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Looking back at claims to have predicted the Great Recession

8 April 2014

Many economists and financial experts claim to have predicted the Great Recession. That’s important, since these are the people we should be listening to.  Oddly, they seldom quote or cite what must be their greatest accomplishment. Let’s look at one such claim, by Steve Keen.

Update: Steve Keen provides additional citations in the comments.

Crystal Ball

First, a background note. By 2006 and 2007 it was clear to many people, not just experts, that the US had a large asset price bubble in residential real estate. Some of the the most obvious symptoms: rising vacancy rates, inappropriate credit extension to borrowers (often fraudulent), and obviously unsustainable prices.

What very few saw was that the collapse of the bubble would send the US into the most severe recession since the 1930. What nobody saw, so far as I know, was that this would spark a global crisis. There were many factors that magnified a sector crisis in America into a global downturn, but the top of the list were the collapse of US and foreign banks. This was unexpected, probably even to senior executives at those banks. The widespread belief as late as early 2008 was that the US might fall into a recession, but that the banks were strong. Banking collapses are the one of the two most common causes of severe economic downturns (wars are the other).

Back to the forecasting game. One economist often cited as predicting the crisis is Steve Keen (retired Prof Economics, U Western Sydney.). He often makes this claim, most recently (and unusually mildly):

Back in the Olde Days, before the global finan­cial cri­sis, when I was one of a hand­ful rais­ing the alarm

Let’s look at the link Keen gives as evidence of his predictive skill: “‘No one saw this coming’ – or did they?“, Dirk Bezemer (Asst Prof Economic, U Groningen), Vox, 30 September 2009 (see the full paper here):

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Did economists not see this crisis coming? This column says that analysts who used models featuring a distinct financial sector issued fairly detailed, well reasoned, and public warnings of imminent finance turmoil. It argues that mainstream models missed the crisis because they use a “reflective finance” view in which financial variables are wholly determined by the real sector. “Flow of funds” models may be the way forward for anticipating finance-induced recessions.

Bezemer gives one citation to Keen’s work, in a list of relevant models: “These may serve as pars pro toto for the class of “Flow of Funds” models of real-financial interactions”. The work cited:

Keen, S (2009), “The Dynamics Of The Monetary Circuit”, in Jean-François Ponsot and Sergio Rossi (eds.), The Political Economy of Monetary Circuits: Tradition and Change.  {the link goes to the 7 August 2009 proof}

But this was written after the crash (see the figure 9.11, showing the crash in US stock and housing prices).  It’s not evidence that Keen predicted the recession, in any form. As a side note, in it Keen predicts a “price spike” (inflation) after the credit crunch, which did not happen after the 2008-2009 event.

Conclusion

The 21st century might hold challenges greater than America has even face. Perhaps even challenges among the greatest humanity has ever faced. To prosper, perhaps even to survive, we must improve our game. Evidence and logic, clear vision and thought, are among our most powerful tools.

Our performance in the new millennium has been sub-par. Our madness in the War on Terror, with two lost wars. Reducing the debate about ways to prepare for climate change to a cacophony. Allowing the Republic to decay before our eyes. Living in politically-pleasing fantasies, rejecting contrary evidence (which the Internet makes so easy to do).

We can and must do better in the future.

Crowd-sourcing the question

Please post in the comments any citations showing somebody correctly predicting the crash 2008-2009. Not just the popping of the real estate bubble — that was widely foreseen — but the severe recession in the US, or (better yet) the severe global recession.

For More Information

Why this is important:

  1. Remembering is the first step to learning. Living in the now is ignorance., 29 October 2013
  2. The missing but essential key to building a better America, 21 November 2013 — Clear sight about our condition
  3. Swear allegiance to the truth as a step to reforming America, 24 November 2013

Posts about predictions:

  1. Checking up on past forecasts about climate change, a guide to the future, 6 January 2013
  2. How to predict the outcome of this great monetary experiment, and how we got into this box, 15 November 2013
  3. Posts about Forecasts: possible futures for America and the World
  4. My predictions – how do they look now?
  5. Smackdowns – corrections & rebuttals to FM posts

Posts about experts:

  1. Experts now run the world using their theories. What if they fail, and we lose confidence in them?, 21 June 2013
  2. Do we face a future without confidence in experts?, 25 September 2013

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40 Comments leave one →
  1. Pluto permalink
    8 April 2014 5:00 pm

    The only economist I can think of who predicted the economic downturn that came after the popping of the real estate bubble was Roubini, aka “Dr. Doom.” Sorry, but I don’t have time right now to look up the reference.

    Krugman and Schiller nibbled around the edges of a prediction in research documents pre-dating the crisis by up to 15 years but neither predicted anything like the severity of the actual event.

    Hussman made quite a number of predictions that were proven valid (here’s one example: http://www.hussmanfunds.com/wmc/wmc080107.htm) but he focuses heavily on his specialty, stock prices, and only discussed the rest of the world in passing.

    Like

    • 8 April 2014 7:17 pm

      Pluto,

      I follow Roubini’s work closely, and reprinted several of his reports. He didn’t see the size and scope of the Great Recession, even as late as September 2008: “The Coming US Consumption Bust”, by Nouriel Roubini, 6 September 2008.

      Just to be clear, I did not either. But my analysis was more accurate and earlier than most — by far. I was writing about the likelihood of a severe recession in March 2008, when the consensus of economists still believed the crises was contained (the June 2008 collapse of Bear Sterns made believers out of many of them, but not all).

      See “The US Economy at DEFCON 2“, 11 March 2008

      Like

  2. 8 April 2014 7:34 pm

    Ehhhm….

    Back when the crises actually occurred, during the Bush Admin, I posted a criticism of the Admins handling of the issue, which the then editor of FM (i.e. FM?), re-posted as a stand alone comment. Surely the current editor of this site has access to the FM articles dating from the time under consideration? (My post was after the full effects were obvious to all, but refers to the run up to the crises and my disapproval in how it had been handled by the administration.)

    At the time, it would have been wholly inappropriate of me to provide supporting documents and communications relating to the ‘crises’, and to a great extent the same is true today, for the following reasons I made very clear in the commentary. Although the Administration had mishandled the consequences of flawed policy, and thus deserved it’s share of criticism, I argued that WHILE the then current leadership of the Majorities in the House and Senate remained as they were, it was utterly unlikely that the appropriate reforms would be made to stop or address the deeper problems.

    That was around seven years ago. The Leadership of the Senate Majority, and what is now the House Minority, HAVE NOT CHANGED. Furthermore, as I warned in my commentary: the underlying problems and structural weaknesses in our economic system have NOT been addressed nor reformed. The current Administration has suffered many of the same problems and conflicts that faced the Bush Administration, and has yet to demonstrated an ability to stand up to the political and financial special interests in their OWN PARTY, necessary to begin to redress the issue.

    When a commentary on the blog you now edit proves, seven years later, to have been more or less predictive, what possible reason would you have not to link current readers to it? I assure you I was not posting in hindsight, or from an outside prospective, but rather out of disgust over the consequences of the Administrations decision, as well as disgust at the hypocrisy demonstrated by the leaders of the Majorities in both the House and Senate.

    Finally. Full disclosure: Although my recommendations were ignored within the Administration at the time, as well as my warnings, I myself as well as financial institutions I have a personal stake in, DID foresee the crises, and were therefore able to prepare for the fallout, and position ourselves and our clients pension funds so that we not only avoided serious losses, but were in a position to expand and prosper afterwards. Moreover, I am very proud that we were, unlike so many other financial institutions, able to protect the pensions of my States Firefighters and police officers and others… what most people call “Main Street America”, from the cynicism and follies of the Capital.

    I put it to the reader: what would you consider to be a sufficient demonstration of ones grasp and predictions related to the economy? An academic paper full of statistics written in hindsight? Or a demonstration of ACTUAL PROFIT, along with commentary in the public domain dating from the period in question? Come now, sir: I’ll show you MINE, if you’ll show me YOURS!

    A. Scott Crawford

    Like

    • 8 April 2014 7:47 pm

      Scott,

      Here’s the link to your comment.

      As to your point that this crises has sparked NO meaningful reforms, I agree — and consider that one of the most interesting results. I have written about this several times during the past few years, speculating that the very success of the government’s stabilization efforts also eliminated the public’s interest in reforms ( a welcome result for the 1%).

      Like

  3. 8 April 2014 9:43 pm

    FabMax,

    Agreed. Nothing has been done to protect citizens against the predations of the financial sector–all favoring the top 0.01%.

    BTW, I called the crisis and will send you excerpts from my investor letter(s) offline.

    Alas, you think I don’t understand monetary policy and its implications;) All the best,

    Like

  4. 8 April 2014 10:02 pm

    Steve Keen (University of Western Sydney), receiving more than twice as many votes as his nearest rival, has been judged the economist who first and most cogently warned the world of the coming Global Financial Collapse. He and 2nd and 3rd place finishers Nouriel Roubini (New York University) and Dean Baker (Center for Economic and Policy Research) have won the inaugural Revere Award for Economics. It is named in honour of Paul Revere and his famous ride through the night to warn Americans of the approaching British army.

    Keen, Roubini and Baker have been voted to be, more than all others, the three economists who if the powers of the world had listened to, the Global Financial Collapse could have been avoided.

    More than 2,500 people voted—most of whom were economists themselves from the 11,000 subscribers to the real-world economics review. With a maximum of three votes per voter, a total of 5,062 votes were cast. The voters were asked to vote for the three economists who first and most clearly anticipated and gave public warning of the Global Financial Collapse and whose work is most likely to prevent another GFC in the future. The poll was conducted by PollDaddy. Cookies werei used to prevent repeat voting.

    Revere Award Citations: Steve Keen (1,152 votes). Keen’s 1995 paper “Finance and economic breakdown” concluded as follows:

    The chaotic dynamics explored in this paper should warn us against accepting a period of relative tranquillity in a capitalist economy as anything other than a lull before the storm.

    In December 2005, drawing heavily on his 1995 theoretical paper and convinced that a financial crisis was fast approaching, Keen went high-profile public with his analysis and predictions. He registered the webpage http://www.debtdeflation.com dedicated to analyzing the “global debt bubble”, which soon attracted a large international audience. At the same time he began appearing on Australian radio and television with his message of approaching financial collapse and how to avoid it. In November 2006 he began publishing his monthly DebtWatch Reports (33 in total). These were substantial papers (upwards of 20 pages on average) that applied his previously developed analytical framework to large amounts of empirical data. Initially these papers analyzed the Global Financial Collapse that he was predicting and then its realization.

    Like

    • 8 April 2014 10:21 pm

      Peter B,

      Thank you for this cite! Valuable and pertinent information.

      Like

    • 9 April 2014 3:00 am

      Peter,

      I lost interest in this when I read “The poll was conducted by PollDaddy.” It’s a popularity poll. Probably not one in a thousand of those voting know what any of these people actually said before the crash.

      It’s noise.

      Like

    • 9 April 2014 3:10 am

      Peter,

      Let’s look at the one paper cited: “Finance and economic breakdown: modelling Minsky’s Financial Instability Hypothesis“, Journal of Post Keynesian Economics, 1995

      While perhaps a sound addition to the literature on Minsky, Keynesian economics, and the macroeconomic effects of debt — it makes no predictions in any useful sense of the term. To say this predicted the Great Recession means that I and thousands of others did so as well.

      Like

    • 9 April 2014 7:31 am

      Peter,

      I cannot find the poll, to see if my comment was correct. I’ve seen too many internet polls flooded by partisans, skewing the voting, to consider them representative without some form of limiting the audience.

      The Revere Award, however, is significant. Note that it was not for predicting the crisis, but “for being the economist whose work is most likely to prevent a future financial crisis.”

      Like

  5. 8 April 2014 10:12 pm

    Good grief Maximus,

    Why are you even looking at journal papers or book chapters for proof of calling the crisis before it happened? That’s an inherently straw man critique of such claims: have you never heard of publication lags?

    My 1995 paper, for example, was written in 1992, and accepted for publication in 1993–and then took two years to turn up in print in the Journal of Post Keynesian Economics.

    At worst you should be looking for working papers or monographs, and at best media articles and interviews–because if you think (as I did from December 2005) that a really serious crisis was coming, you don’t bother with the academic production mill with its refereeing and editorial delays. You go for the mainstream media (and of course blogs).

    BTW I chose to use Dirk’s Vox paper rather than the work on which it was based because that was an immediate URL rather than link to a PDF as with the paper.

    If you had checked that–which you should have, given the claims you’re making here–then you would have seen this link:

    Keen, S. (2006). “The Lily and the Pond“. Interview reported by the Evans {Ed: sic, s/b Evatt} Foundations, 12 December 2006.

    That’s far from the first such warning I gave of the causes and severity of the crisis I expected (with a focus on Australia since that’s where I live). Here are a few other links for you:

    (b) Why deflation is really possible“, Paul Amery, MoneyWeek, 7 February 2008

    (c) Boom in Australia goes bust as global slowdown hits“, USA Today, 28 December 2008

    (d) To intervene or not to intervene“, ABC (Australia), 3 November 2008

    (e) Holding tight: can Australia ride the storm?“, The Age, 11 October 2008

    (f) Economics Meltdown 101“, Reporter: Steve Keen, The Age, sometime in 2008 — Similar content to the (e) article.

    (g) Australia facing debt-driven depression“, ABC (Australia), 3 February 2009

    Regards, Steve Keen

    Like

    • 8 April 2014 10:20 pm

      Prof Keen,

      I used that link because it was what you cited. It does not disprove your claim, but does not support it either.

      Also, as I noted, this shows the crash in US stock and residential home prices — so this is not a case of publication lag.

      All that out of the way, thank you for these cites! I looked for an article or blog posts by you following up on your predictions, but could not find it (perhaps limitations of Google, or of my searching skills). I suggest that you write one. Good predictions are too rare to go undocumented, especially amidst all the chaff.

      On the FM website past predictions are listed and tracked — his and misses. See the links in the for More Info section, or the buttons on the top menu bar.

      I will review these and post an update, and (depending on the results), a follow-up post.

      Thank you for your prompt comment, especially valuable from one of your prominence.

      Like

    • 8 April 2014 10:31 pm

      You’re welcome Fabius. It is probably worth a post now, since now that the crisis is passing (see

      1. Why the US can’t escape Minsky, 2 April 2014, and
      2. Closing the door on the GFC, Business Spectator, 10 March 2014

      ) this kind of inverse scepticism is actually helping to cement the dominance of the Neoclassical orthodoxy post the crisis they certainly didn’t see coming.

      Like

    • 8 April 2014 10:46 pm

      Prof Keen,

      Will do. My guess is that the next few years will provide a definitive test for current economic theories, of a magnitude not seen since the 1930s. I have written scores of posts about this, but am unable to even speculate about what lies beyond that transitional period.

      You are better equipped to write about that, however tentatively. It probably would find a large audience.

      Like

    • 9 April 2014 2:44 am

      Prof Keen,

      I’ve gone over these (I also added full citation info to your comment). The fall into two groups. Neither supports your claim of predicting the crash.

      (1) The first two were written before the crash, warning in general terms about the dangers of too much debt. These were common as dirt. I’ve written many. Here’s the first: Death of the post-WWII geopolitical regime – death by debt, 8 January 2008. Here are others.

      These are IMO not predictions of the 2008-2009 downturn. There are unspecific in terms of time, nor do they describe the specific features that turned a commonplace recession into the great recession: especially the collapse of the banks — perhaps the most surprising event.

      (2) The other articles were written during or after the crash, more or less commonplace analysis. A few predictions; some correct, some wrong.

      The references you gave

      (a) Keen, S. (2006). “The Lily and the Pond“. Interview reported by the Evans {Ed: sic, s/b Evatt} Foundations, 12 December 2006.

      The is the story behind Australia’s private debt. It has been growing more than 4% faster than our GDP for 53 years. … It is 147.1% now. If the rate of growth doesn’t slow down, it will crack 150% of GDP by March 2007, and it will exceed 160% of GDP by the end of 2007. We simply can’t keep borrowing at that rate. We have to not merely stop the rise in debt, but reverse it.

      Unfortunately, long before we manage to do so, the economy will be in a recession. … So when will this recession begin? On current data, the domestic economy may already be in one.

      (b) Why deflation is really possible“, Paul Amery, MoneyWeek, 7 February 2008 — The only reference to Keen is to show a graph of long-term debt/gdp growth from his website.

      (c) Boom in Australia goes bust as global slowdown hits“, USA Today, 28 December 2008

      The financial crisis is hitting debt-laden Australians hard. “We’re headed for a recession for the same reason the USA is in one now — the bursting of a debt-financed speculative bubble” … Keen predicts the downturn will unfold a bit differently than it did in the USA, where problems began in the housing market and spread to the broader economy. “We’re likely to go into the macro crisis first as debt growth plummets; then a housing crisis as the newly unemployed are unable to maintain their mortgages; and finally a credit crunch where the banks’ solvency doesn’t look so hot anymore.”

      This was only partially correct; Australia did not have a housing crisis.

      (d) To intervene or not to intervene“, ABC (Australia), 3 November 2008 — This makes no predictions.

      (e) Holding tight: can Australia ride the storm?“, The Age, 11 October 2008

      “I think the comparison (with the Great Depression) is valid and the prognosis is extremely bleak,” suggested Sydney academic Steve Keen this week. … And Steve Keen, a University of Western Sydney lecturer, holds dire views. He has long warned of Australians’ “unsustainable debt addiction”. His latest musings put it this way: “We are not in a Great Depression — not yet anyway — but a key pre-condition for one has developed right under the noses of central banks: excessive private debt.

      (f) Economics Meltdown 101“, Reporter: Steve Keen, The Age, sometime in 2008 — Similar content to the (e) article.

      (g) Australia facing debt-driven depression“, ABC (Australia), 3 February 2009

      The world is facing a “full-blown depression” and Australia needs to drastically rethink its attitude to debt if it is to climb out of its current economic trap, says leading economist Steve Keen.

      This is quite wrong, predicting a depression right near the trough of the downturn.

      Like

  6. Winston permalink
    8 April 2014 11:01 pm

    This group predicted it:

    http://www.leap2020.eu/September-2006-IMF-confirms-LEAP-E2020-s-anticipations-on-Global-Systemic-Crisis_a300.html

    September 2006 : IMF confirms LEAP/E2020’s anticipations on Global Systemic Crisis

    http://www.leap2020.eu/Factor-N-4-Economic-recession-in-the-US_a2539.html

    http://www.leap2020.eu/English_r25.html

    And they are getting more alarmist

    By the way, some are wondering if America (and UK) will follow example of Greece: “Is American democracy headed to extinction?“, Stein Ringen (Prof emeritus of Oxford), op-ed in the Washington Post, 28 March 2014

    Like

  7. 9 April 2014 3:12 am

    If they were all I had, I might agree with you; and if your warnings had a model of debt deflation like the one below, I might put your calls on equal footing–as you do in your next comment.

    Finance and economic breakdown: modelling Minsky’s Financial Instability Hypothesis“, Journal of Post Keynesian Economics, 1995

    You’re being a very literal foot-soldier, General, and a lazy one at that. I’ll leave you to your ruminations.

    Like

    • 9 April 2014 3:30 am

      Prof Keen,

      “if your warnings had a model of debt deflation like the one below”

      That’s a valid point. As an economist, your warnings of debt were based on your expert analysis. Whereas mine were based on citations of economists’ work (examples about deflation here and here). We’re not on the same level. On the other hand, a prediction is a prediction.

      “You’re being a very literal foot-soldier, General, and a lazy one at that. I’ll leave you to your ruminations.”

      (a) Considering the detailed analysis I’ve given to your citations, that seems quite an odd insult.

      (b) Insults aside, citing articles written after the crash as evidence of prediction. What can you intend by this? If that is “being a very literal foot-soldier”, then I plead guilty as charged.

      (c) That your defense so quickly descends to insults tells us more about you than I.

      This is a nice example of a Socratic dialogue (without the booze), cutting through the chaff to the truth. Thank you for participating.

      Like

    • 9 April 2014 4:01 am

      Fabius, you are making a very big call–that I didn’t predict (or warn of) the crisis, when I spent basically my entire life from December 2005 on doing precisely that. There are numerous entries posts on my website that you could have consulted, including documents such as:

      Expert opinion, 22 December 2005 — Summary:

      I have been asked to provide my expert opinion “as to the consequences or potential impact of the lending typified in Loan 5 on the {Australian} economy generally”. In summary my opinion is …

      Deeper in Debt“, Center for Policy Development, 13 December 2007

      Australians have an unsustainable debt addiction, which will be hard to kick, and painful to recover from. A new report by CPD fellow Steve Keen has found that in just 18 months time we may be spending as much of the national income on interest payments as we were in 1990 – when interest rates were at 17 per cent.

      Australia’s level of irresponsible lending isn’t as high as that which brought on the US subprime crisis, but because our debt to GDP ratio is growing so much faster the impact of any slowdown will be more severe here – and the pain will be much more widely spread.

      In ‘Deeper in Debt: Australia’s addiction to borrowed money‘, Steve explains the dynamics of Australia’s debt addiction in clear and accessible language. The paper outlines the probable economic consequences of the end of the debt binge, offers advice on how to cope with the debt hangover, and proposes reforms to prevent it happening again.

      You can also see reports on the likelihood of a crisis published by me in PDF form as “Steve Keen’s Debtwatch” since November 2006 by going to this page.

      Is it amazing that after all the work I have put in, I get exasperated with people dismissing it on the basis of reading one or two blog posts?

      Like

    • 9 April 2014 5:31 am

      Prof Keen,

      Please read this to the end. Or perhaps start with the last section, (d).

      (a) “”you are making a very big call – that I didn’t predict (or warn of) the crisis …”

      I believe we have a misunderstanding here. Let’s replay the tape.

      I quote your claim:

      One economist often cited as predicting the crisis is Steve Keen (retired Prof Economics, U Western Sydney.). He often makes this claim, most recently (and unusually mildly): Back in the Olde Days, before the global finan­cial cri­sis, when I was one of a hand­ful rais­ing the alarm …”

      I examine the article you cite as evidence: “‘No one saw this coming’ – or did they?“, Dirk Bezemer (Asst Prof Economic, U Groningen), Vox, 30 September 2009 (see the full paper here).

      I draw a conclusion from that evidence:

      But this was written after the crash (see the figure 9.11, showing the crash in US stock and housing prices). It’s not evidence that Keen predicted the recession, in any form.

      You provide additional supporting evidence,

      I examine the new evidence, and draw what seems to be a logical conclusion — You gave two kinds of citation:

      (1) These {group 1} are IMO not predictions of the 2008-2009 downturn. There are unspecific in terms of time, nor do they describe the specific features that turned a commonplace recession into the great recession: especially the collapse of the banks — perhaps the most surprising event.

      (2) The other articles were written during or after the crash, more or less commonplace analysis. A few predictions; some correct, some wrong.

      As a social scientist, who understands precise use of language, you must see that your assertion is incorrect. I do not make the global claim you attribute to me: “you are making a very big call – that I didn’t predict (or warn of) the crisis …”. I examine specific evidence you give as supporting evidence, and draw a conclusion about that evidence.

      (b) “There are numerous entries posts on my website that you could have consulted”

      As a scientist you understand the nature of claims, and that your statement is methodologically unreasonable. It’s not my job to search your website to find evidence for your claims when your own offered evidence is insufficient.

      (c) “I get exasperated with people dismissing it on the basis of reading one or two blog posts?”

      I get exasperated when people offer material as evidence that is not apropos, and even more so when their defense is to insult me. But let’s get over these petty things and search for common truths.

      (d) Here is my guess at what’s happening here.

      You have made substantial contributions to macroeconomic theory regarding the role of debt. That’s a judgement I’m not competent to make, but it seems likely. And the handling of debt is, IMO, the core issue in the paradigm crisis afflicting economics today. As I wrote in October 2008 about the causes of the collapse:

      (f) The Thomas Kuhn-type paradigm crisis in Keynesian economics, by which the world economies have been steered for fifty years. The aggregate debt level of an economy is not a significant variable; attempts to integrate into orthodox theory by radical Keynesians (e.g., Hyman Minsky) were unsuccessful. Sometime after 2000 we reached and broke though the edge of the “operating envelope” of Keynesian theory. We ran like Wile E. Coyote off the cliff and beyond — a few exhilarating years — and now we fall.

      I am no macroeconomic theoretician, but we have been saying similar things during the past few years.

      To gain support for your theory you are claiming to have predicted the great recession. Evaluating such things is subjective, but the materials you have shown in my opinion don’t justify such a claim — except in the sense that thousands of people have predicted a bad end to the debt supercycle (to use the term coined by Hamilton Bolton and Tony Boeckh of Bank Credit Analyst).

      It’s an understandable impulse to claim predictions as evidence. It’s one I often have as well. Certainly the events of 2007 – now provide ample supporting evidence for your theory, without the need to make perhaps over-reaching claims which distract attention from you more serious insights.

      Like

    • 9 April 2014 5:42 am

      Prof Keen,

      I’ll make one more guess, a wild guess: you might be frustrated that your work — and the work of others like yourself — has been and is being ignored by Australia’s policy-makers while Australia’s real estate bubble grows.

      Welcome, brother. It’s a feeling I well understand. We’ll make some room for you on the pew. You can tell us your stories about the land down under. Our tales of madness in America will, I expect, top yours.

      Like

    • 9 April 2014 5:51 am

      On that “welcome brother” comment I can only agree. The capacity of the mainstream to hang on to their ignorance is incredible.

      Like

    • 9 April 2014 6:03 am

      Prof Keen,

      This is where Kuhn is helpful. He says that paradigms cannot be disproven, only replaced. That’s a slow process, even when there is a relatively clear replacement available. Kuhn quotes Max Planck’s grim insight:

      “A new scientific truth does not triumph by convincing its opponents and making them see the light, but rather because its opponents eventually die, and a new generation grows up that is familiar with it.”

      This process can be accelerated by external pressure, such as the Great Depression provided to economics. We might come to that point again.

      Like

    • 9 April 2014 5:50 am

      To start where I agree, the serious insights and alternative theory matter more than the prediction–and I’m not claiming to be Nostradamus, but to have an alternative theory of capitalism which (as it happens) did enable me to predict that a crisis was inevitable, and the causal factor behind when it would begin–when the rate of growth of private debt slowed–but not the timing of that event.

      My analysis is the opposite of what you state in your October 2008 excerpt, by the way–where you claim that “the aggregate debt level of an economy is not a significant variable…”. I argue that it’s a crucial one, and its neglect by mainstream theory is why it was unable to anticipate this crisis.

      I did integrate private debt into non-orthodox theory–that was the core of my 1995 paper–and my warnings of a crisis were based on the dynamics of private debt. A concise statement about that argument (using Australian data) before the crisis is below:

      “So how do I jus­tify the stance of a Cas­san­dra? Because things can’t con­tinue as nor­mal, when nor­mal involves an unsus­tain­able trend in debt. At some point, there has to be a break–though tim­ing when that break will occur is next to impos­si­ble, espe­cially so when it depends in part on indi­vid­ual deci­sions to borrow.

      How­ever, it is pos­si­ble to quan­tify the min­i­mum impact that the end of the unsus­tain­able might have on the econ­omy: what would hap­pen to aggre­gate spend­ing if pri­vate debt grew no faster than GDP?

      Aggre­gate spending–on both com­modi­ties and assets–is the sum of incomes plus the increase in debt. Using GDP as the mea­sure of income, this was $1,001 bil­lion in the last cal­en­dar year. Over the same period, pri­vate debt increased by $202 bil­lion. Aggre­gate spend­ing was thus approx­i­mately $1,200 bil­lion. Pri­vate debt grew by 14.9 per cent in the last year, ver­sus a 7.4 per cent growth in nom­i­nal GDP.

      If both pri­vate debt and nom­i­nal GDP were to grow at the same rate as GDP last year, then GDP next year would be $1,075 bil­lion, while debt would rise by $115 bil­lion. Aggre­gate spend­ing would thus be $1,190 billion–or $10 bil­lion less than spend­ing this cal­en­dar year.”

      (Booming on Borrowed Money, 30 April 2007)

      The reason this stuff matters however is that mainstream theory is using the charge that “no-one saw this coming” to support their leaning that “no-one could have seen this coming”–ie that crises like this are unpredictable. That in turn supports the continued dominance of the mainstream. That would do society a great disservice.

