In so doing he conveniently ignores those economists and investors who correctly predicted the crisis and explained in detail what was going to happen and why it was going to happen in the years before the crisis.
There’s always someone predicting a financial crisis, and when it inevitably happens (and one will eventually come), someone probably predicted it. Was there anyone who predicted the crisis based on reliable methods that we could use to predict another crisis?
Easterly does have a point though—there are two ways to predict a crisis. Infer the implicit market prediction, or predict it yourself. The latter is extremely hard because as soon as you find some reliable method of predicting financial crises and tell the world about it, market prices will change to reflect this knowledge. On the other hand, as soon as the market knows about the crisis, the crisis is beginning (if people know the price of X is going to fall soon, then the price of X will fall now as they all sell it). So in some sense, a crisis has to come out of the blue.
It sounds like Easterly was being sarcastic—taking a jab and macroeconomists who DO try to predict crises.
Was there anyone who predicted the crisis based on reliable methods that we could use to predict another crisis?
The Greatest Trade Ever describes how John Paulson’s hedge fund identified the coming sub-prime collapse and made $15 billion betting on it. It also covers several other investors who identified the same issues and made money, though most were not as lucky/smart with their timing as Paulson.
The crisis also looks a lot like a classic example of a credit crunch as described by Austrian business cycle theory. Peter Schiff is one of the best known commentators who predicted the broad outlines of the crisis before it really hit.
Now, I’m not saying that Austrian economists have all the answers or that there isn’t some element of ‘even a stopped clock tells the right time twice a day’ with the predictions of disaster panning out but there were people out there telling a coherent story about why the economy faced major problems and how the crisis would play out. Some of them were quite accurate on the timing as well. You wouldn’t know it from the pronouncements of most economists, bankers and politicians because they look much better if they can proclaim that ‘nobody’ saw or could have seen the problems coming. I’m a lot more impressed with the likes of Andrew Lahde bowing out with a ‘f*ck you’ and millions of dollars in profits from betting on disaster and being right than by William Easterly smugly proclaiming vindication of mainstream economics when his profession largely failed at making predictions or even understanding what was going on in the real economy.
I think the ABC theory, at least in the form that I understand it, is onto something, but I don’t think it’s quite right. I think there should be less attention on the fed and more attention on the decision making of investors. And someone should just mathematicize the damn thing already.
Some Austrian influenced economists (but not Austrian) are convinced that the housing market is doomed to bubbles due to it’s structure and the structure of the human mind. Basically, once prices start rising for an extended period of time, the human mind treats these prices as if they will continue rising EVEN IF they know that the prices are way higher than they should be, given the actual value of the asset. Many experiments have bore this out. Here’s a link.
ETA: Just to clarity a bit, I do think it’s possible—though difficult—to predict that a crisis is going to happen, and even have a decent idea of the magnitude. The timing, on the other hand, I think is nearly impossible to get right with any precision.
There’s always someone predicting a financial crisis, and when it inevitably happens (and one will eventually come), someone probably predicted it. Was there anyone who predicted the crisis based on reliable methods that we could use to predict another crisis?
Easterly does have a point though—there are two ways to predict a crisis. Infer the implicit market prediction, or predict it yourself. The latter is extremely hard because as soon as you find some reliable method of predicting financial crises and tell the world about it, market prices will change to reflect this knowledge. On the other hand, as soon as the market knows about the crisis, the crisis is beginning (if people know the price of X is going to fall soon, then the price of X will fall now as they all sell it). So in some sense, a crisis has to come out of the blue.
It sounds like Easterly was being sarcastic—taking a jab and macroeconomists who DO try to predict crises.
The Greatest Trade Ever describes how John Paulson’s hedge fund identified the coming sub-prime collapse and made $15 billion betting on it. It also covers several other investors who identified the same issues and made money, though most were not as lucky/smart with their timing as Paulson.
The crisis also looks a lot like a classic example of a credit crunch as described by Austrian business cycle theory. Peter Schiff is one of the best known commentators who predicted the broad outlines of the crisis before it really hit.
Now, I’m not saying that Austrian economists have all the answers or that there isn’t some element of ‘even a stopped clock tells the right time twice a day’ with the predictions of disaster panning out but there were people out there telling a coherent story about why the economy faced major problems and how the crisis would play out. Some of them were quite accurate on the timing as well. You wouldn’t know it from the pronouncements of most economists, bankers and politicians because they look much better if they can proclaim that ‘nobody’ saw or could have seen the problems coming. I’m a lot more impressed with the likes of Andrew Lahde bowing out with a ‘f*ck you’ and millions of dollars in profits from betting on disaster and being right than by William Easterly smugly proclaiming vindication of mainstream economics when his profession largely failed at making predictions or even understanding what was going on in the real economy.
I think the ABC theory, at least in the form that I understand it, is onto something, but I don’t think it’s quite right. I think there should be less attention on the fed and more attention on the decision making of investors. And someone should just mathematicize the damn thing already.
Some Austrian influenced economists (but not Austrian) are convinced that the housing market is doomed to bubbles due to it’s structure and the structure of the human mind. Basically, once prices start rising for an extended period of time, the human mind treats these prices as if they will continue rising EVEN IF they know that the prices are way higher than they should be, given the actual value of the asset. Many experiments have bore this out. Here’s a link.
ETA: Just to clarity a bit, I do think it’s possible—though difficult—to predict that a crisis is going to happen, and even have a decent idea of the magnitude. The timing, on the other hand, I think is nearly impossible to get right with any precision.