Those Who Saw the Crash Coming. . .

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I’ve been more than a bit irritated by Vice President Cheney’s recent comment that no one saw the financial crisis coming.
In response, Zachary Karabell has a very interesting essay on Robert Shiller and his prescience not only about the financial crisis but the character and drivers of that meltdown.
Karabell writes:

Robert Shiller is one of a handful of economists who have been feted for foreseeing the credit crisis, but he is the only one who predicted it for the right reasons. New York University’s Nouriel Roubini, now known as “Dr. Doom,” warned as early as 2006 of an imminent housing crash that would stop America’s consumer-spending spree and lead to severe recession. Another uber-bear, Morgan Stanley’s Stephen Roach, had warned for years that the weakening dollar and the U.S. trade deficit with China were signs of a dangerously imbalanced global economy, doomed to fall. While both deserve credit for highlighting weaknesses that others ignored, neither had much to say about the real reasons for the current state of affairs, namely the vast amount of speculation that took place in the financial world linked to home mortgages.
Shiller did. Long before the extent of the subprime-mortgage crisis was evident, Shiller anticipated that home prices would fall more rapidly than any models had predicted and that financial markets globally would be upended as a result. A specialist in the management of risk, he recognized that the real-estate bubble in the United States and parts of Europe represented, above all, a failure to manage risk. Now Shiller, a Yale professor who first made his name by accurately forecasting the stock-market collapse of 2001, is alone again, this time in his prescription for what needs to be done to stabilize credit markets in the future.
Most experts will tell you that Barack Obama needs to move quickly to contain the multitrillion-dollar market that turned low-quality mortgages into high-priced derivatives, the Wall Street innovation now widely blamed for the credit crisis. Shiller says the opposite. He argues that unless the central issue of risk is addressed, all the money that governments are pouring into financial rescues won’t prevent another, potentially worse financial crisis down the line. In Shiller’s view, derivatives “are a risk management tool much the same way insurance is. You pay a premium and if an event happens, you get a payment.” His radical answer to our problems is that trying to leash financial innovation is hopeless, and that we should instead push forward into a brave new world where derivatives become as common as cash.

The whole article is interesting, but I would also add any number of others who foresaw a big shock on its way — particularly economist Dean Baker, who was a one-man Cassandra about the American housing bubble, George Soros, Clyde Prestowitz, Ken Rogoff (yep, he was worried and was advising John McCain), and Joseph Stiglitz.
And there are probably a lot of others.
— Steve Clemons

Comments

21 comments on “Those Who Saw the Crash Coming. . .

  1. nick says:

    Ron paul was not the only one. THe likes of jesse ventura, chuck baldwin, ralph nader they knew about it. I think any person who challenges the majority is someone to listen too

    Reply

  2. Catherine says:

    It’s easy to be wise after the event but it is clear what would happen if the way things were going would continue.

    Reply

  3. Catherine says:

    It’s easy to be wise after the event but it is clear what would happen if the way things were going would continue.

    Reply

  4. Gary C says:

    All lenders are hurt buy these shady mortgages that flourished for years. They have no one to blame except them self. Any smart intelligent person would of seen this coming!

    Reply

  5. annie says:

    I’ve Bookmark this content…very good to read
    thanks

    Reply

  6. Scott says:

    Many saw the financial crisis coming but there is something called greed which distorts the mind.

    Reply

  7. Joey says:

    These guys will all claim to be gurus who had anything to do with possibly pre-calling the recession. I don’t think they really knew exactly what they claim to.

