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):
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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:
- 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
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