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2017-02-13 - Retirement of Downside

After almost two decades, we are retiring Downside. The site will remain up as a record of the first dot-com boom and bust. Thanks for all the years of attention.

2010-09-25 - Movie recommendation
Gordon Gekko is back, in "Wall Street, Money Never Sleeps". This movie is worth seeing for Gekko's speech alone, where he reprises his "Greed is Good" line from the first "Wall Street". The financial industry is portrayed in meticulous detail, from trading floors to the New York Fed's boardroom. Some of the real Wall Street players appear in cameo roles. Others are satirized. The ego level in the finance industry is made clear, without being overdone. Recommended to Downside readers.
2009-05-31 - Conventional wisdom

Much of what we've written here was once radical, and is now conventional wisdom. As we pointed out last September, we predicted all this years ago.

We predicted the mortgage crisis in October 2004, again in 2006, again in 2007, and said it was here in March 2008. It was obvious from the fundamentals that houses were overpriced and a collapse had to come. The Fed's rate cuts delayed the inevitable for a few years, and kept the bubble expanding. When the collapse came, it was worse than expected.

We predicted auto company bankruptcies in 2006. We predicted the oil spike in 2005. We predicted the dot-com collapse in 2000. Our track record is on these pages. Sometimes we were a bit early. But everything we said would go bust, did.

The future is now in the hands of political forces. We can't predict that from fundamentals. So we have no further predictions at this time.

2009-03-16 - End of a Ponzi schemer

Federal Bureau of Prisons Inmate Locator
Inmate Information for

Bernard Madoff Inmate Register Number 61727-054
Age 70
Projected Release Date UNKNOWN

Mr. Madoff is safely behind bars. Others will follow.

There's irrational exuberance, and then there's felony fraud. Perhaps more of the latter than was suspected.




2008-12-25 - Bah! Humbug!

Somewhere in Manhattan, forensic accountants are working through the holidays, trying to unravel Bernie Madoff's $50 billion Ponzi scheme. To them, we wish Happy Holidays.

2008-12-02 - Book recommendations

The first books on the current crisis are starting to appear. We recommend these:

Cooper's thinking is close to our own. Krugman is focused on Japan's bubble of the 1980s. Bernanke, it turns out, is a student of the first great depression.

2008-11-27 - Fear of deflation
The US experienced about 1% deflation in October. This is not a major problem. We'll have inflation soon enough, as the excess liquidity being injected via bailouts comes out as spending. Runaway inflation a year or two out is a real possibility. Meanwhile, prices are down. Stock up on necessities. It's going to be a long recession.
2008-10-24 - Anniversary of the 1929 crash
Today is the 79th anniversary of Black Friday, the beginning of the First Great Depression.
2008-10-10 - The Panic of 2008

This isn't 1929. That was an equity crash. This is a debt crash. The closest historical analogy in US financial history is the Panic of 1873, which offers little guidance for what happens next.The collapse of Japan's real estate bubble after 1989 is the closest modern analogy. Japan's markets did not recover for a generation. We can expect a similarly long recovery.

The recovery will not be controlled by the US Government. It's in the hands of the US's creditors, notably China. China Daily has outlined the political price of financial support.

2008-09-29 - What happens next

We do fundamentals, not politics. So we don't know what will happen next. The options which might work are probably those that have worked before - the Resolution Trust Corporation comes to mind. If that doesn't work, we'll have to look to the Great Depression for models.

Four years ago, we said this would happen, in "2004-10-11 - The coming mortgage crunch". Two years ago, we predicted "Homeowners" with adjustable-rate interest-only loans default and are foreclosed. Housing prices crash as foreclosures glut market. We were right.

We expected trouble sooner. Desperate attempts by the Fed and Treasury to postpone the collapse, but not prevent it, delayed it by a few years. Now it's here. Worse than expected, because the inevitable was postponed.

We did our part.

NRA logo
National Recovery Administration, 1933.
2008-09-28 - Details of the bailout proposal

The current draft of the "Emergency Economic Stabilization Act of 2008" is worth a close read. A few notes:

  • The Secretary of the Treasury is empowered to purchase "troubled assets" from any financial institution.
  • The Treasury's new "Office of Financial Stability" does the buying. A new assistant secretary of the Treasury runs that office, and has to be confirmed by the Senate. That's the new "bailout czar".
  • The insurance program requested by conservative Republicans is provided for. Premiums are to be sufficient to support the program.
  • There's oversight, including reports of all transactions to Congress. "To facilitate market transparency, the Secretary shall make available to the public, in electronic form, a description, amounts, and pricing of assets acquired under this Act, within 2 business days of purchase, trade, or other disposition." We look forward to seeing those transaction journals.
  • There's a "foreclosure mitigation" scheme.
  • Initial borrowing authority is for $250 billion. This can be extended to $350 billion on Presidential request, and to $700 billion with Congressional consent.
  • The SEC gets rather broad authority to suspend "mark-to-market" accounting. Probably a bad move; a similar provision kept dead Japanese banks semi-alive for over a decade.
  • Salaries above $500,000 per year are not tax-deductable for bailed-out financial institutions. That number somehow crept up from $400,000.
2008-09-22 - Notes on the bailout proposal

The administration's proposed bailout plan is disappointing, but not atypical. No oversight. No accountability. No plan. And very expensive.

