The Trouble With Prescience

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"The Trouble With Prescience"

Via Paul Rosenberg, a very interesting pre-crash paper from Dean Baker called “The Run-Up in Home Prices: Is it Real or Is it Another Bubble?” His conclusion was bubble. He marshals a variety of evidence for this conclusion, but the key point is simply that the notional value of homes was increasing much more rapidly than the actually observed price of renting a place to live:


The only problem with the paper is that it was published way back in 2002. Baker not only makes the case for the existence of the bubble persuasively, but he highlights most of the various ways in which its collapse will create huge economic problems. But in 2003, the houses are more expensive than ever. And in 2004, things have gone up even more. Then they keep going up in 2005. And then for another year! And this is precisely what makes bubbles so problematic. Even when you’re pretty sure you’ve identified one, this gives you almost no insight into questions of timing. Consequently, it’s quite difficult to use your insight to go make tons of money. And that in turn makes the bubbles more severe, since the skeptics are basically out on the sidelines.

And in the reputational economy of analysts the consequences are even worse. If you go along with the herd and then predict a problem a month before it arises, then you strike everyone as prescient. But if you start warning about something and then it doesn’t happen, and then you keep nagging people, and then you keep complaining about how nobody’s listening to you, you start getting dismissed as a crank. And when you’re proven right, you’re still that crank nobody wants to listen to. You don’t get hailed as a hero. But Ben Bernanke who made very mainstream mistakes and then pivoted adroitly once the bill came due does.

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