Who Called the Crisis?
An interesting piece in the FT yesterday re how those economists who followed the financial flow circuits called the crisis, as opposed to the general equilibrium types who did not.Â Complementary to the analysis of Tom Palley on the macro roots of the crisis, who rightly insists that the “no one saw it coming” crowd are trying to implicate all economists in the failure of the dominant discourse.
Why some economists could see the crisis coming
By Dirk Bezemer
Published: September 7 2009 19:34 | Last updated: September 7 2009 19:34
From the beginning of the credit crisis and ensuing recession, it has become conventional wisdom that â€œno one saw this comingâ€. Anatole Kaletsky wrote in The Times of â€œthose who failed to foresee the gravity of this crisisâ€ â€“ a group that included â€œalmost every leading economist and financier in the worldâ€. Glenn Stevens, governor of the Reserve Bank of Australia, said: â€œI do not know anyone who predicted this course of events. But it has occurred, it has implications, and so we must reflect on it.â€ We must indeed.
Because, in fact, many had seen it coming for years. They were ignored by an establishment that, as the former Federal Reserve chairman Alan Greenspan professed in his October 2008 testimony to Congress, watched with â€œshocked disbeliefâ€ as its â€œwhole intellectual edifice collapsed in the summer [of 2007]â€. Official models missed the crisis not because the conditions were so unusual, as we are often told. They missed it by design. It is impossible to warn against a debt deflation recession in a model world where debt does not exist. This is the world our policymakers have been living in. They urgently need to change habitat.
I undertook a study of the models used by those who did see it coming.* They include Kurt RichebÃ¤cher, an investment newsletter writer, who wrote in 2001 that â€œthe new housing bubble â€“ together with the bond and stock bubbles â€“ will [inevitably] implode in the foreseeable future, plunging the US economy into a protracted, deep recessionâ€; and in 2006, when the housing market turned, that â€œall remaining questions pertain solely to [the] speed, depth and duration of the economyâ€™s downturnâ€. Wynne Godley of the Levy Economics Institute wrote in 2006 that â€œthe small slowdown in the rate at which US household debt levels are rising resulting from the house price decline, will immediately lead to a sustained growth recession before 2010â€. Michael Hudson of the University of Missouri wrote in 2006 that â€œdebt deflation will shrink the â€˜realâ€™ economy, drive down real wages, and push our debt-ridden economy into Japan-style stagnation or worseâ€. Importantly, these and other analysts not only foresaw and timed the end of the credit boom, but also perceived this would inevitably produce recession in the US. How did they do it?