What does it mean to have 'predicted the global financial crisis'?

Good article here explaining how Steve Keen didn't predict the GFC.

Full article is pretty long, I have just copied a few paragraphs here...

What does it mean to have "predicted the crisis"?

Since 2008, quite a lot of people have boldly claimed that they "predicted the crisis". Usually, the claimants use this "fact" to argue for the superiority of their economic school of thought, modeling approach, investing approach, or personal intuition. But what does it mean to have "predicted the crisis"?

As an example, let's take Steve Keen.

Steve Keen, formerly a professor at the University of Western Sydney, is known for claiming more loudly and confidently than just about anyone else on the planet that he "predicted the global financial crisis". According to Keen, this should be a reason to believe his extensive critiques of neoclassical (i.e. mainstream) economics, and his suggested alternative paradigm, known as "Post-Keynesianism".

So in what way did Keen "predict the crisis"?

Searching the internet, I can find no record of an ex-ante prediction by Keen of a large-scale U.S. housing bubble. He did, however, predict an Australian housing bubble, in 2007 after the U.S. housing bubble had already begun to pop. That prediction has so far yet to materialize; Australian housing prices have not collapsed yet. As a result of this incorrect prediction, Keen lost a high-profile bet.

Did Keen predict the collapse of the U.S. finance industry (the Lehman shock and subsequent bailouts)? Not that I can find. Nor did he warn of the risk of such an industry collapse, as far as I can find.

How about the recession and stagnation? Here, Keen makes his strongest claim to have made an ex ante prediction. His argument is laid out in this paper. (Warning: as others have noted, Keen's papers are nearly unreadable.)

In any case, it is clearly apparent that nowhere in this paper - or in any other paper that I can find - does Keen present a model whose output bears even a passing resemblance to the crisis we experienced in the late 2000s. (As an aside, note that many models, including a simple neoclassical Ramsey model, have equilibria in which the economy collapses completely. Building such a model is very very easy. But complete economic collapses - total and permanent cessations of economic activity - haven't yet been seen in the real world...ever.)

Therefore, we can conclude that there is no Steve Keen model that predicted the recession and long stagnation that we've experienced. And in fact, there does not seem to be any "Post-Keynesian model" whose features closely resemble the financial crises and recessions that we see in the real world.

Anyway, so we see that Steve Keen's prediction of the global financial crisis was considerably less impressive than his bold claims would have us believe. He does not have a model that can predict bubbles, financial collapses, or recessions. His personal warnings of doom often don't seem to materialize for over a decade...if they materialize at all. If you trust Steve Keen as an economist or as a personal prognosticator based on his 2005 warnings of imminent global recession, you may be falling victim to the common behavioral phenomenon of overconfidence. (Not that I expect this fact to give pause to many of his...um...ardent followers. Remember that pundits get more fans by displaying self-confidence than by being right!)

Link to full article... http://noahpinionblog.blogspot.com.au/2013/05/what-does-it-mean-to-have-predicted.html
 
Who cares? :confused:

Did you predict it?

Predict which aspect of it?

I predicted on GH.PC in early 2008 that interest rates would be slashed in late 2008 and this would result in a house price surge. I predicted house prices would not crash.

Steve Keen claims to have predicted the GFC, yet he didn't predict any aspect of it with any accuracy. He said the GFC would impact Australia by causing house prices to crash 40%, unemployment to hit double digits, severe recession, and ZIRP by 2010.

And who cares? Well, you for a start since you replied.

The 155 comments under the linked article suggest some degree of interest.

Also Steve Keen himself has taken a great interest, having been engaged in a bit of a 'twitter war' with Noah Smith over the article.

So yes, I think the article has actually generated quite a bit of interest.

But since you don't care, I assume you won't comment any further on this thread.

Goodnight.
 
The GFC writing was on the wall long before it came.

When I was on exchange in University of Hong Kong in July 2006, a Duke University professor told me about the subprime crisis (first time I heard this term) and predicted the default of subprime loans and the ripple effect it'll have due to securitisation. In fact he spent a whole tutorial talking to 20 of us about it.

In 2007 a very professional stock forum I used to go to (won't mention the link here) talked about subprime crisis.

First time I saw it in the papers was when mums and dads found out in 2008.

Therefore, it's pretty stupid when people try to equate the subprime crisis which led to the GFC to the Australian housing market.
 
