Voting is now open for the Revere Award for Economics. The Revere Award is the positive companion to the Dynamite Award in Economics, which was developed by the Real World Economics Review to recognize the failure of the vast majority of economists to foresee the Global Financial Crisis. It was awarded to the three economists whose work most helped cause the GFC, with the eventual winners being Alan Greenspan, Milton Friedman and Larry Summers (see Greenspan, Friedman and Summers win Dynamite Prize in Economics).
The Revere Award, on the other hand, will go to three of the handful of economists who foresaw the global financial crisis. Yours truly is one of the nominees, along with Dean Baker, Wynne Godley, Michael Hudson, Paul Krugman, Jakob Brøchner Madsen, Ann Pettifor, Kurt Richebächer, Nouriel Roubini, Robert Shiller, George Soros and Joseph Stiglitz. Click here to go to the Real World Economics Review voting site.
The remainder of this post reproduces the three relevant entries from the RWER:
- Voting is now open for the Revere Award for Economics;
- Foresight and Fait Accompli: Two Timelines for the Global Financial Collapse; and
- Shortlist for the Revere Award for Economics
For the record, I voted for Wynne Godley, Michael Hudson, and myself.
The Revere Award for Economics is named in honour of the American revolutionary hero Paul Revere, who rode through the night to warn of the approaching British army. In this its inagural year, it will be awarded to the 3 economists who first and most clearly saw the Gobal Financial Collapse coming and whose work is most likely to prevent another GFC in the future.
96 people were nominated for the prize. Through consultation with contributors to the Real-World Economics Review Blog, the following shortlist of twelve economists has been selected for the ballot: Dean Baker, Wynne Godley, Michael Hudson, Steve Keen, Paul Krugman, Jakob Brøchner Madsen, Ann Pettifor, Kurt Richebächer, Nouriel Roubini, Robert Shiller, George Soros and Joseph Stiglitz.
As with the Dynamite Prize, which attracted over 7,500 mostly economist voters –, the ballot will be conducted by PollDaddy.
Voting is quick and easy. The ballot is near the top of the right-hand column (of the Real World Economics Review Blog home page). Click on your three choices and then the big yellow “vote” button.
Steve Keen concludes his JPKE paper “Finance and economic breakdown: modelling Minsky’s ’financial instability hypothesis’” as follows:
There are, however, severe doubts as to whether the kind of government that has been constructed over the last thirty years is a sufficiently powerful or balanced stabilizer to capitalist investment behaviour.
From the perspective of economic theory and policy, this vision of a capitalist economy with finance requires us to go beyond that habit of mind that Keynes described so well, the excessive reliance on the (stable) recent past as a guide to the future. The chaotic dynamics explored in this paper should warn us against accepting a period of relative tranquillity in a capitalist economy as anything other than a lull before the storm. [emphasis added]
Wynne Godley in a paper with L. Randall Wray argued that the current stability in the US economy was unsustainable, because it was driven by the growth of households’ debt, which in turn was fuelled by real estate capital gains. Using an accounting framework of the US economy developed by Godley, they predicted that when debt growth slowed down – as it inevitably would within years -, growth would stop.
Kurt Richebächer in September 2001 wrote:
the new housing boom is another rapidly inflating asset bubble financed by the same loose money practices that fuelled the stock market bubble.
Dean Baker in August published “The Run-Up in Home Prices: Is It Real or Is It Another Bubble?” in which he said:
While the short-term effects of a housing bubble appear very beneficial—just as was the case with the stock bubble and the dollar bubble—the long-term effects from its eventual deflation can be extremely harmful, both to the economy as a whole, and to tens of millions of families that will see much of their equity disappear unexpectedly. The economy will lose an important source of demand as housing construction plummets and the wealth effect goes into reverse. This will slow an economy already reeling from the effects of the collapse of the stock bubble of 1999, … Unfortunately, most of the nation’s political and economic leadership remained oblivious to the dangers of the stock market and dollar bubbles until they began to deflate. This failure created the basis for the economic uncertainty the country currently faces … [which] will be aggravated further by the deflation of the housing bubble. This process will prove even more painful if the housing bubble is allowed to expand still further before collapsing.
Jakob Brøchner Madsen (month unknown) wrote:
I am very pessimistic. We are heading into something in the world which is worse than what we experienced in 1982. It will be the worst recession since the Second World War”.
Ann Pettifor in August published in Open Democracy “The Coming First World Debt Crisis”. The article, which focused on “a giant credit bubble”, began:
The reckless financial policies of leading western powers in the last two decades make it likely that the next seismic debt crisis will be in America, not Argentina. It can be avoided … only by serious efforts to bring regulation and balance to the international economy.
Ann Pettifor in September published her edited collection Real World Economic Outlook: The Legacy of Globalization: Debt and Deflation, which examined the growth and new dominance of the financial sector. Contributors included Dean Baker, Herman Daly, Wynne Godley, Michael Hudson and Joseph Stiglitz.
Pettifor’s introduction said:
Removing controls over the finance sector paved the way for its rise to dominance, which in turn has led to a transformation of the global economy and increased instability.
