Who Predicted The Global Financial Crisis?
Gary Karz, CFA
Host of InvestorHome Follow GKarz on Twitter
Principal, Proficient Investment Management, LLC
In the years since the Global Financial Crisis exploded on the scene, there have been a number of articles and initiatives documenting the individuals that publicly predicted the crisis and arguably deserve credit for having sounded the alarm. This page summarizes those efforts and links to those sources (and I expect to update it over time as more information and research becomes available). While plenty of foreign leaders and professional doomsayers have long predicted the collapse of the US economy, to the extent possible it should be useful to differentiate them from those that legitimately warned about a financial crisis or critical elements of it based on some logical analysis that appears to have merit after the fact. I believe a large percentage of investors and home buyers were exposed to at least some credible warnings about a housing bubble, but clearly many people chose to ignore those warnings or dismiss the predictions of a coming housing crash and/or crisis as unlikely to come true. Separately, I was interested in hearing what these individuals prescribe and 9 of the predictors/winners have participated in the crisis expert survey thus far.
Some that claimed to have predicted a crisis and/or housing crash were at a minimum "early." Additionally, predicting the crisis didn't necessarily translate into profits, or reduced losses, in fact there are plenty of examples of recommendations by crisis predictors that did not work out well (and may not have been better in the long run than holding an appropriately structured portfolio balancing risk and return appropriate for the specific investor and periodically rebalancing). Yet, certainly heeding the advice of some of these individuals may have been beneficial for those that listened and acted accordingly. Given that the Global Financial Crisis was arguably the financial event of our generation and (as has been argued by some) was predictable and/or preventable, I believe these individuals deserve a certain degree of credit (although I am generally not an advocate of market timing, past performance doesn't necessarily correlate with future performance, and Jason Zweig has also questioned whether anyone should expect to benefit from "The Extraordinary Popular Delusion of Bubble Spotting").
Nouriel Roubini appears to be the most commonly recognized by (virtually all) the main sources I've seen. Yet, economists chose Australian Professor Steve Keen over Roubini for the Revere Award (outvoted by more than a 2 to 1 margin - details below) for publicly warning of the Global Financial Crisis. Among the first to warn about the bubble and recognized by most sources for accurately predicting the crisis was Dean Baker (who placed 3rd in the Revere Award voting). While there have been dozens of best selling books discussing the crisis after the fact, the first best seller that warned about the crisis in advance was from John Talbott. Suggestions that no one of high stature (or holding a track record for predicting major events of this sort) can be countered by the fact that respected and well known Professor Robert Shiller warned about both the dot.com bubble prior to its peak and warned very publicly about this pending crisis.
The first major effort to identify those that publicly predicted the crisis was a paper titled "No One Saw This Coming": Understanding Financial Crisis Through Accounting Models by Dirk Bezemer. Bezemer identified 12 individuals (academics, government advisers, consultants, investors, stock market commentators and one graduate student) that between 2000 and 2006 warned specifically about a housing led recession within years. "Together they belie the notion that ’no one saw this coming’, or that those who did were either professional doomsayers or lucky guessers." The Bezemer 12 are
Fred Harrison (UK)
Steve Keen (Australia)
Jakob Madsen & Jens Kjaer Sørensen (Denmark)
Bezemer applied four selection criteria.
Some account on how they arrived at their conclusions.
Including an analytical account linking a real estate crisis to real-sector recessionary implications (eliminating John Talbott).
Prediction in the public domain, and
The prediction had to have some timing attached to it (eliminating Raghuram Rajan and Claudio Borio)
Warren Buffett is an interesting case that highlights the importance of context in quotes related to what people did or didn't see coming prior to the crisis. In an interview with Charlie Rose Buffett stated "No one saw the tsunami coming fully" (or here). Yet Buffett was one of the cautionary voices in the years leading up to the crisis, both in terms of risks in derivatives and in real estate prices. For instance, the Berkshire 2002 Shareholder Letter includes "Charlie and I are of one mind in how we feel about derivatives and the trading activities that go with them: We view them as time bombs, both for the parties that deal in them and the economic system." See also Buffett warns on investment 'time bomb' (3/4/2003). In this 2006 interview titled Buffett: Real estate slowdown ahead with Jason Zweig, Buffett states "We've had a real bubble to some degree. I would be surprised if there aren't some significant downward adjustments." So Buffett clearly warned in advance of the potential problems, but he (and most people) perhaps just didn't expect the severity or sequence of events that played out.