First, based on the administration's track record, which started with an economic adviser from Enron and went downhill from there, the money would be spent badly. The dollar amounts are too big this time to allow that.

Second, as we've been pointing out for years, we had a housing bubble, and it must deflate. Historically, the median house sells for about 2.5 to 2.8 times the median income. In the last few years, the national ratio peaked around 4, and in some markets, reached 10. That number is dropping, and it's going to drop until the historical ratio is restored. The "wealth effect", the idea that it was normal for house prices to increase forever, misrepresented inflation as growth. Trying to restore that state of affairs with taxpayer money is both a major public policy mistake and doomed to failure.

All bubbles collapse, and when they collapse, they collapse all the way. Reread "Extraordinary Popular Delusions and the Madness of Crowds". Trying to stop a bubble collapse is an expensive exercise in futility

Japan went through this. Their real estate market peaked in the late 1980s, and when the bubble collapsed, Tokyo residential real estate declined 90%. It wasn't the end of the world. Now houses in Tokyo are affordable again.

Where would the money come from? Higher taxes? Runaway inflation? A World Bank-type intervention in the US economy? Just paying the interest will be a huge load on the economy. The Government won't be able to borrow that money at 2%. Some of my friends are already dumping US paper and buying CHF and EUR denominated bonds.

We may have to take the collapse and then clean up the mess with Depression-type measures and strict regulation. We need to let the "creative destruction" part of capitalism do its job on the financial community. When the dust settles, the US will have a much smaller financial community, and it will be a service function for the more useful parts of the economy.

At one point, 40% of US corporate profits were coming from financial activities. That couldn't last; financial activities are an operating cost, not a productive output. Before 1992, there were no credit derivatives. It's now clear that the whole concept of trying to offload credit risk in this way is a failure. It has to go. Removing the Depression-era restrictions on financial institutions, like Glass-Steagall and the restrictions on branch banking, was, in hindsight, a big mistake. Giant integrated financial institutions aren't more stable; they just fail more spectacularly.

We need something like the Resolution Trust Corporation again; something that holds a limited class of assets to be worked out or sold off. We may need more federal funds to prop up the FDIC. But that's all. That's where Government intervention must stop. We can't afford to throw good money after bad trying to prop up failed financial institutions.

"Too big to fail" is over. We've reached "too big to rescue".

2008-09-21 - While we were out

Downside has not been updated in several weeks, due to the decision by our hosting provider to exit the web hosting business. Downside is now back up, and the databases are being updated regularly at 4 AM as usual.

We will have more to say about the current financial collapse shortly.

2008-07-27 - Runaway inflation
Until 1983, the Consumer Price Index, the measure of inflation, included housing prices. In 1983, changes were made to the index which gave much less weight to housing costs, on the grounds that "people don't buy a new house every year". offers data series for the old method of computing the CPI.
CPI computed using pre-1982 method

Inflation, computed the way it was computed until 1983, is now over 12%. The numbers today look very much like the "stagflation" of the 1970s, after oil prices tripled.

2008-03-17 - A crisis of confidence

WASHINGTON -- Amid heightened concerns over the state of the world financial system, U.S. President George W. Bush gave assurances Monday that capital markets are working smoothly, adding that the U.S. is "on top of the situation."

"One thing is for certain, we're in challenging times," Mr. Bush told reporters after meeting with his top economic aides. "But another thing is for certain -- that we've taken strong and decisive action.

"The United States is on top of the situation," Mr. Bush said.

Now there's a sell signal.

2008-03-06 - The mortgage crisis

At the beginning of 2006, our predictions included this: "US interest rate spike. "Homeowners" with adjustable-rate interest-only loans default and are foreclosed. Housing prices crash as foreclosures glut market."

We were right about the housing price crash. It came a year later than we expected, but it's definitely here now. There's no sign of an interest rate spike yet, because the Fed is desperately intervening to keep rates down. That's producing inflation and negative real yields. Unclear how that unwinds; politics drives enconomics in this area.

Judged by commodity prices or exchange rates, the US is now experiencing inflation at Third World levels.

2008-02-21 - Bank Junius Baer IPO controversy
We've been plagarized. A posting we made on Slashdot was copied by Wikileaks, issued by them as a press release, then appeared in a story on ZDnet and many other outlets. After the first two lines, the published text, credited to Wikileaks, is a word for word copy of our text. We are not amused.

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