[One of] the consequences for the global economy [is an] enormous increase (or ‘bubble’) in the stock of financial assets in relation to the real economy, as measured by GDP or the stock of physical, human, and technological capital.
There will be a collapse in the credit system in the rich world, led by the United States
Once default rates approach 1 per cent of the value of the debt across the whole lending spectrum, the profitability of banks is called into question. If default rates reach 2 per cent, the probability of a financial crisis rises appreciably.
Also in September, Pettifor restated her arguments for a forthcoming global financial collapse in a cover article for The New Statesman magazine.
Dean Baker published in the Los Angles Times on December 3 “Who to Blame When the Next Bubble Bursts. This was the first of dozens of columns that Baker wrote on the bubble. (most can found at http://www.cepr.net/index.php?option=com_issues&task=view_issue&issue=11&Itemid=22)
Dean Baker’s column “Building on the Bubble” in May appeared in six US newspapers. He wrote:
The fact that people are borrowing against their homes at a rapid rate (more than $750 billion in 2003) is more evidence of an unsustainable bubble. The ratio of mortgage debt to home equity is at record highs.
This is especially scary because equity values may be inflated by as much as 30 percent due to the bubble,
Michael Hudson in June presented at an academic conference the paper “Saving, Asset-Price Inflation, and Debt-Induced Deflation”. He noted that the ‘large debt overhead – and the savings that form the balance-sheet counterpart to it” is the ‘anomaly of today’s [US] economy’. He warned against the ‘self expanding growth of savings’ and the unsustainable ‘growth of net worth through capital gains’ induced by US monetary and tax policies. He said that the:
natural limit to the process was reached in 2004 when the Federal Reserve reduced its discount rate to 1 percent. Once rates hit this nadir, further growth in debt threatens to be reflected in draining and amortization payments away from spending on goods and services, slowing the economy accordingly.
Dean Baker sponsored through the CEPR a $1,000 essay contest to solicit the most-convincing argument that the housing market was not in a bubble. The contest was twice written up in the New York Times.
Jakob Brøchner Madsen (month unknown) wrote:
There is something completely wrong. We are seeing large bubbles and if they bust, there is no backup. House prices and shares are completely out of proportion. And it will go wrong.
Dean Baker and Paul Krugman in March predicted in a paper written with J. Bradford DeLong that asset prices in the US were bound to fall in the medium term.
Robert Shiller in May in the Introduction to the second edition of his book Irrational Exuberance warned that home prices were looking “very anomalous” and that:
further rises in the [stock and housing] markets could lead, eventually, to even more significant declines… A long-run consequence could be a decline in consumer and business confidence, and another, possibly worldwide, recession. This extreme outcome … is not inevitable, but it is a much more serious risk than is widely acknowledged.
Paul Krugman on 27 May wrote in his NYT column:
If housing prices actually started falling, we’d be looking at [an economy pushed] right back into recession. That’s why it’s so ominous to see signs that America’s housing market … is approaching the final, feverish stages of a speculative bubble.
Nouriel Roubini in summer 2005 predicted that real home prices were likely to fall at least 30% over the next 3 years.
Steve Keen in December, drawing heavily on his 1995 theoretical paper “Finance and economic breakdown: modelling Minsky’s ‘financial instability hypothesis’” and convinced that a financial crisis was approaching, decided to go very public with his analysis. He registered the webpage www.debtdeflation.com dedicated to analyzing the “global debt bubble”. His site soon attracted a large international audience. At the same time he began appearing on Australian radio and television with his message of approaching financial collapse.
Jakob Brøchner Madsen (month unknown) wrote:
I feel lost. Money growth is increasing, oil and commodity prices have doubled in the last 10 years. Therefore inflation and interest rates should increase, but nothing happens. All the models we use to predict inflation have broken down, it is chaos.
George Soros in January on CNBC television said:
There’s (a) problem that I think is brewing, and that is the end of the housing boom in the United States and the ability of households to spend more than they earn because the value of their house is rising.
So I expect that by ‘07 there will be a significant decline in U.S. consumer spending and I don’t see what will take its place because it’s so important as a motor of the world economy.
And to an audience in Singapore Soros said:
the soft landing (for the US economy) will turn into a hard landing. That’s why I expect the recession to occur in 2007 not 2006.
Michael Hudson in April published ‘The Road to Serfdom: An Illustrated Guide to the Coming Real Estate Collapse’, in Harper’s Magazine. In it he wrote:
almost everyone involved in the real estate bubble thus far has made at least a few dollars. But that is about to change. The bubble will burst… America holds record mortgage debt in a declining housing market… For those who bought at the top and who now face decades of payments on houses that soon will be worth less than they paid for them, serious trouble is brewing. …. Rising debt-service payments will further divert income from new consumer spending. Taken together, these factors will further shrink the “real” economy, drive down those already declining real wages, and push our debt-ridden economy into Japan-style stagnation or worse.