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  8. pauline says:

    “Fed Magician Digs Deep in Bag of Tricks”
    by CHRIS PETHERICK
    “In a desperate attempt to shock the economy out of recession, Federal Reserve Chairman Ben Bernanke dug deeply into his bag of tricks in late December and ordered that the federal reserve rate be cut to zero percent. In effect, Bernanke is now offering free money to bankers so they can put more consumers and businesses in debt at pure profit to themselves.
    With the master magician’s help, bankers will now be able to pull their own disappearing act on Americans’ money, transferring it to their vaults, so they can get themselves out of the deep financial pit they dug over the past decade. Unfortunately, for the American people, the Fed’s sleight of hand only cheapens the dollar, bringing it as close to worthless as it has ever been.
    The Federal Reserve rate refers to the rate at which private banks borrow money from each other or from the Federal Reserve in order to meet their reserve requirement for making loans, which is usually about 10 cents in reserve for every dollar they loan. It is set by the Fed and is considered one of its most powerful tools to control the country’s money supply. By lowering the rate to zero, the Fed is essentially handing out free money to bankers, saying: “Take this bag of cash. Use it for loans or for whatever you want. It doesn’t matter what interest rate you charge; you’re guaranteed a profit.”
    In announcing the move, Bernanke said the Fed is willing to try anything to stimulate the economy. The problem for the American people is that the Fed has already loaned an unprecedented $9 trillion into the economy in the past several months, and it has had no effect on the tanking economy. It has only propped up insolvent financial institutions, while consumer spending flatlines and the unemployment rate goes up.
    Bernanke’s magic act did have some effect, however, on the value of the dollar, which had been gaining ground in recent months. Almost immediately after the news of the rate drop, the dollar slid even further against Asian currencies like the Japanese yen. The greenback also sank against the euro, which has been down considerably from a high of nearly $1.50 to the euro.
    For Main Street, the move sends a strong signal that the Federal Reserve is not interested in helping Americans directly. If the Federal Reserve really wanted to come to the rescue of the American people and help them recover from an economic depression, Fed officials would offer zero percent loans directly to American businesses and citizens, bypassing the banks entirely. This would have the effect of introducing interest-free dollars into circulation. It would cut out the middleman and remove the extra cost to Americans—the interest the bankers make on the loans.
    Clearly, the Fed is only interested in ensuring the future of the current system of debt—and the profits of its fellow private bankers. And with that in mind, how can anyone believe that the Fed is trying to help the man in the street?
    In his timeless book on the ills of private banking, titled The Legalized Crime of Banking*, author Silas Adams pointed out this very fact, recounting the now infamous speech by one-time Bank of England president Sir Josiah Stamp given at the University of Texas in the 1920s. Before a packed room of students and some 150 university professors, Stamp pulled back the veil on private banking, admitting that “Banking was conceived in iniquity and born in sin. . . . Bankers own the Earth. Take it away from them but leave them the power to create money and, with a flick of the pen, they will create enough money to buy it back again. . . . Take this great power away from them and all great fortunes like mine will disappear, and they ought to disappear, for then this would be a better and a happier world to live in. . . . But if you want to continue to be the slaves of bankers and pay the cost of your own slavery, then let bankers continue to create money and control credit.”
    Few words ring truer today than what Adams had to say about private banking and what it has done to the United States. It has forced millions of people, along with our own government, deeply into debt by controlling the people’s own property—their means of exchange, money.
    Adams had advice for his readers, which seems even more appropriate today: “Remember 1929, and the years that followed, and curse yourself for not compelling Congress to take back the creation and control of money, and the nation’s credit then.”
    Reading his words in January 2009, you have to wonder how long Americans will continue to believe in this gigantic fraud of private banking.
    “You have been taught that bankers made all that’s good possible, and you fear you might starve if you lost your master,” writes Adams. “He may be a fraud, you admit to yourself, but maybe his fraud, you reason, keeps you. Well, brother, it does—it keeps you in bondage.”
    source —
    http://www.heartlandnews.us/01_02_09_fedtricks.html

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  9. pauline says:

