Summary: There are many who claim to have predicted the 2008 crash. Most (or all) in fact did not foresee the banking collapse that was at its center, that expanded a commonplace downturn into the worst global downturn since the 1930s. That tells us something important about our times, and what we an expect in the future.
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“Unless you expect the unexpected you will never find truth, for it is difficult to discover.”
— Heraclitus, the pre-Socratic “Weeping Philosopher” of Ionia
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An important message of the FM website is that the post-WW2 era has ended, starting an era of unpredictable events. It’s a message nobody wants to hear, ripping asunder our comfortable belief in the reliability and normality of our institutions. We see these things in the history of the 2008 crash, the worst since the Great Depression. Legions claim to have seen it coming; in fact few (perhaps nobody) predicted its nature.
I doubt the many (or anyone) will do better in the next crisis. This uncertainty is a fundamental aspect of our situation. We’re “off the map”, sailing through unknown conditions (that part of the puzzle I got right, writing about it as early as Sept 2008).
As an example of how this worked — and what we can expect in the future — a previous post looked at Steve Keen’s predictions of trouble for our financial system. He saw the flaws in our financial system, the potentially ruinous fault lines — but not the distinguishing feature that in 2008 turned the commonplace bursting of an investment bubble into a global 1929-like crash: the collapse of banks in the USA and Europe.
Other economists, such as Nouriel Roubini, also saw the danger in broad terms, but not the fragility of the banks that brought so many nations to the brink of Depression. Many non-economists also saw it (though in less detail), such as myself (e.g., the housing bubble and unsustainable levels of debt). I doubt that the senior managers of the banks themselves saw the danger (although their blindness proved quite profitable for themselves, getting paid both to cause and clean-up the bubble).
Another prediction of the crash
Another description of a successful prediction appeared in Gideon Rachman’s review of Jonathan Kirshner’s new book, American Power after the Financial Crisis (Financial Times, February 9): “The fire of the crisis was extinguished at great cost, but ‘the firetrap remained.”
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Kirshner, a professor {of Government} at Cornell University, wrote in 2004: “America is at greater risk of a major financial crisis than at any time since the second world war,” referring to the “recently deregulated US financial economy and high-flying international capital markets”. He foresaw that, as a “few firms were pulled down by the undertow, a full-blown panic would emerge. In the United States, the paper losses would be enormous.” … Kirshner is appropriately (and unusually) modest about the ability of social scientists to foresee the future.
As evidence he cites “Globalization, Power, and Prospect“, chapter 11 in Globalization and National Security (2006).
For example, although globalized finance has enhanced the relative power of the United States, America is actually at greater risk for a major financial crisis than at any other time since the Second World War. 18
That says little. What kind of financial crisis did he expect? We’re directed us to footnote #18:
With the United States running massive fiscal and trade deficits year after year, expectations about the value of the dollar — expressed in the inflation rate and the exchange rate — may emerge. In this case, the enormous dollar reserves held abroad — over one trillion dollars — might look less like a sign of American strength than oceans of fuel to be dumped on the fire should a medium-sized financial disturbance emerge in the United States and work its way through the system via the recently deregulated US financial economy and high-flying international capital markets.
Kirshner predicted a crisis sparked by a decline of the US dollar. That was my concern as well (see the posts below). That’s not what happened.
The crash began with defaults in subprime mortgages and collapse of mortgage brokers. It grew from there to defaults in prime mortgages, credit card debt, and eventually many of the largest US and European banks and investment banks. Things went downhill from there. During this the broad trade-weighted dollar index moved sideways in the decade before the crash — and rose on a flight-to-safety during it (from 95 in July 2008 to March 2009).
Conclusion
If you know of anyone who accurately predicted the crash, please post the evidence in the comments!
About Jonathan Kirshner’s works
Prof Kirshner’s work explores the interrelationships between economics, politics, and national security. His new book, American Power after the Financial Crisis, is well worth reading. Also timely and useful is this summary: “The Global Financial Crisis: A Turning Point“, Forbes, 8 November 2014.