Steve Keen predicted a housing bubble and subsiquent bursting of that bubble with a 40% drop in values. His reaction was to his own home in anticipation of this. He made no predictions that I recall of a GFC or even recession of any scale anywhere.

In response to the GFC, the government and RBA took a number of economic measures. Many of these were a complete waste of money IMO, but some such as the additional FHOG insentives and dramatic cuts in interest rates had the opposite effect to Keens predictions, effectively causing a housing boom in 2009-2010. Since then there's been a decline on average, but certainly no bubble bursting.

Had the government taken no action, Keens predictions may well have come true and in his retrospective arguments he has often cited "government intervention" to justify why his predictions fail. IMO this just demonstrates how much of an achademic hack he truely is. If it's so obvious that we're heading for a crash, it's also reasonable to predict that a cashed up government (which the Rudd/Swan government was at the time) will take measures to prevent the crash and nurture the economy to a gentle landing.

The measures which the government did take were pretty much straight out of an economic text book. If Keen was as good as he thinks he is, he would have accounted for this in his predictions.

Keens predictions that gain public attention are almost universally negative in nature. He does often foresee the bad things on the horizon but he never seems to be able to go the next step and model the response to future challenges and the outcome of those responses. Arguing that the economy is artifically propped up is foolish because an economy is something that can be managed, manipulated and moderated to generate a more useful outcome. Constantly arguing doom and gloom without foreseeing a reasonable and executeable response just shows that he's an achademic who predicts the problem but can't contribute to a solution.
 
Had the government taken no action, Keens predictions may well have come true and in his retrospective arguments he has often cited "government intervention" to justify why his predictions fail. IMO this just demonstrates how much of an achademic hack he truely is. If it's so obvious that we're heading for a crash, it's also reasonable to predict that a cashed up government (which the Rudd/Swan government was at the time) will take measures to prevent the crash and nurture the economy to a gentle landing.

The measures which the government did take were pretty much straight out of an economic text book. If Keen was as good as he thinks he is, he would have accounted for this in his predictions.

It's even worse than that. The stimulus and FHOG boost had already been announced the month before Steve Keen made his losing bet with Rory Robertson where he agreed to walk up a mountain if house prices didn't crash.

Keen knew all about the fiscal stimulus. And in fact he expected even more monetary stimulus than we got, because he expected ZIRP.

He just believed the stimulus wouldn't work because he believed there was a property bubble and nothing could prevent it from bursting.

He was wrong on both counts. There was no property bubble to begin with, and the stimulus did work, as it caused a boom.

Without the stimulus prices would not have risen as fast in 2009-2010, and they also wouldn't have corrected in 2011-2012. Without the stimulus house prices would be pretty much the same as they are now, but would have taken a different path to get here from - i.e. four years of moderate gains, rather than two years of boom followed by two years of correction.
 
The measures which the government did take were pretty much straight out of an economic text book. If Keen was as good as he thinks he is, he would have accounted for this in his predictions.
Which textbook contains the following measures used in Australia?

Ban on short selling of bank shares
Borrowing from foreign central banks
Central bank purcase of RMBS to add liquidity to securitization market
Cash handouts to First Home Builders & Buyers
Wholesale lending and bank deposit guarantees

I think you will find in many cases the methodologies they've used to battle the GFC (depending on your interpretation of what that entails) are unique and previously untested. They will be rewriting economic text books once this is all over.
 
I mean textbook in the sense that they essentially tried to spend their way around a recession. This has been done on many occassions both locally and overseas. I wasn't referring to the specific application they used.

One of the contributers (there were many) to the GFC was that the US tried to avoid a recession in 2003 by starting a nice little war with Iraq. Not a constructive use of money with only delayed the inevitable and made the end result worse.

I also think that most of the money spent here was completely wasted. $1000 extra with your tax return was a complete farce. Cash for clunkers, batt schemes, baby bonus', etc were nice catch phrases but did nothing to help anyone and probably caused more long term harm than good to many individuals. Telling schools to build a new hall would have been much better used by simply saying we've got an allocation for you, how do you think it would best be spent to your benefit? A friend of mine made a killing out of this as an architect, but the GFC was over by the time the construction started and the rest of the money flowed through to the community.

Don't even get me started on the banking packages. DUMBEST. IDEA. EVER.

In the past governments have spent through recessions by doing things like building habour bridges, hospitals and public transport. Most of Californias highways were built in low economic times and are now badly in need or repair.