    Ron Paul saw it years ago —
    “Mr. Speaker, I rise to introduce legislation to restore financial stability to America’s economy by abolishing the Federal Reserve. I also ask unanimous consent to insert the attached article by Lew Rockwell, president of the Ludwig Von Mises Institute, which explains the benefits of abolishing the Fed and restoring the gold standard, into the record.
    Since the creation of the Federal Reserve, middle and working-class Americans have been victimized by a boom-and-bust monetary policy. In addition, most Americans have suffered a steadily eroding purchasing power because of the Federal Reserve’s inflationary policies. This represents a real, if hidden, tax imposed on the American people.
    From the Great Depression, to the stagflation of the seventies, to the burst of the dotcom bubble last year, every economic downturn suffered by the country over the last 80 years can be traced to Federal Reserve policy. The Fed has followed a consistent policy of flooding the economy with easy money, leading to a misallocation of resources and an artificial “boom” followed by a recession or depression when the Fed-created bubble bursts.
    With a stable currency, American exporters will no longer be held hostage to an erratic monetary policy. Stabilizing the currency will also give Americans new incentives to save as they will no longer have to fear inflation eroding their savings. Those members concerned about increasing America’s exports or the low rate of savings should be enthusiastic supporters of this legislation.
    Though the Federal Reserve policy harms the average American, it benefits those in a position to take advantage of the cycles in monetary policy. The main beneficiaries are those who receive access to artificially inflated money and/or credit before the inflationary effects of the policy impact the entire economy. Federal Reserve policies also benefit big spending politicians who use the inflated currency created by the Fed to hide the true costs of the welfare-warfare state. It is time for Congress to put the interests of the American people ahead of the special interests and their own appetite for big government.
    Abolishing the Federal Reserve will allow Congress to reassert its constitutional authority over monetary policy. The United States Constitution grants to Congress the authority to coin money and regulate the value of the currency. The Constitution does not give Congress the authority to delegate control over monetary policy to a central bank. Furthermore, the Constitution certainly does not empower the federal government to erode the American standard of living via an inflationary monetary policy.
    In fact, Congress’ constitutional mandate regarding monetary policy should only permit currency backed by stable commodities such as silver and gold to be used as legal tender. Therefore, abolishing the Federal Reserve and returning to a constitutional system will enable America to return to the type of monetary system envisioned by our nation’s founders: one where the value of money is consistent because it is tied to a commodity such as gold. Such a monetary system is the basis of a true free-market economy.
    In conclusion, Mr. Speaker, I urge my colleagues to stand up for working Americans by putting an end to the manipulation of the money supply which erodes Americans’ standard of living, enlarges big government, and enriches well-connected elites, by cosponsoring my legislation to abolish the Federal Reserve.”
    source —
    http://www.lewrockwell.com/paul/paul53.html

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  10. etienne says:

    I’m afraid M. Karabell has not really studied the work of Nouriel Roubini: if you’ve read his blog these last three years, the roots of the crisis had been described accurately.
    And Steve is also right about Stiglitz. The latter used a more “macroeconomic frame of analysis, but he was correct all along.
    This lead me to a question: Steve, do you have any information regarding (what looks like)the absence of Joe Stiglitz in the Obama team discussions?

    Reply

  11. karenk says:

    Best response capturing what the average middle class working American is thinking was the person who stood outside the stock exchange with a sign saying, “JUMP FUCKERS!”
    Greed greed greed…

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  12. Robert Morrow says:

    I remember Jim Rogers giving an interview with Maria Bartiromo in 2004 or 2005 and he was predicting all sorts of doom, gloom and disaster. She asked him about Fannie Mae, which was trading around $50-$60 at the time, and he said Fannie Mae was a “PERMANENT SHORT” for him at that it would eventually blow up and go to zero along with a lot others.