See his bio here, and this list of links to many of his works.
For More Information
All posts about the great crash of 2008, and the events leading up to and following it.
Causes of the crash:
- The post-WWII geopolitical regime is dying, 21 November 2007 — Why the current geopolitical order is unstable, describing the policy choices that brought us here.
- Diagnosing the eagle, chapter I — the housing bust, 6 December 2007
- Death of the post-WWII geopolitical regime – death by debt, 8 January 2008 – Origins of the 1982 – 2006 economic expansion; why the down cycle will be so severe.
Seeing the crash:
- The US economy at Defcon 2, 11 March 2008 — Where are we in the downcycle? What might the world look like when it ends?
- Can the European Monetary Union survive the next recession?, 11 July 2008
- High priority report: a geopolitical sitrep on the financial crisis, 15 September 2008 — We’re in the “golden hour”
Worries about the US dollar:
- A brief note on the US Dollar. Is this like August 1914?, 8 November 2007 — How the current situation is as unstable financially as was Europe geopolitically in early 1914.
- Geopolitical implications of the current economic downturn, 24 January 2008 – How will this recession end? With re-balancing of the global economy — and a decline of the US dollar so that the US goods and services are again competitive. No more trade deficit, and we can pay our debts.
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http://www.nytimes.com/2009/03/04/business/economy/04webecon.html?adxnnl=1&pagewanted=all&adxnnlx=1415774002-M3OYBYGaEjZ9331Mfm6+9g
Hard to time these things due to hidden information. Even Bernanke was surprised by the crazy risks being taken by AIG. This is the thing only very few new prior to the crash, but created so much doubt in the solvency of banks. In a moment their AAA rated assets, uh, became not that. 2008 should have cleared the way for more transparency about these things, but it didn’t. Anyone who calls a date is guessing, or in on very secret data.
Cathryn,
All correct. You are setting the bar higher than I! Did anyone predict the crash — the event — not asking for predicting when (timing of the event).
The collapse of AIG was significant, but was just another rock rolling downhill in the avalanche. It was preceded by the crash of the big mortgage brokers, Bear Stearns, Lehman Brothers, and IndyMac (4th largest bank failure to that date).
By September 16, when the run on AIG began, the crises has gone global. Quickly leading to Iceland going bankrupt (http://www.nytimes.com/2008/10/10/business/worldbusiness/10icebank.html), the Swiss government had to bailout its big investment banks, etc.
As you note, one interesting aspect is that the senior managers of the institutions involved were ignorant of the risk. There was money to be made, and they carefully constructed systems that blocked any critics who got in the way. Correctly so, since few of these executives paid any price for this behavior. No prosecutions. Few were fired. Most we paid bonuses to create the crash and again to clean-up afterwards. Genius!
It is an old story. The Pentagon Papers show how DoD did the same during the Vietnam War.
Cathryn,
For a clearer description of the crash timeline, on the critical days in September: http://www.nakedcapitalism.com/2014/11/aig-bailout-trial-revelation-morgan-stanley-told-geithner-file-bankruptcy-weekend-became-bank.html
Even in the trial about AIG, AIG is shown as a pawn in the game.
Not a prediction but a letter that could have been written ten years ago:
1st May 2013 Open Letter TO the FASB —
Russell G. Golden, Chairman
Financial Accounting Standards Board 401 Merritt 7
Norwalk, Connecticut 06856-5116 USA
Tech. Director director [at] fasb.org
AND TO IFAC — the Members, International Accounting Bodies
Dear Sirs, dear Madams:
ACCOUNTING STANDARDS — REQUEST FOR RECONSIDERATION: Accounting Perversion in Bank Financial Statements — Demand Deposits Do NOT comply with IFRS (GAAP)
I am of the opinion that underlying the ongoing Global Financial Crisis is continuing accounting malpractice based on faulty accounting standards, or their false interpretation. The effects are devastating. I request you to reconsider and, if you agree, to act.