      Like

    • 9 April 2014 5:59 am

      Prof Keen,

      To the extent that I understand these things, I concur with your analysis. One detail:

      My analysis is the opposite of what you state in your October 2008 excerpt, by the way–where you claim that “the aggregate debt level of an economy is not a significant variable…”. I argue that it’s a crucial one, and its neglect by mainstream theory is why it was unable to anticipate this crisis.

      I took the quote from my post out of context. I fully agree with you on this point. I was describing the role of debt in mainstream macroeconomic theory. My view is that the inadequate treatment of debt levels is a weakness — perhaps the weakness — in the reigning paradigm. Current events have exposed or highlighted this, and put economics into a Kuhn-type paradigm crisis.

      Like

    • 9 April 2014 6:05 am

      Yes that did seem odd to me–thanks for clarifying.

      Like

    • Winston permalink
      9 April 2014 5:19 pm

      The French think tank goes much further than housing bubble. They re looking at it from a very broad perspective. If you see what they are saying now, is something you won’t find anywhere else yet.

      Like

  8. 9 April 2014 6:22 am

    No one can predict the human policy decisions that powerful actors on the macroeconomic stage will make. Subject to those limitations I think Steve Keen has done remarkably well. The First Home buyers loan subsidy program is what averted a housing collapse in OZ. Asset purchases in the multi trillions of dollars by central banks world wide have altered the course of the current crisis. But Keen was noting the folly of Bernanke’s great moderation victory lap speech in 92. He noted the disturbing pattern of Ponzi lending as defined by Minsky which he saw playing out in the run up to the GFC.

    Today, Keen points out the continuing absurdity of Loanable Funds which Krugman still parrots and which underlies much of orthodox economic thinking. The pressing need is for credible macro economic models which can be back tested successfully enough to merit their use in making policy decisions. Lives are in the balance. Pedantic defense of risible notions like loanable funds by PK stands at one end of the spectrum and serves as a standard of pure idiocy. I place Keen at the other end of this spectrum. The real test will come only when competing analytic frameworks can be funded, and back tested against solid historical data. Few in the orthodoxy want to do that. My money is on Keen in that race and in a perfect world we won’t bother guessing at policy reactions to crisis because policy will flow from the powerful analytic tools we rationally develop.

    Like

    • 9 April 2014 7:48 am

      Peter,

      “which Krugman still parrots”

      You must have wonderful self-esteem to write such a thing. Krugman might be right — or wrong — about any specific item of economic theory. It’s science, not revealed religion. But I doubt if you are qualified to dismiss his work or views in such a manner.

      Like

  9. Todd Guthrie permalink
    9 April 2014 8:13 am

    Roubini “Dr Doom”, as always, predicted (surprise) Doom, and he happened to be correct.
    In other words, a broken clock still shows the correct time twice per day.
    If a group of economists make a series of random predictions, some of them will be correct.
    In other words, if you have enough monkeys on typewriters, eventually one of them will write Shakespeare.

    Seriously, it takes more than one correct prediction to demonstrate any knowledge or skill at predicting. Given the overwhelming number of academic, professional, and amateur economic predictions, it would take more than a few correct predictions to form a statistically compelling trend.

    Who predicted a global recession followed by minimal-to-no inflation? Anybody? (…crickets chirping…)

    Like

    • 9 April 2014 1:32 pm

      Todd,

      “Roubini “Dr Doom”, as always, predicted (surprise) Doom, and he happened to be correct. In other words, a broken clock still shows the correct time twice per day.”

      I would be interested to see citations for the false predictions you believe made by Nouriel Roubini, like a stuck clock’s readings 23 hours a day.

      Perhaps you are saying that a long-standing prediction of trouble from some factor, such as excessive debt, without specifying opeationally specific details — time, how it unfolds — does not count as a prediction? If so, I agree.

      “it takes more than one correct prediction to demonstrate any knowledge or skill at predicting.”

      The history of science proves that statement to be wrong. Powerful single proofs are rare, but they make history.

      1. Halley’s prediction of a comet’s return in 1758.
      2. Einstein’s prediction, using general relativity, for the deflection of starlight by the Sun during the total solar eclipse of 29 May 1919.

      Like

    • Todd Guthrie permalink
      9 April 2014 2:49 pm

      to Editor:
      “Perhaps you are saying that a long-standing prediction of trouble from some factor, such as excessive debt, without specifying opeationally specific details — time, how it unfolds — does not count as a prediction?”
      – Yes, that’s exactly what I meant. Thanks for putting it so eloquently. He had been making his predictions of financial system collapse since at least 2004. I would have taken him more seriously if he had been correct with a very specific prediction of when, why, and how a significant economic event would occur.