Wynne Godley in May in a paper with Gennaro Zezza, “Debt and Lending: A Cri de Coeur”:
demonstrated again the US economy’s dependence on debt growth and argued that only the small slowdown in the rate at which US household debt levels were rising, resulting form the house price decline, would immediately lead to a “sustained growth recession … somewhere before 2010
Kurt Richebächer in July wrote in his newsletter:
The one thing that still separates the U.S. economy from economic and financial disaster is rising house prices that apparently justify ever more credit and debt”…
… a recession and bear market in asset prices are inevitable for the U.S. economy. … This will not be a garden-variety recession, in which monetary easing unleashes pent-up demand, as it used to do in past business cycles”.
… the great trouble for the future is that the credit bubble has its other side in exponential debt growth
The U.S. liquidity deluge of the last few years has had one single source: borrowing against rising assets backed by the Fed’s monetary looseness… all hinging on further rises in asset prices. But they are going to plunge.
Michael Hudson published his paper “Saving, Asset-Price Inflation, and Debt-Induced Deflation”.
Joseph E. Stiglitz et al. in August 2006 published Stability with growth: macroeconomics, liberalization and development which includes a chapter on “capital market failures” that looks “at how capital market liberalization can exacerbate the problems posed by coordination failures and broader macroeconomic failures” [p. 189]
Robert Shiller on August 30, writing with K. Case in the Wall Street Journal, said:
there is significant risk of a very bad period, with slow sales, slim commissions, falling prices, rising default and foreclosures, serious trouble in financial markets, and a possible recession sooner than most of us expected.
Nouriel Roubini on August 23, 2006 wrote:
By itself this [house price] slump is enough to trigger a US recession.
On August 30 he wrote:
The recent increased financial problems of … sub-prime lending institutions may thus be the proverbial canary in the mine – or tip of the iceberg – and signal the more severe financial distress that many housing lenders will face when the current housing slump turns into a broader and uglier housing bust that will be associated with a broader economic recession. You can then have millions of households with falling wealth, reduced real incomes and lost jobs…
Like Baker and Keen, Roubini now put out repeated public warnings of the systemic implications of the housing bubble.
Kurt Richebächer in September 2006 wrote:
There is no question that the U.S. housing bubble is finished. All remaining questions pertain solely to speed, depth and duration of the economy’s downturn.
Ann Pettifor in October published her book The Coming First World Debt Crisis, an extension of the analysis she had presented in 2003 and which detailed legislation needed to avert the coming collapse. She summarized her book’s analysis in articles for The Guardian and Open Democracy.
OctoberThe boom in US house prices begins to reverse its course. Defaults on home mortgages approach record levels.
Joseph E. Stiglitz on October 30 on the Alex Jones radio show discussed the warning signs of plummeting real estate prices in the U.S. and the possibility of a global economic downturn. He said:
If it’s well managed it will only be a slow-down, if it’s not well-managed it could be a recession,
….I think we can avoid an implosion if we manage this carefully but it’s going to be very risky
Steve Keen in November began publishing on www.debtdeflation.com his monthly DebtWatch Reports (33 in total). These were substantial papers (upwards of 20 pages on average) that applied his previously developed analytical framework to large amounts of empirical data. Initially these papers analyzed the GFC that he was predicting and then its realization. His first report was titled “The Recession We Can’t Avoid?”.
Dean Baker in November, published the paper “Recession Looms for the U.S. Economy in 2007” (http://ideas.repec.org/p/epo/papers/2006–29.html) in which he forecasts that weakness in the housing market was likely to push the economy into a recession in 2007, predicting –0.7 % GDP growth over 2007, Baker wrote:
The wealth effect created by the housing bubble fuelled an extraordinary surge in consumption over the last five years, as savings actually turned negative. …This home equity fuelled consumption will be sharply curtailed in the near future…. The result will be a downturn in consumption spending, which together with plunging housing investment, will likely push the economy into recession….Over the course of the year, the economy will shed 1.2 million jobs.”
Nouriel Roubini in a Nov 17 blog said:
[t]he housing recession is now becoming a construction recession; and the construction recession is now turning into a clear auto and manufacturing recession; and the manufacturing recession will soon turn into a retail recession as squeezed households – facing falling home prices and rising mortgage servicing costs – sharply contract their rate of consumption.
Steve Keen’s December report, titled “The runaway train of debt”, concludes:
Clearly households can’t go on like this. At some point, whether voluntarily or by duress, households have to stabilise, and preferably substantially reduce, their level of debt. They can only do this by either significantly reducing spending, or by liquidating assets. Long before this process actually causes the debt burden to fall, the economy will be in a debt-induced recession.
Paul Krugman on 4 December in the NYT wrote
Right now, statistical models based on the historical correlation between interest rates and recessions give roughly even odds that we’re about to experience a formal recession.
2007 (The GFC becomes a fait accompli)
Steve Keen continues through the year with Debtwatch Report
February The decline in US house prices accelerates. HSBC issues its first profit warning in its 142-year history, citing bad debts in its US subprime unit.
April New Century, the US’s largest subprime lender, goes bankrupt.
Wynne Godley in April foresaw output growth “slowing down almost to zero sometime between now and 2008 and then recovering toward 3 percent or thereabouts in 2009–10”; but warned that “unemployment [will] start to rise significantly and does not come down again.”
July – