CASSANDRA WANTS TO SCREAM

CASSANDRA IS ENRAGED

Nicole Morgan

You can read today in a FT article the same lament we can read each time a bubble burst “ Silicon Valley Bank collapses after its investments in long-dated bonds made it vulnerable to interest rate rises. The BBC is thrown into chaos after suspending its top football pundit and colleagues abandon their posts in solidarity. JPMorgan Chase suffers reputational damage and lawsuits after keeping sex offender Jeffrey Epstein on as a client for five years after he pleaded guilty to soliciting prostitution, including from a minor. In all these cases, we can ask, as Queen Elizabeth II did on a visit to the London School of Economics during the global financial crisis in 2008: “Why did no one see it coming?” https://www.ft.com/content/4d589d5c-f2cb-4568-93dd-acda6fab931f

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Indeed the so-called Great Recession, which had begun in late 2008 and would run until mid-2009, was set off by the sudden collapse of sky-high prices for housing and other assets — something that is obvious in retrospect but that, nevertheless, no one seemed to see coming.

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All the experts in the audience made approval little noises. For once experts admitted they were wrong but for a good reason: nobody could have predicted the melt down. They all shook their heads in disbelief starting with the mighty former Federal Reserve Chairman Alan Greenspan.

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On October 24th 2008, he explained he was “shocked” at the breakdown in U.S. credit markets Shocked and deeply surprised! Shaking his head he repeated that a crisis of this magnitude was unpredictable. “We cannot, he humbly muttered, expect perfection in any area where forecasting is required. We have to do our best but cannot expect infallibility or omniscience.” Three weeks later, Treasury Secretary Henry M. Paulson Jr. added to the point “We, he said, are going through a financial crisis more severe and unpredictable than any in our lifetimes”??

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The remarkable feature of these words is they were uttered with a straight face, impervious to the rather predictable flurry of journalistic scrutiny[1] which was not long to dig up a list of analysts who had for a long time predicted the so-called unpredictable with some variations in style: from Paul’s Krugman’s bold clear statements to Nouriel Roubini’s detailed scenario[2] not forgetting Jeremy Grantham’s metaphor of “watching a very slow motion train wreck”[3] or Michael Hudson, Charles Morris [4] or Robert Shiller[5] .?The list of accurate forecasters is long although not long enough considering the magnitude of a phenomenon which with hindsight appears so inevitable. But at the time, their warnings were dismissed, laughed at and ridiculed in the circles of power and its devoted press. Grantham was dismissed as an old pessimist; Krugman was accused to be ideologically biased. Roubini nicknamed “Dr Doom” became an entertainer at rubber chicken dinners, delighting those who revel watching catastrophic movies from the comfort of their home movies theaters.

Some insiders were also worried; Bernake himself ?had been warning for the last year Henry M. Paulson Jr., the Treasury secretary, that the worsening situation might ultimately force a sweeping federal intervention[6] . Lower profile analysts working directly for Greenspan and Paulson has been raising a flag of various tone of red for years. Analysts of Citi Group expressed concerned[7] . According to an Associated Press review of regulatory documents, remarkably prescient warnings foretold the financial meltdown.[8] [9]

What happened to these forecasters, futurists, analysts, professors? At best they were ignored. At worst they were they were fired. They were modern Cassandras.

Who was Cassandra[10] ? A beautiful woman who was unlucky enough to irate a powerful lover, Apollo. He gave her the power of prophecy but deprived her of the power to persuade. Conform to the curse, she foresaw the danger posed by the Trojan horse; the people of Troy, ignored her warnings and the Greek soldiers hiding inside the horse were able to capture the city. The Troyans, the legend says, were all the more impervious to any warning as they drank themselves to a state of “irrational exuberance”. ?

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Fate was implacable. There was nothing to do except what Cassandra did, as shown in a painting: pulling her hair out. ?Bubbles are bubbling in every directionWhile in 2008 bubbles were largely confined to the American housing and credit markets, they are now to be found in almost every corner of the world economy. ?The goal : get drunk with immediate return whatever the impacts and consequences.

Each quarter,?Credit Bubble Bulletin’s Doug Noland ?posts a “flow of funds” report that analyzes the debt and securities markets data released by the Fed in its Z.1 Report. In 2017?it was already ?shocking to see the numbers we’re dealing with, but even more so lately as?history’s biggest financial bubble starts to dwarf its predecessors.

To the naked eye, percentage debt growth figures for the most part don’t appear alarming. But there’s several unusual factors to keep in mind. First, the outstanding stock of debt has grown so enormous that huge Credit expansions (such as Q3’s) don’t register as large percentage gains. Second, overall system debt growth continues to be restrained by historically low interest-rates and market yields. Debt simply is not being compounded as it would in a normal rate environment. And third, it’s a global Bubble and a large proportion of global Credit growth is occurring in China, Asia and the emerging markets. U.S. securities markets continue to be a big target of international flows.

It does not take a specific gift in forecasting to predict the outcome. Bubbles burst on landing (there is not such a thing as soft landing). The Queen if she was still with us would go back to the London School and ask the same question and she will have the same answer of false innocence.?Whoever wants to believe in progress and growth (a majority) want to ignore long term studies all together.

The worst is the repetition of the platitudes which comes after the disaster. The author of the ?2023 FT article who authored a book offers this piece of advice

” Leaders also need to persistently praise people who speak up. The penalties for doing so are often more obvious than the rewards. Those who keep their heads down are seldom blamed” Then comes the reference to the wise man. “As Warren Buffett said: “As a group, lemmings may have a rotten image, but no individual lemming has ever received bad press.”