Real-World Economics Review is an economics journal that in 2010 polled their readers and asked them to vote for "the three economists who first and most clearly anticipated and gave public warning of the Global Financial Collapse and whose work is most likely to prevent another GFC in the future." Revere Award for Economics winners and details are here and documentation of the predictions by the finalists are included in Foresight and Fait Accompli: Two Timelines for the Global Financial Collapse. The Revere finalists in voting order below included four not previously identified (in italics below) by Bezemer.
Jakob Brøchner Madsen
A number of reports have described "winners" from the crisis. From my perspective a "winner" as opposed to a "predictor" is someone that gained from trading (as opposed to hedging) in advance of the crisis with the key distinction being whether the individual publicly warned about the crisis. When researchers discover investment information that the market is not valuing accurately, they generally have two options. They can publicize the information and seek recognition, or they can try to profit from taking positions. Just as with Stock Market Anomalies, in the case of the Global Financial Crisis there are individuals that went public and attempted to warn about the pending crisis, and there are others that attempted to profit from it. The FCIC conducted a Hedge Fund Survey that could have identified winners, but it was conducted confidentially. Wall Street Winners Get Billion-Dollar Paydays (4/16/2008) in the NYTimes was an initial reporting, but Gregory Zuckerman and Michael Lewis wrote extensively about numerous winners in The Greatest Trade Ever and The Big Short (i.e., Michael Burry, John Paulson, Paolo Pellegrini, Greg Lippmann, Steve Eisman, Philip Falcone, Jeffrey Greene, Andrew Lahde, Charley Ledley, and Jamie Mai). Some investors of course both invested and went public, for instance Jeremy Grantham. I had read Grantham's It’s Everywhere, In Everything: The First Truly Global Bubble in 2007 which includes some great quotes including "Every bubble has always burst" and "The bursting of the bubble will be across all countries and all assets, with the probable exception of high grade bonds."
Another early list of predictors/winners was They Called It Right by Elizabeth Ody (now at Bloomberg) in Kiplingers (12/22/2008). She documents predictions from Grantham and several identified elsewhere including Robert Shiller, Nouriel Roubini, Peter Schiff, and Meredith Whitney (Whitney is also discussed in The Big Short - although Whitney's downgrade of Citigroup dated 10/31/2007 was too late for the criteria of Bezemer and others). Ody's list also adds David Tice and Mark Kiesel, whom I haven't seen elsewhere. She also lists Bob Rodriguez (and Tom Atteberry) - Rodriguez is also discussed by Roger Lowenstein in The End of Wall Street.
Another on-line article discussing crisis warnings was 8 who saw the crisis coming... by Katie Benner and Christopher Tkaczyk at Fortune. They credit Sean Egan (Egan-Jones Ratings), Nouriel Roubini, Mike Mayo, Robert Rodriguez, William Poole, Richard Baker, David Einhorn, and Bill Ackman. Baker served in Congress (R-Louisiana), where he spent much of his career pushing for legislation to impose restrictions on Fannie Mae and Freddie Mac and argued that they were getting too big, taking on too much risk, and needed a stronger regulator. The Baker bill never passed, and in 2008 the government had to step in at taxpayers expense. In the mortgage giants present a huge market risk in Fortune (9/1/2003), some of Baker's warnings that unfortunately proved to be accurate included the following.
"The concern is that if something doesn't work out the way they predict, the American taxpayer could be called on to pay off the debt in some sort of bailout."
"There is clear evidence that the management of this highly regarded company went to great extremes to manipulate the public image of the corporation's performance."
Former Georgia Governor (D) Roy Barnes was elected in 1998 and pushed through the toughest antipredatory lending law in the country in 2002 (according to Michael Hirsh in The Predators’ Ball - 8/9/2008). The law made everyone up the line, including investment banks and rating agencies legally liable if the loans they sold, securitized, or rated were deemed unfair. Barnes warned major mortgage issuers 'You're in for a crash here'." The law was gutted in early 2003 by the Georgia Legislature.