    Reply

  13. Susan says:

    I am one who saw the crash coming – back in 2005. And that was before I learned about CDS and CDOs! When I learned about them – late 2007 – I realized our economy is going to TANK TOTALLY!
    Yeah, we will call this the “greater depression after the crash of America”.
    I also figured out that they would not find any WMDs in Iraq, and since Iraq did not and could not hurt us, it was all a massive war crime. And as I watch these criminals get away with this war crime, I am sickened and really don’t even want to be an American any more. It is just too evil.
    And how did I figure all this out? I read. I still am capable of critical thought.
    And I work as a pediatric audiologist.
    ps. you can watch al Jazeera English at http://www.livestation.com

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  14. DonS says:

    I saw this crash coming for God’s sake! So did lot’s of others including lot’s of other ordinary people who did not have an economic or political stake in turning, if not perpetuating the environment to turn, a blind eye.
    This wasn’t an accident. The institutionalization of mechanisms to promote and protect the fruits of greed for as long as possible for the ‘chosen’ class and its minions was a plan in any meaningful sense. Only by the narrowest reading of the unfolding collapse was it either unpredicatble by those claiming or unforseen by those claiming ‘no one saw it coming . . . ‘

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  15. ... says:

    >>Most experts will tell you that Barack Obama needs to move quickly to contain the multitrillion-dollar market that turned low-quality mortgages into high-priced derivatives, the Wall Street innovation now widely blamed for the credit crisis.<<
    will most experts be on the level in describing how fannie mae and freddie mac, the gov’t supported enterprises (gse’s) along with asset back commercial paper (abcp) had a very big role to play in all of this? i wonder, as thhat might be revealing too much and start pointing back to the federal reserve under greenspan who turned a blind eye to it all.. not to say greenspan is the only one who knew what was going on, but all of these bankers were complicit in creating a volatile concoction that none of them would ever want to openly acknowledge or admit to.. hey, it is all about profit right??
    screwing the little guy and making sure the bankers are looked after seems to be the acceptable course of washington.. one need only look at where all the bailout money went no questions asked, while on the other hand the auto industry has been told to basically go screw themselves and break up their unions while they are at it.. if the ordinary citizen in the usa can’t see that writing in large letters, then it is as the saying goes ” there’s a sucker born every minute” and that hasn’t changed..

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  16. WigWag says:

    Paul Krugman saw this disaster coming long ago. He pointed out that we were in a housing bubble over and over again in his column. And he was one of the harshest and most prescient critics of Alan Greenspan.
    As for Roubini (who I like), like James Grant, he’s predicted 10 of the last 3 recessions.

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  17. Bob says:

    The Austrian economics bunch have been talking about it for years.

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  18. Spunkmeyer says:

    Anyone who read Ben Jones at The Housing Bubble Blog from 2004
    onwards or read CR and Tanta at Calculated Risk any time in the
    past few years was seeing compilations of material that pointed to
    the current situation.
    I personally used that information to make some life changes in
    2005 and try to be better insulated against the storm than I was in
    2004.
    Four years later, I have no regrets.

    Reply

  19. Angela says:

    I don’t know how many people “saw the crash coming” but I can tell you that many people saw parts of it coming. My husband was a mortgage loan officer in Los Angeles five years ago and he refused to sell Adjustable Rate Mortgages because he knew what was going to happen to the people who took them.
    I think that a large number of intelligent people saw portions of this crash coming, but didn’t know it was going to be this widespread or severe.
    Angela from Aberdeen
    Backlinks

    Reply

  20. Zathras says:

    What Vice President Cheney likely meant is that no one he knew saw the crash coming. If this is so, his statement is probably an accurate one — at least as accurate as then-NSA Rice’s testimony after 9/11 that no one could imagine people hijacking airplance and flying them into buildings. The difficulty, As Donald Rumsfeld might have put it, is that it’s often the people you don’t know who know things you don’t know.

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  21. ... says:

    cheney was too busy seeing wmds in all the places he wanted haliburton to go, that he didn’t see much else.. the man has lacked character and integrity from the get go.. why bother even quoting him? i refuse to be propagandized by the man..
    as for the financial crisis, i maintain we are just in the early stages of the show… until more folks take the time to understand what the ‘federal reserve’ is, they are bound to find out more as we move forward..

    Reply

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