As public accountants we cannot continue to watch banks fail only a month after we have certified their financial statements as going concerns when they are clearly not. We cannot continue to hide behind the assertion that in the conduct of our audits we have complied with IFRS (GAAP) attesting, for example:
Michael Schemmann, PO Box 9, Pakthongchai 30150, Thailand
Letter to FASB, IASB, IFAC
Re Accounting Perversion in Bank Financial Statements 1 May 2013
“In our opinion, the financial statements… present fairly, in all material respects, the financial position of the Company as of … , and the results of its operations and its cash flows… in accordance with generally accepted accounting principals in (the country where the report is issued).”
when the standards are misconceived and patently false, and we know that they are.
Demand deposits referred to by the public as “cash in bank” is recorded and reported by monetary financial institutions (MFI) in units of account by double-entry bookkeeping in a process which the MFIs call “lending ” — but which is effectively a nullity — by debiting loans receivable and crediting demand deposits.
These so created units of account are then denominated at will in dollars, pound sterling, euros, etc., depending on the terms of the documentation or underlying promissory note, or whatever is the legal document giving rise to this type of “lending,” using whatever is the name of the currency in the jurisdiction in which it takes place, but legal tender the “demand deposits” are not.
Banks do not have pre-existing funds in the form of legal tender to lend, except in miniscule amounts relative to the size of their loan portfolios.1 In other words, banks create demand deposits out of nothing, and it therefore remains a nothing. The malpractice continues because public accountants as auditors sanctify the aforementioned practice by “certifying” the banks’ financial statements, provoking credit expansion, moral hazard, asset bubbles, liquidity-stressed financial markets, bank runs, and eventually global financial crises.
By our inaction, we, the public accountants and their standard setters, are the enablers of the MFIs and responsible, in part at least, and not a small one, of the Global Financial Crisis that started in August 2007 when BNP Paribas refused to redeem certain sub-prime mortgage funds for inability to determine their value. The GFC is ongoing, continued in the form of a sovereign debt crisis, haircuts of bank deposits to “recapitalize” failed banks, and so on. The horror stories resulting from our oversight and malpractice are enormous. Yet, we remain quiet, we hide behind our complicated standards, are therefore not yet in issue, so it may appear.
The creation of units of account by MFIs that are masquerading as demand deposits defined by the FASB’s ASC 305-10-20 as “cash in bank” do not comply with GAAP or IFRS. These socalled “loans receivable” that give rise to these socalled “demand deposits”
are not assets within the meaning of economic resources,
do not have the capacity to eventually result in cash inflows (cash being legal
tender or central bank money, so called federal funds),
are created bank-internally and therefore in violation of self-dealing,
have no cost basis,
2 Central Bankers Ben Bernanke, Mervyn King, Jean-Claude Trichet, as he then was,… came and helped out with cash, real cash like legal tender, central bank money. Lehman Brothers bankruptcy, Monday 15 September 2008 … the line in the sand… drawn by US Sec. Treas. Hank Paulson, his grudge against his former rival Dick Fuld, but NEVER again. See “Quantitative Easing,” “Outright Monetary Transactions”…
3 Yes, “common usage,” but if THAT constitutes and justifies Generally Accepted Accounting Principles, so might all kinds of things people do, and the end must also be generally accepted, including the GFC. For professional accountants, “common usage” is another nullity.
which have never prevented any of the ongoing bank failures and crises, become superfluous.
No end to the GFC until we act
Until the accounting standard setters act by correcting their own misconceptions and malpractices, there is no end to the ongoing Global Financial Crisis, and the central banks are forced to continue to plug the holes to save the world’s payment system from collapsing.
The Americans call this exercise “Quantitative Easing,” the Europeans “Outright Monetary Actions,” which is all the same, namely band-aids to keep banks funded with real money because we, the public accountants, are aiding and abetting the bankers’ common practice of creating non-transferable units of account NOT money, violating our own conceptual framework as the basis for our standards. 4
With best professional regards,
Michael Schemmann, PhD, CPA, CMA Director
“… It could have been written ten years ago”
My hindsight is 20-20, too.
