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.
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:
- Are there better quotes from Roubini and Baker than the ones used by the Revere Award?
- Regardless of when they were published, are their predictions any more detailed or accurate than mine?
- Does the fact that mine were written in Spring 2007 rather than Fall 2006 make them any less prescient?
- 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?.