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.
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):
.
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:
- Remembering is the first step to learning. Living in the now is ignorance., 29 October 2013
- The missing but essential key to building a better America, 21 November 2013 — Clear sight about our condition
- Swear allegiance to the truth as a step to reforming America, 24 November 2013
Posts about predictions:
- Checking up on past forecasts about climate change, a guide to the future, 6 January 2013
- How to predict the outcome of this great monetary experiment, and how we got into this box, 15 November 2013
- Posts about Forecasts: possible futures for America and the World
- My predictions – how do they look now?
- Smackdowns – corrections & rebuttals to FM posts
Posts about experts:
- Experts now run the world using their theories. What if they fail, and we lose confidence in them?, 21 June 2013
- Do we face a future without confidence in experts?, 25 September 2013
.
.
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.
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
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
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%).
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,
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.
Peter B,
Thank you for this cite! Valuable and pertinent information.
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.
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.
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.”
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
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.
You’re welcome Fabius. It is probably worth a post now, since now that the crisis is passing (see
) 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.
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.
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.
(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
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
(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
This is quite wrong, predicting a depression right near the trough of the downturn.
Sorry to break it to you Keen but you did not even come close to predicting the financial crisis. To say you did based on some article written in 1995 makes me question your mental stability. No economists can even claim to have predicted the crisis. That’s just funny when they do. You guys were all asleep. Baker’s claims are ridiculous as well. Roubini didn’t come close. None of those guys came close.
I’ve never seen an economist make money from his “predictions” which is why they take academic jobs instead of running money. And those who do run money are almost always failures like Hussman.
John,
You are right, but it is important to understand where economics is in its evolutionary cycle – and what it can and cannot do.
Economics is a young science. Making reliable predictions is a sign of mature science. Economic theory isn’t there yet. Also, the dynamics of modern economies have been changing for centuries due to social and technological changes – so seeing the underlying rules (like gravity shaping planetary orbits) is difficult.
Also, we are unwilling to pay for reliable economic data (when Congress wants to cut spending, they love to do so in the government’s stat offices – our eyes on the world). So we know pretty well where the economy was 3 months ago. So predictions 3 months out are really six months out – which is a long-time in our fast-changing world.
While predictions are beyond the state of the art, economics is a useful way to see and understand what is happening today – and estimate the likely effect of policy actions. So it is a valuable tool for decision-makers.
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
Winston,
Thanks! This crowd-sourcing thing is working out well.
Winston,
Is American Democracy Headed to Extinction? My forecast was nowhere like the first, but might prove to have been times well: Forecast: Death of the American Constitution, 4 July 2006
Winston,
These are similar to Keen’s predictions, and to my predictions, and to those of a thousand others who warned about too much debt during the past two decades. As I said to Keen, that’s not enough to count as a useful prediction IMO.
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.
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.
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:
“Deeper in Debt“, Center for Policy Development, 13 December 2007
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?
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:
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:
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:
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:
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.
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.
On that “welcome brother” comment I can only agree. The capacity of the mainstream to hang on to their ignorance is incredible.
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:
This process can be accelerated by external pressure, such as the Great Depression provided to economics. We might come to that point again.
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.
Prof Keen,
To the extent that I understand these things, I concur with your analysis. One detail:
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.
Yes that did seem odd to me–thanks for clarifying.
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.
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.
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.
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…)
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.
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.
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.
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.
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.
“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.
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.
What does it mean to have predicted the GFC? How is this a refutable prediction? Did Keen say there will be of crisis of magnitude x% by the end of 2008?
Jim,
I’m willing to be generous about predictions. Such as scoring as a hit someone predicting before 2008 that there would be a massive US or even global recession in 2008 or 2009. Or going to the heart of the GFC, predicting a global crash of much of the world’s financial machinery causing a downturn.
What does not qualify is saying that there would be problems at some point in the vague future from a crash in US real estate. Sector driven recessions are common. The GFC was not a common event, it was a proto-depression – avoided only by massive government intervention in many of the world’s major nations.
Those that claim to have predicted the GFC don’t seem to make it easy to find their great prediction.
Keen has been predicting an Australian recession for two decades with no success with his minsky model.
Minsky model predicts that a crash is inevitable rather than a surprise. A bold, risky prediction in the tradition of Popper. Debt buildups must lead to a crash.
Jim,
“Minsky model predicts”
Minsky wrote little about his “financial instability hypothesis”, and built nothing like a model in the modern sense of the term. While an interesting theory, it is too vague to produce a predictions (i.e., an event and a date). Which is why it was ignored. It is a clearer way to describe what was obvious in 2007 – the excessive debt in the US real estate sector.
Applied to 2007, it was neither “bold” or “risky.” Many people, including me, were predicting a recession would happen when the RE bubble popped. Minsky’s theory did not predict the events, esp the collapse of banks, that made a sector collapse into the Global Financial Crisis.
“Debt buildups must lead to a crash.”
