Who predicted the financial crisis?

I’m currently writing a paper that asks (and possibly helps to answer) this question, and I am curious about something. We all know it’s a myth that “no one saw it coming”, but for me the key issue is the extent to which people linked a housing bubble (and possibly a subprime bubble) with an economy-wide recession.

I was looking at the evidence for the “Revere Award” and I was underwhelmed. Consider Nouriel Roubini, someone who it is pretty widely agreed to have made a better “prediction” than anyone. The evidence is this:

The recent increased financial problems of … sub-prime lending institutions may thus be the proverbial canary in the mine – or tip of the iceberg – and signal the more severe financial distress that many housing lenders will face when the current housing slump turns into a broader and uglier housing bust that will be associated with a broader economic recession. You can then have millions of households with falling wealth, reduced real incomes and lost jobs…

This was written in August 2006. Similarly, in November 2006 Dean Baker wrote:

The wealth effect created by the housing bubble fuelled an extraordinary surge in consumption over the last five years, as savings actually turned negative. …This home equity fuelled consumption will be sharply curtailed in the near future…. The result will be a downturn in consumption spending, which together with plunging housing investment, will likely push the economy into recession.

Consider my own comments about the housing boom (I’ve previously discussed this here and here). In March 2007 I wrote:

Paul Dales (a Capital Economics anlayst) says that 13% of subprime loans are now in arrears, and default rates have risen to4.5%

The second-largest subprime mortgage lender – New Century Financial – is on the brink of bankruptcy

This was before New Century Financial became bankrupt, thus starting the sub prime meltdown (which happend in the Summer of 2007). In April 2007 I wrote this:

M4 – the broadest measure of the money supply – is running at 12% and therefore there is too much liquidity about. Given that, it seems sensible to assume that the housing market is frothing (rather than it’s operating beautifully and the excess credit is manifesting itself in a hitherto unspotted part of the economy). We can’t know for sure, but it seems a sensible working hypothesis. When interest rates rise – as they surely must – house prices will cease surging, but it’s up to the next Chancellor how this process is managed. The economy is an airbed: Brown merely squeezed on the Dot Com bubble to shift the air pocket to house prices. At some point the charade has to end and the valve released. We’ve been living beyond our means, and the crunch is coming

So here are my questions:

  1. Are there better quotes from Roubini and Baker than the ones used by the Revere Award?
  2. Regardless of when they were published, are their predictions any more detailed or accurate than mine?
  3. Does the fact that mine were written in Spring 2007 rather than Fall 2006 make them any less prescient?
  4. Does anyone have any evidence of anyone else actually calling a credit “crunch” any earlier than April 2007?

Because to be honest, I’m wondering whether I deserve an award as well…

Cross posted: The Filter^: Who predicted the financial crisis?.

11 Comments

  • Joe Jackson says:

    Peter Schiff publicly predicted the crisis in 2002. Check out any youtube “peter schiff was right” clip.

  • Dear Mr Evans,

    I am sure you deserve the Revere Award as well!

    However, as a mathematician I offer another argument into your line of thought: the Cash “crumble” that has been taking place as Credit expansion took place indefinitely.

    But where is the interest for Credit supposed to come from?

    How many “financial economists” can borrow from Peter to pay Paul?

    Doesn’t compounding interest on interest grow exponentially?

    Does the crunch not HAVE to occur in increasing intensity at multiples of e, i.e. 2.7? Look at 27 years and the Kondratieff cycle of 54!…

    Yours in the spirit of logic and rationality,

    Sabine
    http://forumforstablecurrencies.info

  • Sam Duncan says:

    Christopher Fildes’ columns for the Spectator from, say, 2001 would be worth taking a look at if the Speccy’s online archives go back that far. My recollection is that he “predicted it”, but the memory can play tricks and I couldn’t say in how much detail. I’m not sure he saw the trouble brewing across the Atlantic, for example. But he certainly called the credit/housing bubble, talking of “when”, not “if”, it all collapses, very early on.

  • Bob Davies says:

    Anthony,
    My father, Bill Davies, was predicting a financial crisis in 2007 aswell. His focus was on the incredible growth of M4 as you referred to above and the need to control the banks who create most of it, often as speculative debt. His web site http://www.legalforgery.com/ covers a lot of his work and offers a solution.

  • John Paulson, who made about £2bn betting against sub-prime presumably said something. Alternatively, you could call the money he bet a very loud statement.

  • Archie Dean says:

    The UK (land) economist Fred Harrison also predicted the crash. His predictions as to the timing were pretty much spot on and crucially, if awards are to be issued, were made several years prior to the actual event.

  • Paul Lewis says:

    from September 2003 – although he has been predicting the dollar reserve standard would fail since the 1970’s – also John Exter (a central banker with a clue) comes to mind also

    http://www.minnpost.com/craigwestover/2008/09/18/3559/ron_paul_saw_this_financial_mess_coming
    “On Sept. 10, 2003, U.S. Rep. Ron Paul, R-Texas, testified before House Financial Services Committee, which was holding hearings regarding special privileges extended to government sponsored enterprises (GSEs). Think Fannie Mae and Freddie Mac. In his testimony. Paul criticized such privileges in general and warned of the potential for disaster posed by government involvement with Fannie and Freddie specifically.

    Paul noted that according to the Congressional Budget Office, housing related GSEs received $13.6 billion in indirect federal subsidies in fiscal 2000 and had a line of credit with the United States Treasury exceeding $2 billion. That line of credit Paul said was an explicit promise by the Treasury to bail out GSE’s in times of economic difficulty.”

  • Paul Lewis says:

    John Exter interview from 1991 is here

    http://www.lbo.lk/fullstory.php?nid=1692291840

    others that come to mind are

    Antal Fekete
    Marc Faber
    Jim Rogers
    James Sinclair
    Bill Bonner
    Addison Wiggin
    Kurt Richenbacher
    Krassimir Petrov

    there seems to be an Austrian connection

  • Tersal says:

    Dean Baker was calling this in 2002 actually before Peter Schiff,
    see his letter The Run-up in Home Prices: Is It Real or Is It Another Bubble written in 2002.

  • Anthony J. Evans aje says:

    @ Tersal
    Would betting against housing in 2002 have been a profitable strategy?

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