Sir Andrew Large is credited by multiple sources with warning about the coming crash at the London School of Economics in a 2004 speech (he was then deputy governor of the Bank of England - the UK central bank). He reportedly continued to make similar speeches and argue for another two years that the system was unsustainable (he reportedly gave up and retired in January 2006 before his term was up). See Steve Denning's Lest We Forget: Why We Had A Financial Crisis (11/22/2011) which cites Masters of Nothing: How the Crash Will Happen Again Unless We Understand Human Nature by Matthew Hancock and Nadhim Zahawi (not yet released in the US, but available in the UK). Similarly, Rick Bookstaber is credited with predicting a financial crisis arising from financial derivatives in his 2007 book A Demon of Our Own Design: Markets, Hedge Funds, and the Perils of Financial Innovation. See also Why Wall Street should be more like a cockroach at Salon.com (12/20/2007).
Among the first analysts to identify accounting problems at the government-sponsored-enterprises and to warn of the coming credit crisis was Joshua Rosner, coauthor of the best seller Reckless Endangerment: How Outsized Ambition, Greed, and Corruption Led to Economic Armageddon. His related writings date back to at least 2001 and include the following.
6/29/2001 - Housing In the New Millennium: A Home Without Equity Is Just a Rental With Debt
10/3/2004 - A Coming Nightmare of Homeownership? by his Reckless Endangerment coauthor Gretchen Morgenson.
5/14/2007 - Where Did the Risk Go? How Misapplied Bond Ratings Cause Mortgage Backed Securities and Collateralized Debt Obligation Market Disruptions with Joseph R. Mason - "The feared outcome is nothing less than a 21st century bank run."
Time to Slip into Something Less Comfortable? by Jessica Silver-Greenberg in BusinessWeek (6/10/2010) is another article about winners/predictors and she identified Nouriel Roubini, Robert Prechter, Peter Schiff, Michael Panzner, Gary Shilling, Nassim Nicholas Taleb, Marc Faber, Stephen Roach, Meredith Whitney, and David Rosenberg.
The web site economicpredictions.com has also researched Who Predicted the Financial Crisis. Their criteria was 1) claim was public, 2) Was the economist specific about the crisis, its impact and its root causes? 3) Did the economist predict the crisis prior to it's August 2007 start? They identify three previously identified by Bezemer (and others) - Dean Baker, Peter Schiff and Nouriel Roubini (EP obtained a copy of the transcript from an often referenced 2006 IMF session - Bezemer documented Roubini's predictions separately). But EP adds Med Jones, whom I have not found mentioned elsewhere. EP documents multiple sources of predictions by Jones and even concludes that Jones "produced the most accurate predictions among them". Additionally EP has an article listing winners, whom I have added to the extended list below.
Another individual that has been credited with predicting the crisis (but not by traditional media that I'm aware of) is Fred Foldvary. According to Mason Gaffney (author of After the Crash: Designing a Depression-free Economy), "Foldvary stands out as the person who called the 2008 crash" and he argues that Foldvary should have been one of the Revere Award finalists in An Award for Calling the Crash in May of 2011 in Econ Journal Watch. Foldvary published The Business Cycle in the October 1997 issue of the American Journal of Economics and Sociology (a refereed professional journal) wherein he concluded "The 18-year cycle in the US and similar cycles in other countries gives the geo-Austrian cycle theory predictive power: the next major bust, 18 years after the 1990 downturn, will be around 2008, if there is no major interruption such as a global war." By itself some might dismiss this prediction (and some crisis predictions by others) using the explanation that "even a blind squirrel finds a nut every once in a while" or "even a broken clock is right twice a day." But, that suggestion doesn't seem to apply given that Foldvary published other predictive articles including California’s Real Estate Bubble in 2005 and The Depression of 2008 in 2007.
Bezemer and others credit Fred Harrison for predicting the crisis and cite his 2005 book Boom Bust: House Prices, Banking and the Depression of 2010, but previously in 1997 Harrison (and the late Frederic J. Jones) published The Chaos Makers where Harrison wrote "By 2007 Britain and most of the other industrially advanced economies will be in the throes of frenzied activity in the land market . . . on the verge of the collapse that will presage the global depression of 2010. The two events will not be coincidental: the peak in land prices not merely signalling the looming recession, but being the primary cause of it." (See scan provided by Harrison - also cited in After the Crash). Harrison believes land prices are the primary indicator, thus financial mechanisms which are derivative indicators of what's happening in the economy are less accurate tools for predicting business cycle peaks and troughs.
