homes for sale has risen, housing construction activity has fallen substantially.
Construction sector activity has fallen substantially! Fantastic news!
3. The shock to the availability of credit has been concentrated primarily in securitisations rather than in credit markets defined more broadly (for example, in asset-backed commercial paper but not generally in the commercial paper market).
ABCP is over half of the commercial paper market, as his own figure shows. That’s broad enough.
4. Aggregate financial market indicators improved substantially in September and subsequently.
5. As Figure 15 shows, nonfinancial firms are highly liquid and not overleveraged.
Yes, but many nonfinancial firms are hostage to leverage through their ultimate ownership (private equity and hedge funds), and massively-leveraged financial firms themselves are 30% of the S&P. If you take out the hyperleveraged components of US industry, you’re eventually going to be able to show that US industry ex-leverage is not overleveraged. Who cares.
6. As David Malpass (2007) has emphasised, households’ wealth is at an all-time high and continues to grow.
David Malpass has an awful lot of egg on his face right now. Nobody has a clue where household wealth is right now, particularly those who want to be intellectually honest about it and try to account for the subsample of people with substantially negative household wealth, who will be foreclosed out of the population of “household wealth” over the next 1-3 years.
7. Of central importance is the healthy condition of banks.
No further comment needed.
8. Banks hold much more diversified portfolios today than they used to. They are less exposed to real estate risk than in the 1980s, and much less exposed to local real estate risk, although US banks’ exposure to residential real estate has been rising since 2000.
“It’s different this time. Here’s one reason why: although, on second thought, it’s a difference that completely contradicts my point.”
Seems like a pretty dumb article to me. It will probably be forgotten soon, just because events will continue to shred his thesis more effectively than any bile spewing from my keyboard.
So basically, I don’t even know why I’m writing this, other than to fulminate at the world and put off a gigantic backlog of work. Cheers.
 According to the blogosphere’s resident securitized-det guru, JC Kommer (writing in Yves Smith’s comments section), Calomiris is wrong re: leveraged super-senior (“LSS”… as if this discussion doesn’t have enough alphabet soup) asset-backed commercial paper (ABCP).