It wasn’t written 10 years ago.
Here is the link above:
http://www.iicpa.com/articles/Open%20letter%20accounting%20perversion.pdf
This is what Minsky and later Keen said well before the GFC. That banks create demand deposits out of nothing increasing the money supply thereby. These demand deposits spend just like real money issued by the central bank right up until whoops they don’t. For details watch the Southpark “And it’s gone”, episode.
Peter,
I have no idea what you are attempting to say. Demand deposits were “invented” in the 19th century.
Neither Minsky or Keen said anything remotely like a prediction of the 2008 crisis (the post cited in this examines Keen’s relevant work in some detail). I think the word “prediction” doesn’t mean what you think it means.
The Revision to the definition of Mark to Market was a horn blast that the entire Financial system was in grave danger and they knew it.
FASB was then a chimera.
Egagbreton,
Yes, that was a big bold policy change– in response to the visible crisis.
The point here is that, so far as I have found, all the claims to have predicted the economic crash are exaggerated — or outright bogus. That is significant.
Then there’s this guy:
Richard Vague is a managing partner of Gabriel Investments and author of The Next Economic Disaster: Why It’s Coming and How to Avoid It. Vague co-founded Energy Plus (sold to NRG Energy in 2011), First USA (the largest Visa issuer in the industry and which was sold to Bank One in 1997), and Juniper Financial (sold to Barclays PLC in 2004). Vague serves on the Board of many philanthropic organizations and is also Chairman of The Governor’s Woods Foundation. He blogs at Delanceyplace.com and Debt-economics.org.
2. Which narrative presented by Douglas Elliott and Martin Baily of the Brookings Institute in Telling the Narrative of the Financial Crisis: Not Just a Housing Bubble best represents the causes of the Financial Crisis?
“Everyone” was at fault: Wall Street, the government, and our wider society
The government certainly was not the culprit. Lenders and borrowers both were—but theirs was not a moral failing. Runaway lending has recurred so often in the US and other countries (Japan 1991, Asia 1997, US in 1929,1873 and 1893, etc, etc.) as to seem a byproduct of the system.
3. The Global Financial Crisis effectively ended in the year
2010.
4. What were the primary causes of the Global Financial Crisis?
Our research shows that a rapid increase in private debt (business plus consumer debt, including mortgages), coupled with high overall levels of private debt, is *the* reason for financial crises in major economies. Specifically, if the private debt to GDP ratio in an economy grows by roughly 17% or more in a five year period (which I call “runaway lending”), and the overall level of private debt to GDP is 150%, then you are almost certain to have a financial crisis. And if not a crisis, a dramatic deceleration in GDP growth. None of the other factors that are often cited as causes of financial crises come much into play in a causal or predictive way—not government debt, not current account trends, nor currency issues, etc.
Like Keen he says the problem of private sector debt overhang remains unresolved and so another crisis looms.
Peter,
While all very interesting, this is all irrelevant to the subject here: nobody predicted the basic nature of the 2008 global economic crash.
Yes, there are folks predicting dooms. There always are. Almost always wrongly.
Especially wrong are those predicting another crash like the previous one. These get attention from a credulous public due to the Recency fallacy, but almost always prove false because …
(A) Public and private agents have acted in response to the recent past. These doomsters tend to have a bad case of “I’m a genius and the experts are all fools”.
(B) The crash itself changed conditions. In this case, much of the lowest quality household debt (mortgages & credit card) was washed out. The remaining debt is still too high by many (not all) metrics, but structurally stronger.
You asked would anyone predict the next crash? Both Keen and Vague present data that private sector debt, particularly an acceleration in private sector debt largely presage financial crises. Keen explains this data by noting that aggregate demand equals aggregate income plus the change in private sector debt. He then notes that unemployment scales on the change in aggregate demand thus upon the change in income plus the change in the change in debt. A change in the change is an acceleration. Both Keen and Vague present convincing data that private sector debt first accelerates before a crash then decelerates during the crash. Vague, a billionaire, spent big bucks assembling this data and it is very compelling. I believe they are on to something both empirically and theoretically. Time will soon tell.
