I am fascinated by this discussion.

First the comments you include that I passed along are not mine but by assembled by RGE from respected experts. The comments show that lots of knowledgeable people would find your explanation of what brought about the global crash a bit narrow.

I don’t claim the expertise to choose sides other than to hope if all we suffered was a more robust real estate crash than the norm, all of which was absolutely predictable, maybe a robust recovery is in the offing, sooner than some are predicting. That would be wonderful, but I will hold off betting on it.

If I read Richard correctly he states real estate cycles are a given, as history shows. But he doesn’t clarify whether those cycles are independent of broader business cycles, are invariably linked to the normal business cycle and whether the real estate triggers are always similar in nature or were unique this time.

Your observation that a cyclical downturn was due in 2008, also is interesting.
On a humorous note, the comment that “somebody who accurately predicts an unexpected event is not necessarily a person to be revered” (Taleb) could apply to “somebody who accurately predicts an expected event” – e.g. – you and Richard! (Only joking here!)

I can’t figure out if you are arguing the downturn in real estate happened because it was time to, according to the ticking of some historical clock. And, then, voila – because of the dramatic changes in how the financial markets began to operate in the prior decade – a good old run of the mill real estate crash turned into a global meltdown in finance and everything else.

Didn’t the changes is finance inexorably lead to the real estate bubble bursting? And if that is the case how does that fit with the cyclical thesis?

Or is it a chicken and egg phenomenon? And perhaps then do the experts like the RGE crowd in the “it’s bigger than a bread box” camp have a point?

As to the economist advising on risk assessment in the BoA real estate division – if you and Richard are right and the real estate cyclical charts virtually guaranteed a downturn in 2008, am I to believe, the analyst could have been ignorant of the cycles you and Richard claim were givens and that because there was “no past empirical data” to warn him, he was incapable and should be excused for not figuring out that the shit was about to hit the fan on the huge volume of mortgage backed securities and it should not be a shock that he didn’t grasp what the implications for the bank might be? Hmmmmm!

That doesn’t do much for my confidence in the analytical capabilities and the academic training underpinning of highly paid economists employed by major financial institutions charged with assisting those entities to fulfill a fiduciary reponsibiliies to customers.

Now, of course, if Arnie the Analyst had figured out things might be getting hinky soon and declined to become a skunk at the lawn party (risking the loss of the next quarter’s bonus at a minimum), I would understand, but that wouldn’t get him off the hook.

Where I find some culpability on the part of the economics profession (and I am in wide, good company) is that economic theories were dressed up into lovely nostrums that were draped over the investment instruments that paraded down stock market runways around the globe.

Traders told their customers “See how pretty these investments are. Now, as well as pretty they are safe, according to the economists and analysts on our staff and in the “independent” entities that vetted them. Don’t get hung up in how many tranches it takes to make a really great deal. Just buy and we will all get rich together.”

To my knowledge, Warren Buffet was a lonely oracle about the dangers of the new international financial marketplace. Certainly, the economics profession never formed a truth posse to rush to the cameras on Bloomberg saying “be careful” and “pay very close attention to the small print warnings that past results are not indicative of future performance.”

Didn’t the profession say markets were efficient? And what does the fact that the LTCM economists were right with their “buy risk” strategy at a particular institution in a specific circumstance at one point in time during a “near-perfect storm” have to do with the broader questions you have been addressing? You lost me on that one.

I’m sorry but I find unconvincing the comment that regulations failed because “they were too complex for bank regulators to understand and use effectively.” Wasn’t much of the shadow banking system designed, with malice aforethought, deliberately to get around the regulatory regimen of the traditional banking system. And what about the wholesale dereliction of duty at the regulatory agencies under the Bush regime?

I think you catch my drift, it ain’t as simple as you make it sound. I also don’t think the only black thing in all this was a swan.

I am a bit perplexed to find my gentle admonition that “we should all be humble and enjoy living in a world we don’t understand” translate into a call for people to avoid risk taking, experimentation, entrepreneurship and energetic hard work? I didn’t say that now, did I?!

Rather than arrogance, I would submit that courage is the defining characteristic of those who try new things, fail, and try again. I have had the good fortune to work with a few such successful business colleagues. I also ran into my share of the arrogant stripe and on many occasions watched as their judgement got mixed up with their egos and they paid a stiff price, as did their bottom line.

In closing, as an Obama guy from early days, I admit my disappointment, as of now, with the likely outcome of the efforts to restructure the international financial structure. I can understand how reluctant the President’s team is to throw a grenade or two into the system, when it is still vulnerable to a shock that could upset the apple cart all over again. But the fact that the architects of so many poorly designed structures will end up still in charge is appalling first and scary second.

I doubt your wish that we get the risk-takers out of the banks and we bring back bankers is in the cards. I would celebrate a return to sanity over a good malbec. But then I humbly paraphrase Bogart in Casablanca – “At least we will always have malbec!”