What does it mean to have predicted the financial crisis?

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What does it mean to have predicted the financial crisis?

#1  Postby GT2211 » Jun 16, 2013 11:33 pm

http://noahpinionblog.blogspot.com/2013 ... icted.html

I've questioned the predictability of such crises* and have been rather skeptical of claims made by economists who claim to have done so. Most of those who claim to have done so have a track record of predicting all sorts of crisis in all sorts of places, many of which never turned out.

I think parts of the crises was predictable. I've previously posted a study on academic economists vs professional/real estate association economists in predicting the housing bubble which showed the acadmeic's had a much better record(they also didn't have a conflict of interest). I also think large parts of the crisis were resultant from bad policy decisions, decisions which I'm not sure how foreseeable they were.
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Re: What does it mean to have predicted the financial crisis?

#2  Postby FACT-MAN-2 » Jun 17, 2013 3:27 am

GT2211 wrote:http://noahpinionblog.blogspot.com/2013/05/what-does-it-mean-to-have-predicted.html

I've questioned the predictability of such crises* and have been rather skeptical of claims made by economists who claim to have done so. Most of those who claim to have done so have a track record of predicting all sorts of crisis in all sorts of places, many of which never turned out.

I think parts of the crises was predictable. I've previously posted a study on academic economists vs professional/real estate association economists in predicting the housing bubble which showed the acadmeic's had a much better record(they also didn't have a conflict of interest). I also think large parts of the crisis were resultant from bad policy decisions, decisions which I'm not sure how foreseeable they were.

I think most economists fail to see these kinds of crises coming because they're paying attention to things other than what might indicate them as foreseeable. They operate on a kind of faith that such events cannot or will not occur, and they revel in the good times that precede them.

Hardly any economists are critical of the system in fundamental ways, they are products of the system and people don't usually bite the hand that feeds them. There are few in America who are objectively critical who actually study matters looking for the signs of trouble to come, very few indeed. Academic econos are better at it because they're at least somewhat detached from all the machinations, but still, even most of them don't want to see failures, don't think they can or will happen, and so have a blind spot to them.

But America has a bad habit of missing crucial events that it probably could have predicted had it not been so wrapped up in the ideas of American exceptionalism or "they wouldn't dare."

The sinking of the USS Maine in Cuba in 1898
The economic collapse of 1929
The attacks on Pearl Harbor, Wake Island, and Clark Air Base in the Philippines in 1941
The NK invasion of SK in 1950
The rise of Fidel Castro in Cuba in 1958
The strong resistence to US intervention in Vietnam in the 1960's
The Iranian Revolution in 1979
Bombing of the Marine Barracks in Lebanon in 1982
The rise of Daniel Ortega and the Sandinistas in Nicuragua in 1985
Saviings & Loan collapse in 1988
Bombing of the World Trade Center in 1992
Bombing of Khobar Towers, Saudi Arabia in 1996
Bombing of Embassies in Kenya and Tanzania in 1998
The rise of Hugo Chavez in Venzuela in 1999
Bombing of the SS Cole in Aden in 2000
Terrorist strikes on the WTC and Pentagon in 2001
The economic crisis of 2008

All of these events took the US by complete and utter surprise. The degree to which they may have been predictbale is open to question but for most of them there should be no doubt that the US should have seen them coming.
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Re: What does it mean to have predicted the financial crisis?

#3  Postby Loren Michael » Jun 17, 2013 3:57 am

GT2211 wrote:http://noahpinionblog.blogspot.com/2013/05/what-does-it-mean-to-have-predicted.html

I've questioned the predictability of such crises* and have been rather skeptical of claims made by economists who claim to have done so. Most of those who claim to have done so have a track record of predicting all sorts of crisis in all sorts of places, many of which never turned out.

I think parts of the crises was predictable. I've previously posted a study on academic economists vs professional/real estate association economists in predicting the housing bubble which showed the acadmeic's had a much better record(they also didn't have a conflict of interest). I also think large parts of the crisis were resultant from bad policy decisions, decisions which I'm not sure how foreseeable they were.


I agree. It's largely a function of hit-counting and miss-forgetting combined with bad policy responses that weren't themselves particularly given to prediction.

This is one of many reasons prediction markets and well-publicized bets could be useful.
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Re: What does it mean to have predicted the financial crisis?

#4  Postby FACT-MAN-2 » Jun 17, 2013 5:56 pm

Loren Michael wrote:
GT2211 wrote:http://noahpinionblog.blogspot.com/2013/05/what-does-it-mean-to-have-predicted.html

I've questioned the predictability of such crises* and have been rather skeptical of claims made by economists who claim to have done so. Most of those who claim to have done so have a track record of predicting all sorts of crisis in all sorts of places, many of which never turned out.