That is quite false. First, if debt accumulates slower than GDP, a debt problem becomes less likely. Second, it ignores a key insight of Minsky and other economists – the different nature of government and private debt. High government debt levels can be reduced by other mechanisms than a crash (e.g., inflation).
Third, the ability of an economy to carry debt varies by many factors, including demographics and the nature of its financial and legal systems. Such changes can greatly increase debt “capacity.”
Larry, I read the comment stream below between Thomas and yourself. It’s pretty shocking how you went out of your way to try and discredit Stathis’ predictions by making completely false statements. Do yourself a favor. Unless you want the world to know you are a fool, read the book. If you have not read the book you cannot make any claims. Read the book. You assume the back flap of a condensed version of the book stated his predictions but that’s a foolish assumption given the hundreds of predictions that came true.
Stathis DID predict the collapse of the GSEs. He wrote extensively about the topic. He also discussed the alphabet soup of real estate derivatives and he implied that credit rating agencies were rubber stamping toxic MBS securities with investment grade ratings. I am a tenured financial professional (partner at a large fund) so I know what I’m talking about.
You did not even check the links that Thomas posted (which only reveal a small portion of his brilliant analysis). Instead you check the back flap of the book? That sounds like you were looking for a silly reason to claim the book didn’t predict the crisis. That’s pathetic and irresponsible. Perhaps that’s why you closed Thomas down and blocked him from further responses?
Stathis was the only person to have truly predicted the financial crisis. And he has backed that claim with $50,000. Would you care to take Stathis up on his offer? You can easily contact him. I’m sure he would be ready to go.
He predicted so many additional things that have since transpired including the trade issues. Read the book – 2006 original version of America’s Financial Apocalypse before you open your mouth. It’s that simple. Otherwise just admit that you have not read it and so you do not know. One would assume that anyone who claims to be a serious investor would line up to read a book that claims to have predicted the crisis, especially after insiders like me have confirmed that it did. You can check his site for material from his books since you’re too lazy to read it. avaresearch(dot)com
Pingback: About the coming recession - Fabius Maximus website
Pingback: A look at the US economy, and the next recession - Fabius Maximus website
The only person who predicted the financial crisis was Mike Stathis of AVA Investment Analytics. He and his books which predicted the crisis were banned and he remains banned. His censorship is a fascinating story and points to the media wanting those who expose everything to not be heard. Ever since he was banned he has been exposing the media and the Jewish mafia which banned him and wants him not to be heard. He never mentioned anything about Jews prior to being banned.
{antisemetic slurs deleted}
Here are a couple of chapters from his 2007 book.
https://archive.org/details/CashingInChapter12Scribd
https://archive.org/details/CashingInChapter7
His main book 2006 America’s Financial Apocalypse (extended version) detailed so many things that people have only recently recognized as issues including US trade policy, wealth disparity, and many other things. He was far ahead of the curve.
Very briefly, in these books he predicted:
1) The bankruptcies of numerous sub-prime mortgage companies.
2) The collapse and government bailout of Fannie Mae and Freddie Mac.
3) 35% decline (peak to trough) in US media real estate pricing.
4) The DJIA to collapse to 6500.
He recommended:
1) To short the sub-prime mortgage stocks, banks and home builders along with General Electric and General Motors due to their huge financial liabilities.
2) To short Fannie and Freddie.
3) Go to cash and wait for the market to collapse then buy.
4) To buy the US stock market for the first time after the book was released on March 2009 (it turned out to be the bottom). This was not in his 2006 or 2007 book (obviously) but in an article he published in 2009.
Also you should note that as of 2019 he has been bullish on the US stock market ever since first recommending investors to buy in March 2009. He has published research confirming these claims.
Thomas,
I edited out your anti-semetic slurs.
I skimmed the book (the 2007 version). You exaggerate its claims. For example, he does not predict the collapse of the GSEs. But he was qutie correct about the RE and mtg markets. But by 2007 many people were predicting a RE and mtg bust.
But the distinguishing feature of the 2008 crash was the collapse of US banks, leading to a global lending crisis. That’s what turned a mild recession into a potential depression – averted (unlike in 1929-30) by fast strong action by Central Banks. I have found nobody that predicted that.
You have rushed to judge without having sufficiently researched his research. I only posted two chapters of his minor book (Cashing in on the Real Estate Bubble) because those were the only ones available for free in the public domain. The main book that details everything is America’s Financial Apocalypse (extended 2006 version). Read both books in their entirety and see for yourself before to rush to judge, Or you can trust my judgment as a tenured Wall Street fund manager who read his 2006 Apocalypse book before the crisis.
Stathis does predict the collapse of the GSEs. This is a fact. His chapter on the real estate bubble in America’s Financial Apocalypse is nearly 50 pages long, packed with data, charts and detail unlike anything I’ve ever seen in a non-academic book.
Also, he recommended investors to short Fannie and Freddie because he knew the GSEs would collapse. But without having read the full book, you should at least be able to conclude that anyone who recommended shorting Fannie and Freddie believes the they are headed to 0. To claim that Stathis did not predict the collapse of the GSEs implies that you are unaware that the GSEs are Fannie Mae and Freddie Mac! I challenge you to find a book that even recommends shorting any stocks. Think about that one.
