Like most people I didn’t really see the financial meltdown coming. I did think that money was too loose and that interest rates were the wrong tool for fixing that issue, however I merely expected some inflation and perhaps a minor slow down once the central bankers moved to arrest it. I certainly did not expect any sort of widespread collapse of previously successful and stable businesses, or a situation where a subsequent doubling of base currency in the USA could happen at the same time that commodity prices declined (theoretically I have no problem with both coinciding but I didn’t expect to see it in my lifetime). For a glance at the post crisis spike in base currency take a look at the following chart, note the time scale and then note what happens at the very end of the chart:-
Clearly people like me, and clearly people a lot more educated in economics than the likes of me, were missing part of the picture.
So who saw the financial meltdown coming? Not as some vague problem in the future but as a specific impending problem.
Not many people apparently. Certainly not the likes of Alan Greenspan or Glenn Stevens who are pretty much on the record as saying that this was not expected. Ron Paul proponents say that he did. However he has been forcasting bad things for a long time so perhaps people are inclinded to think he just got lucky.
The Peter Schiff footage from 2006 and 2007 shows that he was screaming about the impending finanical crisis. Watching some of his footage now and the stock tips of his critics is quite hilarious and also somewhat tragic. Clearly he was very confident of his forcasts and clearly he wasn’t going to be told he was merely being gloomy. I know this footage already got a plug in the previous ALS article but it really is worth a look.
The other name that gets bandied about is Australian Steve Keen. Initially like anybody that cuts against the mainstream he sounds like a crank. However Steve isn’t just huffing and puffing about the evil of markets and the neoclassical models. He does at least seem to have some reasonably sophisticated alternative models figured out. Whether sophisticated in this context means better is obviously a contentious issue and I’m not really familiar enough with his work to comment.
Here is how he starts his story:-
How come I got it right, and “they”–the official economic managers–got it so wrong?
It’s not because I’m any brighter than they are–there are plenty of highly intelligent people in those organisations. Instead, it’s because they follow mainstream views in economics, and I follow a minority perspective. The economic history we are currently living through is proof that the mainstream is fundamentally wrong about the nature of the economy, while my minority perspective is at least partially right.
This is not something one should be able to say about a science, and there lies the rub: economics is not even close to qualifying as a science. A better model for economics is a group of warring religions–or science, such as it was, before Galileo’s empirical revolution, when what mattered to scientists was not empirical relevance, but conformity to with the Bible.
Forty years ago, Keynes was The Messiah, and his General Theory was the Bible. But the “stagflation” episode of the 1970s allowed a new Messiah to arise: Milton Friedman, with his doctrine of Monetarism. Though Monetarism itself is no longer espoused, the economic religion that Friedman represented–known as “Neoclassical Economics”–supplanted the previous Keynesian orthodoxy. Today, the majority of economists know of no other way to think about the economy–and they run Central Banks and Treasuries throughout the world, and dominate tuition in universities.
However I can’t really do his story justice here so check out his blog.
What I’d love to see is a debate / discussion between Peter Schiff and Steve Keen on what caused this mess, and what policy position we should adopt as a result. Does the worldview of these guys converge or are they each using a different brand of tea leaves.