I think parts of the crises was predictable. I've previously posted a study on academic economists vs professional/real estate association economists in predicting the housing bubble which showed the acadmeic's had a much better record(they also didn't have a conflict of interest). I also think large parts of the crisis were resultant from bad policy decisions, decisions which I'm not sure how foreseeable they were.


I agree. It's largely a function of hit-counting and miss-forgetting combined with bad policy responses that weren't themselves particularly given to prediction.

This is one of many reasons prediction markets and well-publicized bets could be useful.

But the overall net effect to date has meant that people can have little idea of what their economic futures may bring, leaving them to live on an uneasy and stressful edge of not knowing and having to be very cautious about their investments, not a great way to live.

My daughter is a case in point. She had been quite prudent and conservative with her investments and ended up losing more than a half $million in 2009, which set her retirement back almost a decade, from age 57 to age 65. Now she lives in constant dread of a repeat, with no real assurances it won''t happen again.

Multiply this across millions of other Americans and you have a nation that's living under constant threat of being wiped out tomorrow or next week or next month or next year, which simply cannot be good for their mental health and emotional well being. Of course, life is full of risk but it seems to me the threat of losing everything or nearly everything is not one that a decent economy would foist upon everyone.
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Re: What does it mean to have predicted the financial crisis?

#5  Postby Loren Michael » Jun 18, 2013 1:41 am

FACT-MAN-2 wrote:
Loren Michael wrote:
GT2211 wrote:http://noahpinionblog.blogspot.com/2013/05/what-does-it-mean-to-have-predicted.html

I've questioned the predictability of such crises* and have been rather skeptical of claims made by economists who claim to have done so. Most of those who claim to have done so have a track record of predicting all sorts of crisis in all sorts of places, many of which never turned out.

I think parts of the crises was predictable. I've previously posted a study on academic economists vs professional/real estate association economists in predicting the housing bubble which showed the acadmeic's had a much better record(they also didn't have a conflict of interest). I also think large parts of the crisis were resultant from bad policy decisions, decisions which I'm not sure how foreseeable they were.


I agree. It's largely a function of hit-counting and miss-forgetting combined with bad policy responses that weren't themselves particularly given to prediction.

This is one of many reasons prediction markets and well-publicized bets could be useful.

But the overall net effect to date has meant that people can have little idea of what their economic futures may bring, leaving them to live on an uneasy and stressful edge of not knowing and having to be very cautious about their investments, not a great way to live.

My daughter is a case in point. She had been quite prudent and conservative with her investments and ended up losing more than a half $million in 2009, which set her retirement back almost a decade, from age 57 to age 65. Now she lives in constant dread of a repeat, with no real assurances it won''t happen again.

Multiply this across millions of other Americans and you have a nation that's living under constant threat of being wiped out tomorrow or next week or next month or next year, which simply cannot be good for their mental health and emotional well being. Of course, life is full of risk but it seems to me the threat of losing everything or nearly everything is not one that a decent economy would foist upon everyone.


To date, sure, it's a huge problem. Policy should be better, and the media should be less cocksure about things it has no business selling certainty on... unless they put some skin in the game.
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Re: What does it mean to have predicted the financial crisis?

#6  Postby Ihavenofingerprints » Jun 18, 2013 2:08 am

Anyone who actually predicted the financial crisis would have bet on bond yields going down and be a billionare by now.
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Re: What does it mean to have predicted the financial crisis?

#7  Postby Macdoc » Jun 18, 2013 12:02 pm

Anyone who actually predicted the financial crisis would have bet on bond yields going down and be a billionare by now.

wasn't like the warnings weren't in wide circulation....3 years before

The global housing boom
In come the waves

The worldwide rise in house prices is the biggest bubble in history. Prepare for the economic pain when it pops
Jun 16th 2005
|From the print edition

NEVER before have real house prices risen so fast, for so long, in so many countries. Property markets have been frothing from America, Britain and Australia to France, Spain and China. Rising property prices helped to prop up the world economy after the stockmarket bubble burst in 2000. What if the housing boom now turns to bust?

According to estimates by The Economist, the total value of residential property in developed economies rose by more than $30 trillion over the past five years, to over $70 trillion, an increase equivalent to 100% of those countries' combined GDPs. Not only does this dwarf any previous house-price boom, it is larger than the global stockmarket bubble in the late 1990s (an increase over five years of 80% of GDP) or America's stockmarket bubble in the late 1920s (55% of GDP). In other words, it looks like the biggest bubble in history.


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Re: What does it mean to have predicted the financial crisis?

#8  Postby Ihavenofingerprints » Jun 18, 2013 1:49 pm

I'm not saying it came out of nowhere or that there weren't signs something was wrong. But to "predict" the actual financial crisis, there should be something on the line. Any journalist or academic can write articles saying "the economy is going well" or "the economy is going to crash", both at the same time if they want.