The idea was reasonably 'textbook', the implementation was extremely flawed and mismanaged. Like much contempery policital thinking, it was driven by soundbytes for a 24 hour news cycle.

An interesting case study of ecomonic management of a recession was from the Keating era. In the 'Recession we had to have', government spending increased and as a consiquence so did public debt. This did however lead to an increase in employment which meant several years later people had jobs and thus money which could be taxed. This contributed to over a decade of growth and surplus. Unfortuantely for Paul, the public was quite sick of being in a recession and didn't appreciate his longer term vision.

The problem with the Rudd government in the GFC is they spent money on populuar items blowing through the cash reserves with effectively no benefit. Given the increases in exports to China via the mining industry investment phase ramping up, Australia was already fairly isolated from the worst of the GFC. I suspect the eventual outcome of the GFC would have been very similar had the rates simply been decreased. Most of the spending spree was simply unnecessary.

What concerns me today is that we are starting to slide into recession and in a way that we weren't in 2008. Unemployment creep is becoming more pervasive than being isolated to a few sectors. The Gillard government has been goaded into delivering a surplus which it can't deliver, effectivly destroying rather than creating jobs. Again we've got a government that is trying to cater to popular politics rather than putting together long term strategies around development and investment. What really concerns me however, is that Abbot appears to be walking down the same path.
 
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Bit like telling everyone a horse is going to get up on the weekend and win but when it doesn't you claim your only incorrect because another horse was faster !!!!

Two things jump to mind.
1# you didn't do your DD by exploring all possibilities = FAIL
2# if you didn't bet every dollar you had well before the race you questioned your own prediction anyway.

Cheers
 
I mean textbook in the sense that they essentially tried to spend their way around a recession. This has been done on many occassions both locally and overseas. I wasn't referring to the specific application they used.

One of the contributers (there were many) to the GFC was that the US tried to avoid a recession in 2003 by starting a nice little war with Iraq. Not a constructive use of money with only delayed the inevitable and made the end result worse.

I also think that most of the money spent here was completely wasted. $1000 extra with your tax return was a complete farce. Cash for clunkers, batt schemes, baby bonus', etc were nice catch phrases but did nothing to help anyone and probably caused more long term harm than good to many individuals. Telling schools to build a new hall would have been much better used by simply saying we've got an allocation for you, how do you think it would best be spent to your benefit? A friend of mine made a killing out of this as an architect, but the GFC was over by the time the construction started and the rest of the money flowed through to the community.

Don't even get me started on the banking packages. DUMBEST. IDEA. EVER.

In the past governments have spent through recessions by doing things like building habour bridges, hospitals and public transport. Most of Californias highways were built in low economic times and are now badly in need or repair.

The idea was reasonably 'textbook', the implementation was extremely flawed and mismanaged. Like much contempery policital thinking, it was driven by soundbytes for a 24 hour news cycle.

An interesting case study of ecomonic management of a recession was from the Keating era. In the 'Recession we had to have', government spending increased and as a consiquence so did public debt. This did however lead to an increase in employment which meant several years later people had jobs and thus money which could be taxed. This contributed to over a decade of growth and surplus. Unfortuantely for Paul, the public was quite sick of being in a recession and didn't appreciate his longer term vision.

The problem with the Rudd government in the GFC is they spent money on populuar items blowing through the cash reserves with effectively no benefit. Given the increases in exports to China via the mining industry investment phase ramping up, Australia was already fairly isolated from the worst of the GFC. I suspect the eventual outcome of the GFC would have been very similar had the rates simply been decreased. Most of the spending spree was simply unnecessary.

What concerns me today is that we are starting to slide into recession and in a way that we weren't in 2008. Unemployment creep is becoming more pervasive than being isolated to a few sectors. The Gillard government has been goaded into delivering a surplus which it can't deliver, effectivly destroying rather than creating jobs. Again we've got a government that is trying to cater to popular politics rather than putting together long term strategies around development and investment. What really concerns me however, is that Abbot appears to be walking down the same path.
100% agree with all of this. Rudd pressed the panic button way too soon and blew everything on plasma TVs. Now both sides of politics are paranoid of deficits right when we need real public spending - when the infrastructure projects should be rolling out. Our only hope is that the Abbot team will wake up. Problem is deficits are usually the domain of a Labour governments, so it's probably not going to happen. Keen might be proven right yet:eek:
 
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