Ron Paul is frequently credited with having predicted a housing crash in numerous videos and speeches (examples from 2002 and 2003). Also in 2002, in a column on WND.com titled My hero, Alan Greenspan, Vox Day wrote "there can be little doubt that the implosion of the equity markets will soon be followed by the pricking of the credit and real estate bubbles. As great financial houses such as Citigroup and JP Morgan Chase teeter on the edge of bankruptcy, it is well within the realm of possibility that the triple whammy of the equity, credit and real estate implosions will lead to the collapse of the entire global financial system."
Andrew Redleaf is the author of Panic: The Betrayal of Capitalism by Wall Street and Washington and according to A Hedge Fund That Saw What Was Coming from the NYTimes Dealbook (10/3/2007), Redleaf wrote to investors in December  “SOMETIME in the next 12 to 18 months, there is going to be a panic in credit markets . . . The driver in the credit market panic of 2007 or 2008 will be a sudden, profound and pervasive loss of faith in the alchemy of structured finance as currently practiced.” Another well known professional that I believe deserves some credit for sounding the warning bell is Jeffrey Gundlach. I have not met Gundlach personally, but regularly read his gloomy (publicly available on their web site) commentaries in 2007 as part of my preparations for consulting and presentations for the firm. In The King of Bonds (2/21/2011) Barron's credits Gundlach for having "warned of a coming residential-mortgage debacle as early as 2006."
This Bank of Canada speech includes a footnote that "only a handful were able to identify ahead of time the causes and potential scale of the crisis" - 1.Examples include Bill White, formerly of both the Bank of Canada and the Bank for International Settlements; Harvard University's Ken Rogoff; Nouriel Roubini of New York University; Wynne Godley of Cambridge; and Bernard Connolly of AIG Financial Products. But Rogoff "in 2008 predicted the failure of big American banks". Connolly (UK) is also noted by FT.com, but it appears he predicted that the financial and economic crisis would intensify in the December 2007 issue of Law and Financial Markets Review (too late for criteria established by the sources above). Many discussions about the number of people that predicted a housing crash and/or financial crisis have used words like a handful, or few. I believe there were 40 or more in the US, as well as many others abroad. In Europe we had Fred Harrison (UK), Sir Andrew Large (UK), Ann Pettifor (South African living in the UK), Claus Vogt (Germany), Jakob Madsen, and Jens Kjaer Sørensen (both Denmark), while in Canada we had William White, and in Australia we had Steve Keen sounding the warning bells.
A number of other individuals appear to have some justification for claiming to have predicted the crisis or critical aspects of it. Some are discussed in various books and I have listed a number of pre-crisis books here. Some of the authors on the list are already identified as predictors above, but others appear to be worthy of further investigation. In How to Profit from the Coming Real Estate Bust, John Rubino predicted "a deep recession" (although he predicted it for 2004) and he discussed many of the same issues highlighted by other predictors including the rise in home ownership rates, the growing debt, and Hyman Minsky's research. Other book authors that may have a claim (I haven't read them or seen independent research attributions of having predicted the "crisis") include the following.
Bill Bonner and Addison Wiggin, authors of the best sellers Financial Reckoning Day: Surviving the Soft Depression of the 21st Century (2003) and Empire of Debt: The Rise of an Epic Financial Crisis (2005)
Mike Stathis, author of America's Financial Apocalypse: How to Profit from the Next Great Depression (2006) and Cashing in on the Real Estate Bubble (2007)
David Decker and George Sheldon, authors of Cash in on the Coming Real Estate Crash (2006)
Clif Droke author of America's Housing Bubble: The Real Estate Outlook for 2006-2012 (2005)
Harry Dent author of The Next Great Bubble Boom (2004)
The following is an extended list of individuals that appear to have some justification for claims of warning in advance of a housing crash, financial crisis, or a critical aspect of the crisis. I do not claim to substantiate the claims of all of these individuals - I am in most cases citing prior sources (in parenthesis below).
