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Home Publications Blogs Beat the Press John Paulson: Hero of the Housing Bubble

John Paulson: Hero of the Housing Bubble

Thursday, 22 April 2010 04:57

Okay, I don't know Paulson's exact role in the Goldman deal. If he helped to deliberately mislead investors about his own role, pretending to be long on a deal that he was actually betting against, then the SEC should hang him. But there was nothing at all wrong or anti-social about betting against the housing market near the peak of the bubble, as Tina Brown implied on this Morning Edition segment.

By that point, house prices had grown hugely out of line with the fundamentals of the housing market. This priced them out of the reach of millions of middle income people. The temporary run-up in prices also led tens of millions of homeowners to spend based on bubble wealth that would disappear when prices returned to more normal levels.

Betting against the bubble was not "ghoulish," as Tina Brown asserts, it was a public service. It was helping to return house prices to more normal levels. Of course this was not Paulson's motive, but it was a side effect of his bet.

Comments (8)Add Comment
written by zinc, April 22, 2010 7:02
"But there was nothing at all wrong or anti-social about betting against the housing market near the peak of the bubble,"

I can't believe Dean Baker has uttered these words about JP. The implicit presumption in this "interpretation" of JP's impending liability is that Paulson was simply making a measured bet against a financial bubble, in a fwee market, that formed because, well no one knows. The charge is that Paulson was not just betting against the bubble. He was part, a central player, in a pervasive, criminal conspiracy to defraud tens of millions of people of their life savings.

If some mutt is accused of holding up a 7-11 with a squirt gun for a case of beer and cigarettes, there are 100 cops, legislators, and judges waiting to send him away for 10 years. If a super-rich, super villian is exposed for participating in a conspiracy of fraud, the academy wants to exhonerate him as a "hero".

By the same logic, I suppose, Bernie Madoff was a "hero" for helping to cool the financial bubble. The heroes are the everyday Americans who set the standard for our way of life, by living honestly with integrity and trust. Sure as hell not John Paulson. If he is culpable, indict him, now.
written by izzatzo, April 22, 2010 7:14
When homeowners lose, the NPR ruse,
is always Who Could Have Known.

When investors lose, then everyone knows,
It's Madoff, it's Paulson and crew.

Hang the bastards as bad actors they are, but leave the system alone.

It's working fine for those in the know, with nothing for which to atone.
written by zinc, April 22, 2010 7:20
OK, after rereading your post, I overstated your position. After reading the academics at Thoma's blog making excuses for the behaviour of the rating agencies, I transferred my frustration. My apologies.

Insiders use gimmicks
written by skeptonomist, April 22, 2010 9:09
The accusation against Goldman is that they were in effect using inside information (they designed the packages they or their clients were betting against) to make secure "bets". Using inside information is not good no matter what part of the cycle it is on. My impression is that successful short-sellers don't really take the plunge until the market is definitely going down, and that they may often know this through inside information. Certainly a number of people did this in the crash of 1929. Short-selling is sometimes touted as one of the things that make markets "self-regulating", but in practice it may be something, like CDS's, that make them less stable. To some extent it's another gimmick that insiders can take advantage of.
written by Peter T, April 22, 2010 10:44
> If he helped to deliberately mislead investors about his own role

Misleading other investors is not a crime if he had no fiduciary duty towards them or pressed/helped Goldman to not fulfill their fiduciary duty. I agree that betting against the housing bubble would be good, if it helped to shorten it. As Yves Smith has written about the Magnetar trade, some shorting actually prolonged the bubble - the overall framework had changed for the worse with the introduction of CDS.
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About Beat the Press

Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.