Peter,
“Both Keen and Vague present data that private sector debt, particularly an acceleration in private s”
You completely miss the point. There were — there always are — scores, hundreds, or thousands of such forecasts of disaster. Pointing as you do to two as definitive and accurate is quite daft since the record clearly shows that most such forecasts prove false.
Nor is there any rational basis to believe that you have some super special ability to determine which forecasts are correct.
Opinions are indeed a dime a dozen but data is dear and data for total private sector debt and its correlation to GDP growth, unemployment, and other macro variables has not been collected until very recently. We can all form our own opinions but we can’t form our own facts. Facts as they say are stubborn things.
I tried to copy and paste a graph of debt acceleration vs unemployment but failed. The R squared is .88.
Here is the link:
http://www.businessspectator.com.au/article/2014/11/10/china/sizing-threat-chinas-debt-pile
Scroll down. Quite stunning.
Here is a review of Vague’s book:
If all you knew about Richard Vague was that, before he became a Philadelphia investor, philanthropist, and sponsor of Washington think-tank projects, the affable marketing mogul ran a couple of the nation’s biggest credit-card banks, you might expect his book about lending to be a bankers’ apologia.
But The Next Economic Disaster – just 56 pages in its second draft, it will be fatter, with appendices, when published next month by the University of Pennsylvania Press – presents a fresh, forceful thesis:
The threat to economies isn’t too much borrowing by out-of-control governments. It’s the piling-on of private debt by out-of-control banks and borrowers that will most surely lead to economic stagnation.
Like French economist Thomas Piketty’s fat case for a wealth tax, Capital in the Twenty-First Century, Vague’s slender book piles up data-tracking economic numbers across national economies over time.
But Vague is comparing economic growth not to investment or income distribution, but to debt levels, which economists tend to treat as a symptom, not a cause, of changes in production and consumption.
Vague observes that crushing private debt rises in advance of economic stagnation (unlike government debt, which is stimulative). And that debt tends to rise over time because it is typically refinanced by borrowers who hope to spend more and improve their condition.
And that the current U.S. and European malaise, like Japan since the 1990s, is caused not by a cycle of investment, overproduction, and liquidation, but by a long-term accumulation of private debt. That debt is now at levels we haven’t seen since before the Depression and World War II all but wiped out private indebtedness.
There are a few hard roads out of overpowering debt:
War and depression, which wipe out people, property, and their obligations.
Inflation, which wrecks savings and investment and is tough to control.
Voluntary belt-tightening and paydown, which Pennsylvania bankers complained was taking place among farmers collecting royalties in the early Marcellus Shale gas boom, but that is rare across societies, since it tends to mean lower living standards.
Orderly debt-forgiveness programs, like the biblical concept of Jubilee years.
Vague notes that bankruptcy courts allow businesses to cut their debt loads, or convert it to creditor ownership. Many bank critics urged President Obama’s administration to make it easier for consumers to write down debt or transfer the underwater portion to lenders as equity. But it’s tough
to organize bailouts
for anyone who isn’t a big, well-organized industry.
Most important to Vague is enforcing simple rules that would require lenders and loan financiers to set aside a lot of reserve capital in times of rapid loan growth – not just as a hedge against disaster, but to force them to slow down.
Read more at http://www.philly.com/philly/business/homepage/20140609_PhillyDeals__Book_s_fresh_theory_on_the_rising_threat_to_economies.html#hczG7GFcHKocYt4l.99
Here is the link above;
http://investorhome.com/gfc/rv.htm
FM remarks: “An important message of the FM website is that the post-WW2 era has ended, starting an era of unpredictable events. It’s a message nobody wants to hear, ripping asunder our comfortable belief in the reliability and normality of our institutions.”
It’s a message that nobody in America still wants to hear — as witness the latest blockbuster movie storming American theaters, Fury…a movie about (you guessed it) WW 2. Yes, once again an heroic American WW 2 tank crew makes the world safe for democracy.