Bill Ackman (EPw, Fortune, Who’s Holding the Bag? (May 2007), and Confidence Game)
Sheila Bair (Chrostowski, Nocera - see also Wash Post article)
Dean Baker (Bezemer, EP, RA3) - Baker Survey
Richard Baker (Fortune 2008 & 2003)
Roy Barnes (Hirsh)
Rick Bookstaber (A Demon of Our Own Design 2007)
Susan Bies (Chrostowski - 2006 FOMC Transcripts)
Claudio Borio (Tett, Bezemer*)
Brooksley Born (Frontline, EPw, Chrostowski)
Vox Day (Hannity) - Day Survey
Marc Faber (BW)
Fred Foldvary (Gaffney) - Foldvary Survey
Robert Gnaizda (NYTimes - hat tip EPw, Gnaizda is also interviewed in Inside Job)
Wynne Godley (9/2/1926 – 5/13/2010) (Bezemer, RA9)
James Grant (BW)
Jeremy Grantham (BW, Ody)
Jeffrey Gundlach (Barrons)
Fred Harrison (Bezemer, The Chaos Makers 1997, Boom Bust 2005) - Harrison Survey
Kenneth Heebner (WSJ - "significant decline in prices is coming"...but..."won't by itself push the economy down")
Michael Hudson (Bezemer, RA8)
Eric Janszen (Bezemer, America's Bubble Economy 2006)
Med Jones (EP)
Steve Keen (Bezemer, EP, RA1) - Keen Survey
Mark Kiesel (Ody)
Paul Krugman (EP, RA7)
Sir Andrew Large (Hancock and Zahawi in Masters of Nothing - hat tip Steve Denning)
Jakob Madsen (Bezemer, EP, RA12) - Madsen Survey
Michael Panzner (BW, Financial Armageddon 2007)
Ron Paul (MinnPost, Rand Paul - "During congressional hearings in 2003, Ron Paul predicted the housing crisis and market crash")
Ann Pettifor (RA5, The Coming First World Debt Crisis 2006) - Pettifor Survey
Robert Prechter (EPw, BW, Conquer the Crash 2002)
Raghuram Rajan (Bezemer*, EPw)
Kurt Richebächer (1918–August 24, 2007) (Bezemer, RA11)
Stephen Roach (BW)
Robert Rodriguez (& Tom Atteberry) (Ody, Fortune, and The End of Wall Street)
David Rosenberg (BW)
Joshua Rosner (Coming Nightmare 2004, and Where Did the Risk Go? 2007)
Nouriel Roubini (Bezemer, EP, RA2, BW, Ody, Fortune)
John Rubino (How to Profit from the Coming Real Estate Bust 2003) - Rubino Survey
Peter Schiff (Bezemer, EP, BW, Ody, Crash Proof 2007)
Robert Shiller (Bezemer, RA6, Ody, Irrational Exuberance 2, The One Who Saw It Coming)
Gary Shilling (BW)
Jens Kjaer Sorensen (Bezemer - The Dynamics of House Prices - International Evidence - 2006)
George Soros (RA10)
Joseph Stiglitz (RA4, Hirsh)
John Talbott (Bezemer*, The Coming Crash in the Housing Market 2003, and Sell Now! 2006) - Talbott Survey
Nassim Taleb (EPw, BW, Triana, The Black Swan (4/17/2007))
David Tice (Ody)
Claus Vogt ( Das Greenspan-Dossier in German)
William White (Tett, and Early Prediction of Worldwide Banking Crisis Ignored (7/8/2009))
Meredith Whitney (BW, Ody, The Big Short)
As Andrew Lo suggests in Reading About the Financial Crisis: A 21-Book Review, "Like World War II, no single account of this vast and complicated calamity is sufficient to describe it." I expect this summary to be incomplete and I suspect there are other people that deserve credit for sounding the alarm in advance. I regularly find new books, articles, and papers on the topic of the crisis. Hopefully any other "predictors" will be identified sooner rather than later and I will add new information (follow me on Twitter) as it becomes available (time permitting). Suggestions and comments are welcome.
Read more: http://www.investorhome.com/predicted.htm