If they were to hand out medals for predicting the global
financial crisis, the Gold Medal for having predicted the crisis must go to
Irving Fisher, who in 1933 developed the "Debt Deflation
Theory of Great Depressions" – a piece which remains the best
description of what happens to an economy that succumbs to excessive debt in
the context of low inflation. We are now reliving the horror he warned us
against.
Image: The Digerati Life
Silver goes to Hyman Minsky, for combining Fisher’s insights with the vision of
a cyclical economy he inherited from Schumpeter, and investor behaviour under
uncertainty he acquired from Keynes, to develop the "Financial Instability
Hypothesis". This theory explains how a period of economic tranquillity
can lead to runaway expectations that induce a debt-financed speculative bubble
like the one that we partied through from 1994 until 2007.
I’ll award myself the Bronze, for having taken these two inspirations and
developed mathematical models of financial instability in the early 1990s,
which were the reason I expected that at some stage a serious financial
denouement would arrive. My first academic paper on this topic, entitled "Finance
and Economic Breakdown", was published in 1995.
I have a substantial number of colleagues in non-orthodox academic economics
who, by their own developments of Minsky’s analysis, also deserve awards for
prescience. Prominent here are Wynne Godley, Marc Lavoie, Jan Kregel, Randy
Wray, and Michael Hudson. Institutions like the Jerome Levy Institute and the
Economics Department at the University
of Missouri Kansas City
have supported their work.
The most prominent relatively orthodox economist who foresaw this crisis was
Robert Shiller, who originated the term Irrational Exuberance that was later
attributed to Alan Greenspan. He has done an invaluable service by developing
a long run price index for American housing.
Few academics have been as active in the public arena as they have been in
scholarly research. Nouriel Roubini has made the outstanding public
intellectual contribution here, with his RGE Monitor, which began
operating in 2004-though it is a subscription only, for-profit site. Dean Baker of the Centre for Economic and Policy
Research has also made substantive public and analytic contributions.
I began my public commentary on the debt crisis itself in December 2005, and
have maintained a blog on this
since mid-2006. Michael Hudson coined
the phrase the FIRE Economy (Finance, Insurance and Real Estate) to describe
the foundations of this speculative excess, and his website has significant
material on the crisis.
Several notable stock market contrarians predicted a finance-induced
catastrophe, none more so than Marc Sexton, who established the Fiendbear website in 1996, after starting
to comment on the madness of the then very young Internet Bubble in 1995.
The most prominent contrarian commentator is Eric Janszen, who established the iTulip website in November 1998 to parody the
then rampant ‘Internet Bubble’ as a speculative mania. He shut the site down
after the Dotcom Crash of 2000 only to be forced to start it again as the
Subprime Catastrophe gained steam.
Not long after iTulip began, the financial market analyst Doug Noland started
the Credit
Bubble Bulletin, which was probably the most incisive academically-grounded
commentary.
The academic economists who predicted this crisis were ignored because the
mainstream of the economics profession follows what is known as neoclassical
economics, which ignores debt and models the economy as if it is always in
equilibrium. The contrarians were ignored because for so long, the way to make
money was to "go with the herd". Today, conventional neoclassical
economics is being starkly proven wrong by this very crisis, while contrarians
are now the only ones making money.