What they can't do is make money doing that. The people who actually thought something was up would have arranged their finances in a way that reflects this. And I reckon plenty of people did.
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Re: What does it mean to have predicted the financial crisis?

#9  Postby GT2211 » Jun 18, 2013 7:26 pm

Macdoc wrote:
Anyone who actually predicted the financial crisis would have bet on bond yields going down and be a billionare by now.

wasn't like the warnings weren't in wide circulation....3 years before

The global housing boom
In come the waves

The worldwide rise in house prices is the biggest bubble in history. Prepare for the economic pain when it pops
Jun 16th 2005
|From the print edition

NEVER before have real house prices risen so fast, for so long, in so many countries. Property markets have been frothing from America, Britain and Australia to France, Spain and China. Rising property prices helped to prop up the world economy after the stockmarket bubble burst in 2000. What if the housing boom now turns to bust?

According to estimates by The Economist, the total value of residential property in developed economies rose by more than $30 trillion over the past five years, to over $70 trillion, an increase equivalent to 100% of those countries' combined GDPs. Not only does this dwarf any previous house-price boom, it is larger than the global stockmarket bubble in the late 1990s (an increase over five years of 80% of GDP) or America's stockmarket bubble in the late 1920s (55% of GDP). In other words, it looks like the biggest bubble in history.

I would argue that this article highlights the problems with predictions perfectly.
Let's review a bit

The most compelling evidence that home prices are over-valued in many countries is the diverging relationship between house prices and rents....


....America's ratio of prices to rents is 35% above its average level during 1975-2000 (see chart 1). By the same gauge, property is “overvalued” by 50% or more in Britain, Australia and Spain....

http://www.economist.com/node/4079027

This article was wrote in 2005.

The rapid house-price inflation of recent years is clearly unsustainable, yet most economists in most countries (even in Britain and Australia, where prices are already falling) still cling to the hope that house prices will flatten rather than collapse


Image
Despite claims that British property was overvalued by 50%, the FT index shows it rose and remained above the level from when the article was wrote. Nationwide's index showed it later falling back to this 2005 level and Halifax showed perhaps a very slight decline.

In other words claims that the country's housing prices were massively overvalued and set to fall sharply in 2005 were WRONG.


Similarly in Australia, another country who apparently had massively overvalued housing prices in 2005 and according to the author where the collapse was already in progress prices have went up substantially with no collapse at all 8 years later.
Image

He makes no mention of the financial crisis related problems that would ensue and devastate the economy. The closest the article got was:
According to estimates by The Economist, the total value of residential property in developed economies rose by more than $30 trillion over the past five years, to over $70 trillion, an increase equivalent to 100% of those countries' combined GDPs. Not only does this dwarf any previous house-price boom, it is larger than the global stockmarket bubble in the late 1990s (an increase over five years of 80% of GDP) or America's stockmarket bubble in the late 1920s (55% of GDP). In other words, it looks like the biggest bubble in history.


But we know many large falls in the stock markets have not led to wide spread financial meltdown, the author did not mention any causal mechanism for a widespread financial meltdown, or mention anything regarding potential bank runs in general. In summary I don't think the article predicted very much.
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Re: What does it mean to have predicted the financial crisis?

#10  Postby Macdoc » Jun 18, 2013 11:19 pm

You really think the other shoe has dropped??....you're in lalaland.

What the fuck has the stock market casino got to do with a housing bubble - talk about a straw man.

Perhaps I should have posted the companion article for the poorly read...

House prices
After the fall
Soaring house prices have given a huge boost to the world economy. What happens when they drop?
Jun 16th 2005 |From the print edition

PERHAPS the best evidence that America's house prices have reached dangerous levels is the fact that house-buying mania has been plastered on the front of virtually every American newspaper and magazine over the past month. Such bubble-talk hardly comes as a surprise to our readers. We have been warning for some time that the price of housing was rising at an alarming rate all around the globe, including in America. Now that others have noticed as well, the day of reckoning is closer at hand. It is not going to be pretty. How the current housing boom ends could decide the course of the entire world economy over the next few years.


http://www.economist.com/node/4079458

and it did and still does.....

5 June 2013, 11.46pm EST
Spanish banks on the verge of a nervous breakdown

As in the movie that led Pedro Almodóvar to become an internationally famous film director in the late 1980s, Spanish banks have been “on the verge of a nervous breakdown” during the 4 last years, facing a number of serious business challenges and a regulatory overhaul.
.....
Given the precedents, it may seem surprising that Spain has experienced one of the most severe banking crises in recent history. Simply put, the magnitude of the housing bubble was huge and very difficult to digest in an economy with several serious problems. Spain was, and still is, too dependent on external financing. Its economy is uncompetitive, and the private sector has accumulated huge levels of debt (over 220% of GDP).


and that's hardly unique
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