He even pointed to a government bailout for Fannie and Freddie (GSEs). No one else in the world even thought that was a remote possibility. Stathis was the only person in the world to even mention the GSEs before 2008 because they held prime mortgages. No one thought the primes would go down in addition to the sub-primes except Stathis, until maybe the summer of 2008. Check the book.
Considering that I have worked at major Wall Street firm for more than three decades, and considering that I am fully aware of Stathis’ predictions and research, before and after the financial crisis, I do not believe you are in any position to doubt my claims.
As for my alleged “anti-semetic” slurs, that’s, the truth is never anti-semetic. Don’t blame the victim.Blame the villain. Perhaps you should consider investigating claims fully and with an open mind rather than clinging to your bias.
Thomas,
“I only posted two chapters of his minor book”
I didn’t use your links. I used the 2008 book. Hence my comment is quite accurate, with respect to the book.
You should reread my comment. I stated that the major book that predicted the details was the 2006 America’s Financial Apocalypse. I’m not sure what “2008 book” you are speaking of.
“The main book that details everything is America’s Financial Apocalypse (extended 2006 version).”
And in your first comment you state “by 2007 many people were predicting a RE and mtg bust.” Anyone can say anything. How do you know those people had not read Stathis’ book? Writing a book with extensive details supporting your premise is much different than someone saying something.
And it might be better if you were to address all of the points I have made in this and previous posts. For instance, please show me a book that presented extensive detail predicting a crisis, as well as specific detailed recommendations to short Fannie & Freddie in addition to several sub-primes as well as the banks and home builders. But again, these are just a few of the many predictions Stathis made that came true.
I looked at the 2008 paperback of his 2007 (copyright date) book. I doubt that he omitted successful predictions in his 2007 or 2008 editions that were in his 2006 book.
More common is doing the opposite.
The 2006 America’s Financial Apocalypse was quite different than his 2007 book Cashing in on the Real Estate Bubble. I have both books. And I read both books. The details are in the 2006 book. No one came close to the work in predicting the financial crisis as Mike Stathis. And that’s not only a fact; it’s also something he has guaranteed a sum of $1 million to anyone who can prove otherwise. Perhaps you’d like to take him up on that challange?
And I’m confused as to what 2008 book you are referring to. Cashing in on the Real Estate Bubble was written in 2006 (judging by the dates of the stock charts) and released in 2007 with a copyright date of 2007.
Also, I’m wondering how you were able to get a copy of this book in less than 20 hours and read it. Please share your secret.
Thomas,
The book I’m referring to is America’s Financial Apocalypse: How to Profit from the Next Great Depression. Here is the Amazon link.
I cannot imagine why you assume I’m looking at the wrong book. But you’ve burned thru enough time. No more comments on this.
Pingback: What comes after COVID-19 might be worse – Investment Watch | Covid-19 Business Relief Resources
Pingback: What comes after COVID-19 might be worse – Investment Watch - Female Investors Daily
William,
My replies were quite specific. Your claim that I didn’t read the book is incorrect.
I too worked at global financial institutions for three decades, in many roles. So I’ve read predictions of all kinds. Hence the specificity of my reply.
You only mention one specific: the GSEs. He said: “A breakdown in just one of the GSEs is very possible.”
You said “No one else in the world even thought that was a remote possibility.” False. It was a widely recognized possibility. As seen in the belief that the Federal government would bail them out. That was the basis for the market’s confidence in their guarantees, which proved to be correct.
The book says “A breakdown in just one of the GSEs is very possible.” That’s a statement of a risk. An unusually accurate one. A prediction is a statement that something will happen during a specified time period. That’s especially important in investing, when “too early” and “too late” both usually mean “wrong.
His predictions of either serious inflation or deflation were interesting (cover all bets), but was interestingly proven wrong.
The most interesting aspect of his book is that the crash was far larger than he predicted – more sectors and global – yet it was not an “apocalypse.” Like the internet crash he describes as a model foreshadowing the real estate crash, it will be a footnote in the history books. IMO that is the most important bottom line.
A trivial note – with his predictions, did he become fantastically wealthy? I hope so. That would be inspirational.
Larry, I think you should read the book before you comment. The 2006 expanded edition. The full book. Not the condensed 2008 baby version. Here, you can read this chapter from the 2006 expanded version.
https://archive.org/details/chp-10-real-estate-bubble-americas-financial-apocalypse/page/n21/mode/2up
Even though there were other chapters that tied into the real estate and banking crisis, I’ll let I’ll let the real estate bubble chapter from the 2006 book stand on it’s own.
And here’s a video with excerpts from different topics as well as specific predictions.
Let’s do this. Let’s write all of his predictions down that were accurate and then write down those that weren’t. The ones that weren’t you can count on one hand. Those that were are into the hundreds.
I’d love to hear a book you think was as good or better (accuracy and depth of predictions) as Stathis’ 2006 Apocalypse.