I had an opportunity to address a group from the Twin West Chamber of Commerce last week about the economy and the banking industry. I was asked about the housing market: When did I think market conditions would return to “normal”?
My crystal ball is no better than anyone else’s, so I am afraid my answer wasn’t very satisfying. Although the economy is slowly improving, there is so much inventory in the housing market today, that it is going to take a long time for prices and demand to return to pre-2007 levels on a wide-spread basis. GSE reform and the prospect of higher interest rates don’t bode well for the housing market. And, I certainly don’t see any major improvements coming before the November 2012 elections.
We look back at the economy now and it is easy to see the bubble, but at the time, conditions fooled some of the brightest minds out there. Consider this from the Financial Crisis Inquiry Report:
…many financial industry executives and top public officials testified that they had been blindsided by the crisis…even among those who worried that the housing bubble might burst, few — if any — foresaw the magnitude of the crisis that would ensue.
Charles Prince, the former chairman and chief executive officer of Citigroup, Inc., called the collapse in housing prices “wholly unanticipated.” Warren Buffett, the chairman and chief executive officer of Berkshire Hathaway Inc., which until 2009 was the largest single shareholder of Moody’s Corporation, told the Commission that “very, very few people could appreciate the bubble,” which he called a “mass delusion” shared by “300 million Americas.” Lloyd Blankfein, the chairman and chief executive officer of Goldman Sachs Group, Inc., likened the financial crisis to a hurricane.
Regulators echoed a similar refrain. Ben Bernanke, the chairman of the Federal Reserve Board since 2006, told the Commission a “perfect storm” had occurred that regulators could not have anticipated…Alan Greenspan, the Fed chairman during the two decades leading up to the crash, told the Commission that it was beyond the ability of regulators to ever foresee such a sharp decline. “History tells us regulators cannot identify the timing of a crisis, or anticipate exactly where it will be located or how large the losses and spillovers will be.”
The report, of course, goes on to say that, in fact, there were signs of a bubble in housing prices, and that many people did see it coming, or at least, they said so after the fact.
My point is, some people might be able to predict the ups and downs of the economy, but not many. And at any point in any cycle, you will find people who say things will get better and other people who say things will get worse. Knowing how to discern which one is correct is a real trick.