Why some economists could see it coming (Financial Times)

[jakeXT]

Why some economists could see it coming

By Dirk Bezemer

Published: September 8 2009 03:00 | Last updated: September 8 2009 03:00

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 ". 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 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 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?

Central to the contrarians' thinking is an accounting of financial flows (of credit, interest, profit and wages) and stocks (debt and wealth) in the economy, as well as a sharp distinction between the real economy and the financial sector (including property). In these "flow-of-funds" models, liquidity generated in the financial sector flows to companies, households and the government as they borrow. This may facilitate fixed-capital investment, production and consumption, but also asset-price inflation and debt growth. Liquidity returns to the financial sector as investment or in debt service and fees.

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http://www.ft.com/cms/s/0/ec470a00-9c0e-11de-b214-00144feabdc0.html

[PassingFair]

1. I can't believe there were people who DIDN'T see it coming...

I'm an idiot, for cripes sake, and EVEN I saw it coming.

People qualifying for mortgages they COULDN'T POSSIBLY
PAY under the BEST of circumstances, bundled together
and sliced off as INVESTMENTS?

"Who could have foreseen?"

:puke:

[OllieLotte]

2. I had no idea it would be as ugly as it was/is.

I was reading a contrarian named Bill Fleckenstein on a regular basis when he was describing the potential for a meltdown. I thought his columns were well written. Yeah...I thought...another Chicken Little.

Bill, if you are listening. You were right and I was wrong. I know you made a boatload of money and I'm glad for you. Just sorry I didn't have the sense to listen to you. Sucks having to pay for ones own mistakes.

[truedelphi]

4. Same here.

Late nineteen nineties. I have a date with two realtors to look over a piece of real estate for our first home.

The three bedroom, two bath turned out to be located two blocks from the Russian River (A hugely dangerous location in which to settle down - people are flooded out regularly.)

My husband forgot about the appointment. He was the major bread winner in our household at that time.

The place was lovely (if you excluded the location factor.) But it was $ 175,ooo - a bargain compared to properties not near the River.

I mention to the Realtors that we shouldn't bother looking over the place because my income was under 20K. They shrug - don't worry about this, you don't need your husband's income to factor in the accounting. We can set you up and you'll walk out of here as a home owner.

I immediately said, Thanks but no thanks. They follow me out to the car, saying "This isn't anything shady we are doing. We can write up your mortgage, no money down, and you'll leave here with a deed to a house."

My car never got me out of a driveway so fast. 0 to 60 in ten seconds.

On the drive home, I started critically thinking about the housing market. Was it a market or a bubble? And over time, the more I realized it was just like the dot com bubble, except that you would get to live in your investment until it went south. (Which in the case of that home, might have literally have happened, depending which way the river tides took the place.)

[northernlights]

9. what you fail to understand is that you aren't "somebody"

you are a "nobody."

They are, therefore, quite right when they say "Nobdody saw it coming." The "nobodies" of the world indeed saw it coming.

It's the "somebodies," that rarified elite and the only people who actually matter, who sit so high in their ivory towers they don't get enough oxygen in their brains to support vision or rational thought, who were unable to see, let alone add up, 2 + 2 to obtain 4.

:sarcasm:

[Warpy]

10. I'm a retired RN in Podunk and I sure saw the collapse coming

It seems the people most able to see what was happening were the people who were excluded from the benefits of the whole shaky edifice. As long as the cash flow was massively positive, the Grand Pooh-Bahs of the financial world had no stake in forecasting its inevitable collapse.

It's just funny how few of the former wizards have been denounced as humbugs. Their reputation as great geniuses would seem to be mostly intact, only because they presided as apologists for a system of imaginary money that was destined to evaporate eventually as the capacity of workers with depressed wages to pay their debt was exceeded.

We will continue to live in interesting times for the next several years. I'm just wondering how many of those great minds will end up disgraced and driving cabs as all their grand theories are found to be fairy tales.

My guess is none.

[Hannah Bell]

3. because they weren't bought-off shills?

[ixion]

5. To know what was going to happen, all you had to do was listen to the Bushspeak

He kept jabbering about the "ownership society," which is neocon for "You've been pwned!"

It was really that simple.

Well, that and the likewise simple macro-economic fact that when you inflate a core commodity (like housing) via speculation and shady financing you're risking a complete meltdown.

I remember looking at a few places down in Port Charlotte at the peak of the 'boom'. 300k for a cinder block bunker in a crappy neighborhood. Seriously. I couldn't believe it.

A few months later I went so far as to put an offer in on a house in Palm Harbor. The agent sent me the paperwork, and I actually took the time to read the fine print. I pulled out of the deal immediately.

Anyone who actually read the paperwork on these loans should have run away screaming. An 80/20 Option ARM loan is, in essence, buying a house with a credit card, and thus an insane idea.

The people who didn't see this coming didn't want to see it, because if you actually look, there was no way to miss it.

[HamdenRice]

6. When an immigrant Brazilian barmaid told me she bought a $1 million Newark rental on tips ...

that was around 2006. She was the barmaid at the local tavern. She had already bought and flipped several properties. I told her it was a bubble and she better sell as soon as possible. She had a lot of trouble selling, but I think she eventually did at a small loss.

[jakeXT]

7. Did you meet her since then? What is she thinking now ?

[HamdenRice]

8. I haven't seen her in a few years -- before the meltdown

She was the barmaid for a few years, and she was bragging about having become a millionaire. Of course having a Braziltown Newark tenement valued at $1 million by a sleezy mortgage company and having a $1 million mortgage does not make you a millionaire.

She also owned a condo on the beach in Long Island that she rented out and a co-op in Queens where she actually lived -- both probably under water. And she had built a mini mansion in Brazil.

Anyway, she was a really nice person and customers were constantly telling her she was at the tail end of a bubble and needed to finish her flip ASAP. Last I saw her she said she had sold after a lot of trouble finding a buyer who could get financing, but it was hard to tell whether she had sold or was trying to maintain face.

[coalition_unwilling]

11. Your anecdote reminds me of

Joseph Kennedy's alleged quip that he knew it was time to exit the stock maqket in 1929 when the shoe-shine boy began asking him for stock tips!