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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