      “The history of science proves that statement to be wrong. Powerful single proofs are rare, but they make history”
      – I was referring to economics, rather than the ‘hard’ sciences. Not to diminish the work of Halley or Einstein, but financial systems operate on much more dynamic principals than the natural world does. That’s probably a good thing anyway. The more a man can believes he can precisely predict his economic future, the more his excessive leverage of expected success becomes a self-defeating prophecy.

      Like

    • 9 April 2014 2:58 pm

      Todd,

      Predictions are part of science, the bold part. Unfortunately this part of the culture of science integrates in an unfortunate way with our sound-byte hungry news media. So we get a vast stream of poorly-supported predictions of doom from almost every branch of science.

      This is IMO fine if supported by the peer-reviewed literature, but sadly that I s increasingly not so.

      Re: single predictions

      I think you have this backwards. Powerful predictions are trump in all the sciences, economics as well as physics. It is just that they are far more difficult to make in the social sciences. No surprise, since the social sciences are far younger.

      Like

  10. guest permalink
    9 April 2014 9:28 am

    The discussion revolves around the definition of a prediction.

    My personal impression is that SK was basically stating “given the economic model I have elaborated and the role debt plays into it, and given the past evolution of macroeconomic variables, we are very near the breaking point — which should take place in the next couple of years.” FM on the other hand seems to say that “For a statement to be a prediction, it has to be made well before events, accurate enough dates of when these take place have to be specified, and the full description of how things will unroll must be provided — an incomplete description, even if accurate, is not enough”.

    This is just my impression. Perhaps FM should give a clear example of an actual prediction made in the past 60 years in the macroeconomic realm to clear up misunderstandings about what is, according to him, a genuine prediction of an import comparable to the one being discussed here.

    Like

    • 9 April 2014 1:26 pm

      Guest,

      I agree with your summary. Here are two examples that illustrate this.

      (1) If warning about the accumulation of debt was sufficient, then the Great Recession was predicted by thousands of people — over the past 20+ years. Including me, who not only warned about our excessive debt — but also — like Keen — about the risk of deflation (see the posts in the For More Information section).

      But I don’t believe these are sufficiently clear or operationally useful to be called predictions, except in a general sense.

      (2) The ideal kind of prediction that social scientists seek to achieve is those of the physical sciences. Edmond Halley’s prediction of a comet’s return in 1758. Einstein’s prediction, using general relativity, for the deflection of starlight by the Sun during the total solar eclipse of 29 May 1919. These are the gold standard of proof for theories. Unfortunately they are difficult to do in the social sciences.

      So how should we adjudicate such claims by scientists, like Keen? You know the answer. By reading the relevant peer-reviewed literature. Scientists publish their claims; their peers comment in reply. Eventually the claim is accepted or rejected. We can follow the progress through the journals.

      Like

    • guest permalink
      9 April 2014 6:15 pm

      “Unfortunately they are difficult to do in the social sciences.”

      Which leads naturally to the questions
      a) Is the scientific definition of prediction satisfiable at all in the field of economics? If not, we should relax the definition, which sets too ambitious and unreachable a bar.
      b) Are economics a science at all, able to perform prediction? If not, then requiring predictive powers from economics is simply irrelevant.

      Nowadays I tend to go for (b): economics is truly dismal. Since the name of Krugman comes up a lot in the discussion (and whose blog I follow): one of the cornerstone of his analyses is the IS-LM model (which was of course a topic in the political economy courses during my university studies). The model is some 70 years old. We have had the entire statistical apparatus to collect information on GDP, interest rates, unemployment, etc for decades. So we should be in a favorable position to actually determine an empirical IS-LM curve for, say, the USA — and make predictions with it. However, the only thing that Krugman ever shows regarding IS-LM are those abstract graphs showing unrealistically straight curves, entirely devoid of scales, and based on no real-world data. Where is the damn empirically observed IS-LM chart for the USA — or Japan, or Germany, or Australia? Has anybody ever seen a published one?

      Steve Keen at least substantiates his argument with actual long-term chronological series — but I have yet to see any of his Minsky-tool-simulations of his overall model based on real-world data.

      The only field of economics which I find convincing, because it does not pretend to be some kind of mathematical or physical science, is economics history. People like Pomerantz or Bairoch produced great works describing and trying to understand what actually happened in actual economies. We have probably more lessons to learn from that corner than from what passes for economics “science” nowadays.

      Like

    • 10 April 2014 12:09 am

      guest,

      All good points! The problems of verifying theories by proof and prediction vex not just the social sciences but also many fields in the physical sciences. Such as evolution and cosmology.

      From another perspective there is a proof, of sorts, for the basic elements of economic theory: the fantastic growth in the 4 score years since WW2. Rapid evolution of technology, large numbers of new entrants to the system (with differing cultures), large change in trade patterns, etc — yet the economic theory has kept the system stable enough to allow rapid growth without the repeated depressions of the similar period before WW1.

      Like

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