... And the crazies will be rewarded and those who warn will be beheaded.

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If we want any change it will be have to "legal" with teeth (meaning punishment) . ?

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[1] Financial Times .Chris Giles?The vision thing. November 25 2008

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[2] Published: August 15, 2008, New York Times Sunday Magazine. On Sept. 7, 2006, Nouriel Roubini, an economics professor at New York University, stood before an audience of economists at the International Monetary Fund and announced that a crisis was brewing. In the coming months and years, he warned, the United States was likely to face a once-in-a-lifetime housing bust, an oil shock, sharply declining consumer confidence and, ultimately, a deep recession. He laid out a bleak sequence of events: homeowners defaulting on mortgages, trillions of dollars of mortgage-backed securities unraveling worldwide and the global financial system shuddering to a halt. These developments, he went on, could cripple or destroy hedge funds, investment banks and other major financial institutions like Fannie Mae and Freddie Mac.

[3] Jeremy Grantham, called by some the philosopher king of Wall Street even though he's based to the northeast in Boston. In 1977, he co-founded Grantham, Mayo and Van Otterloo, now known as GMO. In his Quarterly Letters to clients, he assesses current market conditions and usually takes a longer view as well. His commentaries are detailed, scholarly, sober and clear…. (Early 2007) Grantham's conclusion is these are all warning signs spelling eventual trouble because as noted above "Every bubble has always burst (with no exceptions, ever)." When the 2000 bubble deflation resumes, "it will be across all countries and all assets, with the probable exception of high grade bonds." In addition, risk premiums will widen (and now are) forcing companies to pay higher financing costs for borrowed funds that will depress investor confidence and reduce economic activity”. By Stephen Lendman15 August, 2007.Countercurrents.org

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[4] The Trillion Dollar Meltdown: Easy Money, High Rollers, and the Great Credit Crash (Hardcover)

by Charles R. Morris (Author)

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[5] Robert J. Shiller?Irrational Exuberance.

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Top of Form

By PETER BAKER; DAVID M. HERSZENHORN CONTRIBUTED REPORTING FROM WASHINGTON, AND MICHAEL BARBARO AND ERIC DASH FROM NEW YORK.

Published: September 21, 2008

This article was reported by Peter Baker, Stephen Labaton and Eric Lipton and written by Mr. Baker.

WASHINGTON -- For the last year, as the nation's economy lurched from crisis to crisis, the chairman of the Federal Reserve, Ben S. Bernanke, had been warning Henry M. Paulson Jr., the Treasury secretary, that the worsening situation might ultimately force a sweeping federal intervention.

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[7] In September 2007, with Wall Street confronting a crisis caused by too many souring mortgages, Citigroup executives gathered in a wood-paneled library to assess their own well-being.

There, Citigroup’s chief executive, Charles O. Prince III, learned for the first time that the bank owned about $43 billion in mortgage-related assets. He asked Thomas G. Maheras, who oversaw trading at the bank, whether everything was O.K.

Mr. Maheras told his boss that no big losses were looming, according to people briefed on the meeting who would speak only on the condition that they not be named.

For months, Mr. Maheras’s reassurances to others at Citigroup had quieted internal concerns about the bank’s vulnerabilities. But this time, a risk-management team was dispatched to more rigorously examine Citigroup’s huge mortgage-related holdings. They were too late, however: within several weeks, Citigroup would announce billions of dollars in losses.

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[8] https://www.huffingtonpost.com/2008/12/01/bush-administration-weake_n_147311.html

[9] With the economy in awful shape and threatening to get even worse, this seems a good time — no, make that “an appropriate time”; good times are probably a thing of the past — to look again at two books that were considerably more prescient than most others in foreseeing the current crisis. Charles R. Morris’s “Trillion Dollar Meltdown” and Kevin Phillips’s “Bad Money” both came out earlier this year and predicted impending disaster. From today’s perspective, their warnings were, if anything, too mild — Morris’s “trillion dollars,” for example, was a scary number in the spring; now it looks like a mere down payment. (I confess that I reviewed “Bad Money” for The Times and thought it might have been too gloomy. My bad.)

But on the essentials they were both wonderfully, terribly, right. They pointed to the dangerous ascendancy finance had achieved in our economy because of new investment instruments like derivatives. Phillips was useful in showing how dominant the financial industry’s position had become since the 1980s; Morris was good at explaining the technical details of the new instruments. Both spoke of unregulated leveraging, debt piled on debt, speculative bubbles. Both mentioned Ponzi schemes in which banks and brokers sold pieces of paper that no one really understood back and forth among themselves, creating credit out of air.” Paper Cuts “Two Cassandras and Alan Geenspan” Blog NYTimes November 27, 2008

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[10] She was the most beautiful of the daughters of Priam and Hecuba, the king and queen of Troy. Apollo, who wished to seduce her foolishly, gave her the gift of prophecy.?She accepted the gift but foolishly, refused him (there are lots of fools in Greek mythology. That what makes it so wonderfully actual.) Being a gentleman (sort of) he let her keep the power of prophecy but he deprived her of the power to persuade).

At the end of the Trojan War, Cassandra foresaw the danger posed by the Trojan horse; the people of Troy ignored her warnings and the Greek soldiers hiding inside the horse were able to capture the city. During the sack of Troy, Cassandra was raped by the Locrian (or "lesser") Ajax, and was then given as a war prize to Agamemnon. She returned to Greece with Agamemnon, and tried to warn him of the danger which awaited him there; once again her prophecy was ignored, and both she and Agamemnon were murdered by Clytemnestra and Aegisthus.

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