It seems clear that America is still living in 1945. We adamantly refuse to move on. To the American people, nothing has changed: it’s still 1945, the great problem in the world is still evil enemies threatening to take over the world (then, Nazis; today Al Qaeda), and the solution is always the same — blow stuff up and kill people in foreign countries.
You have to wonder how much longer this kind of head-in-the-sand denial of reality will remain “business as usual” for the U.S.A….
Peter Blogdanovich once again utters the standard refrain of the online economic cranks, namely a rant against “fiat currency.” These cranks claim that the root of all evil in the American socioeconomic system is the alleged “creation of money out of nothing.” The solution, seldom explicitly stated but always lurking in the background like a fart in an elevator, is to abandon paper currency and fractional reserve banking and central banks, and return to the good old days of gold coinage.
This is an Ayn Rand fantasy. It belongs to the same category as belief in the hollow earth, dianetics, and Bilderberg conspiracies.
Thomas,
Nicely said. It takes astonishing ignorance to advocate traditional gold-backed currencies, with their history of restraining growth and inducing depressions. Esp since the post-WW2 world of fiat currencies has had fastest economic growth since the invention of agriculture.
But that’s our 21st century America!
None of my comments relate to the gold backed commodity money bugs versus the fiat money advocates. For the record I think fiat is fine. One crackpot idea that is relevant is Carl Denninger’s “one dollar of capital” idea that 100% of bank loans should be backed by reserves. It was Schumpeter who noted banks play an important constructive role in creating growth capital exactly as described above from nothing for new enterprise. For this reason we can’t simply get rid of demand deposits being created by banks. The problem is this same ability to effectively create new credit money can and does lead to a potential instability. This is the point of Minsky’s financial instability hypothesis whereby banks lend to asset price speculators who use the money thus created to bid up asset prices thus justifying more loans to speculators and so on. So you have this necessary intrinsic activity of banks to inject capital into new enterprise which takes the form of imposing forced savings on everyone same as Fed printing does but with better allocation of the new capital where it will yield the best return, running in parallel with the alternative destructive lending to asset price speculators. The question is how do we encourage the first while discouraging the second? Keen has thoughts about this.
Amazingly Krugman and other neoclassicals would deny this approach has merit. Despite ample evidence that Schumpeter Minsky and Keen were right about how banks create money by lending, still they claim banks merely intermediate by moving money from savers to borrowers; the so called loanable funds assumption. This is the most crackpot notion of all IMO yet it underlies much of neoclassical thinking.
There are other ideas about how to fix the problem of bad bank behavior. Ellen Brown proposes state owned banks which would do the first kind of good lending while avoiding the second kind of bad price speculation lending. The first step is the realization that banks are both necessary and dangerous. They are a powerful tool of capitalism but as such must be created and controlled wisely.
http://en.wikipedia.org/wiki/Infinite_monkey_theorem
http://www.forbes.com/sites/rickferri/2012/12/20/any-monkey-can-beat-the-market/
If you have enough economists, each making their own random predictions, then by pure chance eventually one of them will predict the next black swan economic event .
A correct prediction by itself, without a consistent and reliable economic model to back it up, doesn’t have much more credibility than a slot jockey at a casino who attributes his sudden jackpot to a lucky quarter.
Given that there were so many, perhaps thousands of predictions of imminent market crashes throughout the mid-2000’s, by amatuers and professionals alike, and that apparently NONE of them saw it going down the way it ended up doing, makes me seriously wonder about the legitimacy of the profession. Could a room full of monkeys on typewriters make better economic policy than our trusted leaders?
Or as Steve Keen put it you need engineers to build bridges but you don’t need economists to have an economy. If bridges failed as often as economies do we would be looking to replace our engineers. Why not our economists?
Peter,
“if bridges failed as often as economies do we would be looking to replace our engineers.”
It’s difficult to imagine a more false statement about history. The gold standard era had frequent “failures” (aka depressions). The post-WW2 era has had none, plus the longest period of sustained global growth in recorded history.
