Barkley Rosser on the crisis predictions debate6 June, 2013 at 09:59 | Posted in Economics | 1 Comment
I probably should not dredge around in this further, but there has been in the last week or so a major outpouring of dicussion about “who predicted the crisis,” with a lot of wrangling and some less than pleasant comments being strewn about. I got dragged into it and should probably leave it alone, but more keeps coming, and I also think there might be a link to developments here at this blog.
Anyway, the main volley and still the main center of this discussion was set off by Noah Smith … He laid out three conditions for having really predicted it fully, actually four. The main three were to have called the housing bubble, then called the broader financial market collapse deriving from the collapse of the housing bubble, and then to have called that there would be deep recession with a long stagnation afterwards. Oh, and to really qualify for him, one needed to do this with a fully specified model based on data. He basically argued that nobody fully satisfied all these criteria, although he makes lots of favorable remarks about Dean Baker, accurately crediting him, I think, with having first called the housing bubble back in 2002, and also arguing that its collapse would lead to a recession, although not necessarily a broader financial collapse nor how deep the recession would be, and also he did not have a fully specified data-based model for his forecasts, although he did use data. I basically agree with this.
Now most of the rest of the post, after throwing out a few other names (not including me), focused on Steve Keen, who has quite prominently claimed to have called the crisis. Noah basically jumped all over Steve, even confessing to not liking him personally based on his tweets. He admits that Steve had an interesting Minsky- based model in 1995, which I happen to be a fan of, but argued that it was not based on data and had various characteristics (such as lots of cyclicity) that made it not all that good for actually forecasting the crisis in the way he prescribed. At least some of this is true, although I commented on the thread that I thought he was overdoing the harshness of his criticisms of Steve, particularly the personal ones. I have always found Steve to be personable and lots of fun in person, even though he definitely argues hard, thereby annoying many. I also noted that Steve has been the victim of a purge at the University of Western Sydney, although I did not fully spell it out there. But he has. His department was eliminated as of the end of March, and there is little question that this was done specifically to get rid of him. One can dump on Steve Keen all one wants, but he is currently unemployed as a result of a vendetta by orthodox types in the Australian establishment against him, which is a scandal as far as I am concerned …
This led me to enter the fray, talking about how I had made predictions on the old Maxspeak about the housing bubble, but that these were not available due to the archives being sealed. Although these were initially inspired by Dean Baker and later supported by data from Shiller in his Irrational Exuberance, 2nd edition, Chap. 2 (did not mention that, but is true). I also noted that though I did not blog on it early, I gave talks about the link between the housing bubble and global financial markets, forecasting a major crash in March and December, 2007 (dates of speeches, I did not pick a time for the crash), with this insight coming from a Sept. 2006 speech by Timothy Geithner in Hong Kong, of all people. I then called that the crash was coming soon in a post here that was … based on a model of mine with Antonio Palestrini and Mauro Gallegati, published in Macroeconomic Dynamics in 2011, although the first draft was out in 2005. Nobody was interested in publishing an ABM of Minsky dynamics somehow prior to the crash. It was this model that Jamie cited when he mentioned me.
That model was more specifically of the three different kinds of crashes that can come out of a bubble according to Minsky initially and picked up by Charles Kindleberger, in his classic _Manias, Panics, and Crashes_: a sudden fall from the peak, a gradual decline from the peak with no hard crash, and then one with a “period of financial distress” wherein there is a gradual decline for awhile after the peak, followed by a hard crash, which is by far the most common historical pattern according to Kindleberger. I said in July, 2008 that the global financial markets were in such a period of distress, which had started in Summer 2007, varying slightly depending on the market, and that it looked like a hard crash was coming probably pretty soon, the Minsky Moment, which indeed happend in mid-September after the failure of Lehman Brothers.
I have since with Gallegati and Marina Rosser published a paper in 2012 in the Journal of Economic Issues noting how other bubbles of the period fit into this. Housing looked like the gradual decline, roughly paralleling its rise, something one would expect more from real estate, particularly residential real estate, where people resist selling their homes when the price is falling, and oil, which in 2008 followed the sudden crash scenario from $147 per barrel in July to around $30 in November, with commodities often more likely to follow this scenario than the other two. I admitted in my comment at Noah’s that I did not anywhere forecast the depth of the recession or the length of the recovery.
Then deep in the debate, Robert Viennau linked to a paper from a couple of years ago by Jamie Galbraith entitled, “Who Are These Economists Anyway?’ I do not have a solid link to it, but it is linked to in another blogpost out yesterday by Lars Syll, http://rwer.wordpress.com/2013/06/04/bashing-crises-predictions . Jamie’s piece mentions another set of candidates for “who predicted it,” including Marxists Patrick Bond and Robert Brennan, Keynesians such as Wynne Godly and people at the Levy Institute, Minsky non-linearians, including the late Peter Albin, me, and Ping Chen, and then “the new criminologists” who focus on insitutions and fraud, Gary Dymski and Bill Black, whom he saw as following his late father’s ideas. (I don’t think he mentioned Steve, but maybe I just did not read closely enough.)
This would be the most recent post by Lars Syll, which on the one hand I appreciate, but on the other I think he does not quite have things right. He bashes Noah for “bashing the predictors,” and then names five people: Dean Baker, Dirk Bezemer, Nouriel Roubini, me, and Steve Keen. Now, he certainly did bash Steve, but I do not think this characterizes what he said about the rest of us. He simply linked to Bezemer’s paper, but really did not comment on it at length other than to argue that none of those listed by Bezemer fulfilled his own criteria, even if all of them got at least parts of it right. He is not all that unfavorable to Roubini, although thinking that his mechanism for the recession was off, involving a crash of the dollar, when just the opposite happened at the Minsky Moment, with Bernanke doing a Fed save by buying up $600 billion of eurotrash to prop up the collapsing euro, which was quietly rolled over during the next six months into MBSs (Noah did not spell out all those last details; I did). Dean Baker he actually said good things about, mostly, even if Dean did not have a full model. And he really did not comment on my post other than to say that Dean was one of those who did not constantly beat his own drum. I am doing so here, although I have not done so super-duper often in the past. As it is, I have to say that Lars overdid how hard Noah came down on all of us, although he definitely came down hard on Steve Keen big time, and promised in some comments to come down hard on Peter Schiff some other time.
I shall close this by noting some quotes that Lars pulled from the end of Jamie’s paper, that he had written in 2000, doing his own “claiming,” I suppose, :-). Just a few, and I think he is right on this. He speaks of “a kind of Politburo of correct economic thinking” that rules the profession. “They predict disaster where none occurs. They deny the possibility of events that then happen.” But, “No one of them loses face, in the club, for having been wrong. No one is disinvited from presenting papers at later annual meetings. And still less is anyone from the outside invited in.” And this remains pretty much true to this day.