6 economists who predicted the global financial crisis 

These were the economists who predicted the global financial crisis and the US housing bubble. So what lessons should we heed for the immediate future?

Nouriel Roubini, chairman of Roubini Global Economics

Once derided as Dr Doom, the New York University professor has become a media star on the back of his predictions in 2006 of a looming credit and housing bubble crisis in the US. That year, in an address to the International Monetary Fund, Roubini warned of the risk of a deep recession that would reverberate around the world.

The professor cites his early 2008 paper, The Rising Risk of a Systemic Financial Meltdown: The 12 Steps to Financial Disaster, as proof that he got it right. It includes a suggestion that “one or two large and systemically important broker dealers” could go “belly-up” (months later Bear Stearns and Lehman Brothers imploded).

As early as August 2006, Roubini had commented that slumping house prices were “enough to trigger a US recession” and, also that month, that “sub-prime lending institutions may thus be the proverbial canary in the mine” signalling an ugly housing bust that “will be associated with a broader economic recession”.

Warning signs: Lessons Roubini preaches to this day include the perils of a lack of market discipline, internal mismanagement and conflicts of interest within financial institutions.

Ann Pettifor, director of Policy Research in Macroeconomics (PRIME)

Pettifor’s 2006 publication – The Coming First World Debt Crisis – bombed on its release, but became a bestseller after the GFC. The then little-known British economist claimed levels of private debt were unsustainable and that the debt crisis “will hurt millions of ordinary borrowers, and will inflict prolonged dislocation and economic, social and personal pain on those largely ignorant of the causes of the crisis, and innocent of responsibility for it.”

In the book, Pettifor blames the US Federal Reserve, politicians and mainstream economists for endorsing a framework to support unsustainably high levels of borrowing and consumption under the guise of propping up the economy. Continuing the theme in her most recent writing, Pettifor attacks the “small elite that controls the global finance sector” and suggests government bailouts protecting speculative private wealth holders mean “we are no longer dealing with anything resembling a free market system”.

Professional Development: Do you have big questions about finance? We’ve got big answers from economists, CEOs and the ultimate experts. Coming to Sydney and Melbourne in 2016.

Power shift: Pettifor, in her most recent book Just Money: How Society Can Break the Despotic Power of Finance, calls for greater public understanding of finance so the monetary system can be managed for the public good. She notes that society seized back control of the monetary system from the wealthy elite after the 1929 crash.

Steve Keen, head of the School of Economics, History and Politics, Kingston University

Keen, an Australian, is widely regarded as one of the first economists to make the call on an impending financial crisis and later won the inaugural Revere Award for Economics for his foresight.

 

In December 2005, when markets seemed buoyant, Keen set up the website debtdeflation.com as a platform to discuss the “global debt bubble”. Then teaching at the University of Western Sydney, he attracted considerable attention, much of it negative, for his views that an exponential rise in private debt in Australia, and in the US, was unsustainable and would lead to a collapse in asset prices.

“This is how bubbles grow and burst and ignoring debt in this way is one of the great fallacies of modern economics.”

 

 

In November 2006, he started publishing monthly DebtWatch reports warning of high debt levels. His first report was called “The Recession We Can’t Avoid?” (PDF). As the global economy plummeted in 2008, Keen’s star would rise on the back of such reports.

Debt wish: Keen opposes debt-dependent economics and over-investment in speculative assets such as property or shares. Commenting in BRW magazine, he argued: “This is how bubbles grow and burst and ignoring debt in this way is one of the great fallacies of modern economics.”

Dean Baker, co-director of the Centre for Economic and Policy Research

In the years leading up to the GFC, Baker wrote numerous columns tipping an American housing price bubble and a subsequent burst. In 2004, in an article in The Nation titled “Bush’s house of cards”, he wrote: “The crash of the housing market will not be pretty. It is virtually certain to lead to a second dip to the recession. Even worse, millions of families will see the bulk of their savings disappear as homes in some of the bubble areas lose 30 per cent, or more, of their value.”

In November 2006, Baker published his paper Recession Looms for the US Economy in 2007, in which he predicted a “downturn in consumption spending, which together with plunging housing investment, will likely push the economy into recession.”

Policy rethink: Since the GFC, Baker has warned against the incompetence of financial policymakers. In his 2010 book, False Profits: Recovering from the Bubble Economy, he states that the US needs to “rein in a financial sector that has grown out of control”.

Raghuram Rajan, governor of the Reserve Bank of India

As an economic counsellor at the International Monetary Fund in 2005, Raghuram Rajan drew disapproving looks from an audience of economists and bankers in Jackson Hole, Wyoming when he questioned the “worrisome” actions of the banks. He said the rollout of complicated instruments such as credit-default swaps and mortgage-backed securities made the global financial system a riskier place. Indeed, he argued that such developments “may also create a greater – albeit still small – probability of a catastrophic meltdown”.

Given that investments markets were revelling in high growth at the time, Rajan was an easy target for criticism. By 2008, his concerns had been justified. Now the head of India’s central bank, Rajan is again worried – he is warning that “super-easy” money from the world’s central banks, including the US Federal Reserve, to combat recession is inflating assets and encouraging bad investments.

Market meddling: Rajan fears long-term low interest rates and unorthodox programs to stimulate economies, such as quantitative easing, may lead to more turmoil in financial markets.

“My sense is that monetary policy can only do so much and beyond a certain point if you try to use monetary policy it does more damage than good,” he told Time magazine in August 2014.

Peter Schiff, CEO and chief policy strategist at Euro Pacific Capital

Famously appearing in debates on Fox News in 2006, Schiff was ridiculed by his fellow commentators for his bearish views. In August 2006, the stockbroker and author declared: “The United States is like the Titanic and I am here with the lifeboat trying to get people to leave the ship ... I see a real financial crisis coming for the United States.” In later debates, he predicted crashing real estate prices in 2007 and a looming “credit crunch”.

The title of Schiff’s 2007 book, Crash Proof: How to Profit from the Coming Economic Collapse, further justifies his selection as one of the few to predict the financial crisis. In his book he described the US as a “house of cards: impressive on the outside, but a disaster waiting to happen beneath the surface”. Schiff practised what he preached – for years he had been helping his clients restructure their portfolios to ride out what he views as the negative aspects of the economy.

False dawn: Claims of a US recovery in recent years are largely an “illusion”, Schiff says, created by the effects of zero per cent interest rates, quantitative easing and deficit spending. These policies have primarily benefited rich owners of stocks and real estate at the expense of creating good-paying jobs and purchasing power for the average Joe.

Read next: 9 workplace trends of the future


Want more articles about finance? Enter your email to receive the fortnightly INTHEBLACK e-newsletter.