Todd,
“If you have enough economists, each making their own random predictions, then by pure chance eventually one of them will predict the next black swan economic event .”
Please provide an example of an economist making “a random prediction.” In fact they work with models, almost always the few models currently used by the major schools of economic thought. Too see the depth of these models, I suggest reading Keynes’ General Theory (1936), or a recent issue of any of the major economic journals. I doubt you’ll understand much of the content, but these will disabuse you of your view about economics.
True, strictly speaking. We had the stagflation of the seventy’s (a big surprise), the SL disaster of the eighties, the tech bubble of the nineties, and a near collapse recently. And now trouble seems to be looming again and this time worldwide. The economic bridges are creaking under ever larger stresses but have not broken yet. Bernanke took a famous victory lap with his Great Moderation speech right before the GFC. As a guy who builds bridges I’m unimpressed by all but Keen and his progenitors. Minsky’s point was that neoclassicals never explained to his satisfaction how a Great Depression was possible nor did it offer a way to predict their reoccurrence, something we have not seen yet from neoclassicals.
Peter,
“We had the stagflation of the seventy’s (a big surprise), the SL disaster of the eighties, the tech bubble of the nineties, and a near collapse recently.”
That’s silly as a defense of your statement “if bridges fail as often as economies”. Your standard of comparison must be Heaven (not anything on Earth), with your information coming from (to be nice) unreliable sources. Read a bit of history.
Friends,
Go to the Archives here, http://www.hussmanfunds.com/weeklyMarketComment.html
page down to 2007 and start reading the various weekly comments like 1/15/07, 4/2/07 or 12/10/07
to point out a few comments. He points out the market was overbought, overvalued and overbullish.
JB,
John Hussman was a Professor of Economics at U of MI, and now runs the Hussman Funds. I read his weekly comments with interest. His call about the market in 2007 was accurate; is forecasts since the crash much less so. But the subject here is not stock market forecasting, since it’s well-proven that nobody has publicly demonstrated much skill at market timing (someone might have such skill, be quite rich but quiet about it).
The subject here is forecasting economic movements.
I can say that I did call the US stock market crash of 2008. I also predicted the entire breakdown of the European Union in 2010. I wrote my live record book of this historic event. When you read the book it can make me seem very overwhelm and very angry. Now when I reflect back during those times of doom, I can tell you that I was angry and loosing my mind. It always makes me feel more comfortable today to know that just recently Aug 26, 2014 in the The Wall Street Journal Bernanke testified to these words: “September and October of 2008 was the worst financial crisis in global history, including the Great Depression,” Mr. Bernanke is quoted as saying in the document filed with the court. Of the 13 “most important financial institutions in the United States, 12 were at risk of failure within a period of a week or two.” Did he say the worst in global history. X marks the spot. That means if this is so and I was correct, my live record could be a rare insight into what most now call the 2008 global financial crisis. I know now why I felt the need to follow this story of financial intrigue. Here’s a link to my web page and amazon book link: http://wallstreetseduction.com/
This is why we need new ideas:
Reuters
The G-7 leaders don’t get it: We need a new way to think about the economy.
WASHINGTON (MarketWatch) — The world desperately needs a new economic paradigm.
As Europe tips into recession again, U.S. growth fails to translate into jobs and incomes, and emerging markets cope with slow global growth and the need to improve living standards, the old economic models no longer seem to work.
The classic economic verities no longer apply — competition is not perfect, markets are not efficient, and growth is not guaranteed.
In fact, the message emerging from Thomas Piketty’s analysis of the stifling effects of capital accumulation, from Larry Summers’ talk of secular stagnation, and from James Galbraith’s new book, “The End of Normal: The Great Crisis and the Future of Growth,” is that slower growth may be the new norm.
How Will G20 Leaders Spur Growth?(2:57)
And policy makers don’t get it.
Many of them have no more economic background than an undergraduate course they have long since forgotten. And they rely on advice from economists trained in an ossified academia that insists on a strict orthodoxy for appointments and advancement — or worse, from people without any formal economic training.
