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.  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 “no one saw this coming”. Anatole Kaletsky wrote in The Times of “those who failed to foresee the gravity of this crisis” – a group that included “almost every leading economist and financier in the world”. Glenn Stevens, governor of the Reserve Bank of Australia, said: “I do not know anyone who predicted this course of events. But it has occurred, it has implications, and so we must reflect on it.” 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 “shocked disbelief” as its “whole intellectual edifice collapsed in the summer [of 2007]”. 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 Richebächer, an investment newsletter writer, who wrote in 2001 that “the new housing bubble – together with the bond and stock bubbles – will [inevitably] implode in the foreseeable future, plunging the US economy into a protracted, deep recession”; and in 2006, when the housing market turned, that “all remaining questions pertain solely to [the] speed, depth and duration of the economy’s downturn”. Wynne Godley of the Levy Economics Institute wrote in 2006 that “the 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 2010”. Michael Hudson of the University of Missouri wrote in 2006 that “debt deflation will shrink the ‘real’ economy, drive down real wages, and push our debt-ridden economy into Japan-style stagnation or worse”. 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?




  • There was a researcher out at one of the regional feds who published a paper on the consumer credit cycle back in 2006 or earlier I believe who also called the crisis in its rough contours and causes. Some of us even saved our friends quite a bit of cash in the spring of 2007.

    The nobody saw it coming crowd are just a group of overconfident weeny boyz who are a now little embarrassed that for all their bluster, certainty and sycophancy they got caught with their pants down. It is a large group which ranges from I would guess 75% or better of every economist working in an NA economics department, 90% of the business press and…and here is the kicker…95% plus of policy makers.

    And the real shame is this. Having been totally exposed running naked in the streets they still have the temerity to step up to the mic and call for more of the same. They still have the temerity to call for further reductions in CIT, further deregulation, further privatization, and deeper “free” trade. Some of these jokers even have such little sense of shame that, with a straight face and in full public light, they think they are still qualified to offer policy advice to social democratic political parties.

    Power concedes nothing without a fight. Perhaps that is why they continue.

  • I think Travis is right. The best policy for the Canadian economy is to increase taxes on investment. Capital is mobile and we don’t want it in Canada so the best thing we can do it tax the crap out of it so it will stay away.

  • Yep that is exactly what I said. And any changes to the rules of trade would be a return to savage merchantalism. Any new public corporation would amount to communism etc etc.

    Have some decency and put some clothes on.

  • Mr. Wills,

    capital is indeed mobile- to a degree. There are much more than simply tax rates that attract capital. The days where capitals loos for the lowest tax rates, lowest labour costs, lowest environmental standards i.e. the lowest cost as determined within some narrow conception that promotes a race to the bottom that the last 30 years have called for has come to an end.

    We shall see a new business culture arise, and this last meltdown was the harbinger of what can occur if we do not act.

    The cost of doing business has just gone up. The cultural mechanism of affixing cost has and will continue to become a lot more complicated and will start factoring into the equation a lot more than the simplistic and narrow perspectives that the neo con era has produced.

    It quite simply has to happen. The future requires it, however if you are in denial and want to put on the diffuse, deny, deflect and disrupt clothing and parade your neo con perspectives then your have are free to do so.

    But Travis is totally bang on, power concedes nothing without a fight, and it has only begun. This continuing crisis is much much much more meaningful in getting the fight going than any neo con ever imagined. It is the beginning of the end for the last 30 odd years of simplicity rules.

    Self regulating markets are just another name for lets race to the bottom. ‘With consideration to who knew what, it is not hard for somebody with any notion of critical thought to know over at least the past 20 years that we were heading for the abyss.

  • With the rest of the world begining to lower their corporate rates on taxation, should Canada not follow along as well. I’m not saying slash rates to zero, but simply keeping with the average. Progressives for the most part in Canada have seemed to attacked every policy towards business. We have the NDP party in Canada convincing people they can save the enviorment by having corporations pay out of their profits and there will be no increase at all in consumer goods. Not only that, but they would prefer we increase taxation on corporations. Social Democratic countries that people in Canada want to copy all have low rates on capital. If we want a productive economy, would should encourage the development of capital stock in our country, and having a competitive tax rate seems important.

  • Wills wrote:

    “Progressives for the most part in Canada have seemed to attacked every policy towards business. We have the NDP party in Canada convincing people they can save the enviorment by having corporations pay out of their profits and there will be no increase at all in consumer goods.”

    Do you just make this stuff up. There is no limit to the demands of the business community for lower taxes and lower regulatory oversight. How demanding that corporations pay their fair share for the public goods, services and infrastructure they use is construed by you as attacking business I do not know. Which NDP environmental policy are you talking about? Be specific give an example of an official policy proposal by the NDP which conforms to your characterization.

    “Social Democratic countries that people in Canada want to copy all have low rates on capital.”

    Ah the SG canard. These social democratic countries have high personal income tax rates, high rates of union coverage (Sweden is + 70% density), and a whole host of welfare state programs that go from education and training to universal daycare.

    So when we get all things here in Canada then I will be the first to demand Zero corporate taxes.

  • NDP “make big polluters pay” policy. Their rhetoric indicated that a carbon tax would effect consumers, but their cap and trade policy wouldn’t. It would make the big corporations pay. Do you believe this to be true? Won’t carbon taxes and cap and trade policies have the same result which making consumers pay for carbon emissions?

  • Depends on which sector and which industry. But I take your point that under existing legislation and the existing state of affairs business will attempt and largely be successful at maintaining their margins at the expense of consumers. And thus I will have to concede you have hit upon a certain flaw at the heart of the NDP ideology. They think they can make capital play without making capital pay. So in turn I guess we are on the same page.

    The peasants will always pay.

    Thanks, you have renewed my radicalism. As you say it is revolution or bust! Who knew you were such a radical!

  • Following up on that last point. There are many ways a reality could unfold in front of us. CAP and TRADE, hard caps, and such policy measures, could be passed onto consumers, and that is one of the reasons I mentioned that the cost of doing business has gone up or will soon, at least from environmental change pressures.

    However, lets take auto for an example, in many ways the current crisis that hit the auto sector resulted in billions of dollars of tax payer monies going into the auto sector. If somehow we would have enforced a direction for this public investment, i.e. into low carbon vehicles, then what we witness is a hard cap being paid for from the public coffers. Depending on who is paying the taxes will determine who paid for those caps. Now of course we did not put a hard cap in place, but you can be sure that some of the money was put into development of these cars. (I am sure it wasn’t put into SUVs) So in some cases you will undoubtedly see some form of public intervention to enable the transformation.

    Next point, not all industries enjoy complete oligopolies that can effectively pass on these costs. So it will depend on how well these companies innovate and transform their value adding capacity to meet these caps. (some in the case of trades will be allowed to buy their way through the initial phases but in the longer run, cap and trade is mainly a hard cap, at least in my interpretation.)

    Next point, if demand changes enough or supply can be truly innovative and say for example produce a vehicle that runs on say water, then you will simply see plan old demand and supply and the functioning of a tradition mass production business solve its own cap problems. This one here is the one that many tech faithful and the profit oriented are hoping for, as this is one where money can be made, especially if the product can go global.

    Next point, there is a lot of unexploited tech and inefficiencies when viewed from an environmental perceptive, tat once some initial costs are met can produce a good bunch of change in a earth friendly way. There is a large inventory of change for this one.

    Next and I will make this my last, there exits within both the consumption and production space right now, many, many ways to conserve with not much in the way of costs. Just whole bunch of old fashioned information and education will be required, along with a bit of attitudinal change. This is the one I would say we have made some headway into and it is also one where policy makers can play a much more instrumental role within.


    P.S. Not sure but does anyone recall the poem I started writing on here about rationalizing my pay, well it was published today in the September CCPA monitor within the poetry section. Cool huh!

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