The result is what we see around us. Europe promoting austerity during a recession with a fervor that is almost sociopathic, the U.S. cutting government spending even as consumers retrench and companies stop investing — governments, in short, applying policies that make a bad situation worse.
This week saw revelations from former U.S. Treasury Secretary Timothy Geithner reflecting the view that many of us have long held — that European Union policy makers are bumbling, short-sighted moralists more intent on punishing countries that broke the rules than on restoring prosperity to the entire bloc.
Short of a full-fledged catastrophe overtaking us, however, neither the political establishment nor the public are ready for this radical a change.
“‘Definitely get out the bats,’” is the colorful way Geithner paraphrased the attitude of EU officials to Greece. “They just wanted to take a bat to them.”
The comments from Geithner — taken from transcripts of background interviews he gave to his assistants for his recent memoir (which were mysteriously leaked to the Financial Times) — go on with some more frank assessments.
“We’re going to teach the Greeks a lesson,” he said, paraphrasing EU officials at a 2010 meeting of G-7 finance ministers. “They are really terrible. They lied to us. They suck and they were profligate and took advantage of the whole basic thing and we’re going to crush them.”
Geithner says he tried to counteract “this blood-curdling moral hazard-y stuff” with cautions about preventing any contagion to other peripheral countries. To little avail.
“I completely underweighted the possibility they would flail around for three years,” Geithner said, according to these transcripts. “I thought it was just inconceivable to me they would let it get as bad as they ultimately did.”
In an earlier batch of leaked statements reported by ProPublica, Geithner acknowledged that U.S. efforts to rein in the banks and mitigate the consequences of the mortgage debacle also fell far short of their goals.
It is well known that early in President Barack Obama’s administration, economic advisers who advocated an aggressive fiscal stimulus — one that might actually have jump-started the economy into more rapid growth — lost the internal White House debate to a more timid camp.
What is needed on both sides of the Atlantic are real leaders with political courage who have enough sense to find economists with new ideas about how to cope with the realities of the 21st century.
Don’t hold your breath.
In a blog post this week, Dean Baker, co-director of the progressive Center for Economic and Policy Research, urged Obama, who faces even more obstacles to legislation with a Republican majority in Congress, to use his last two years in office to change the economic conversation.
“He can use his bully pulpit to explain to the country how we need additional government spending to bring the economy back to full employment,” Baker writes. “Rather than being some burden on our children, additional spending (even financed by dreaded debt) will be a blessing to them.”
Obama could tell people how additional government spending could help rebuild infrastructure, improve education, reduce the cost of college and retrofit millions of homes and offices to make them more energy efficient — all while giving people jobs at higher wages.
Dream on. How can a president who still likes to compare government budgets to households with credit card debt be expected to embrace an enlightened view of deficit spending?
Who will teach him that? His chief economic adviser, Jeffrey Zients, is a former management consultant whose chief claim to fame is that he headed one of the groups trying to bring Major League Baseball back to Washington.
The most progressive experts even fault a populist firebrand like Sen. Elizabeth Warren of Massachusetts for being too timid in her economic views. Joseph Firestone found Warren’s post-election commentary on creating a full employment economy too vague on how to achieve that without relying on the flexibility provided by modern monetary theory.
MMT, which bases models on the reality that the U.S. dollar is a fiat currency created out of thin air through government spending, represents a Ptolemaic revolution for flat-earth economists mired in an 18th-century view of the world.
Short of a full-fledged catastrophe overtaking us, however, neither the political establishment nor the public are ready for this radical a change. If Warren or some other progressive politician is willing instead to take the advice of an estimable economist like MIT’s Simon Johnson, who remains anchored in traditional notions of fiscal probity, that at least would be a start.
In the meantime, we will continue to suffer the travesty of citizens in the two richest economies in the world, the U.S. and the EU, thrust into poverty, stress, and lower standards of living by bumbling politicians using obsolete paradigms for understanding how the world works.
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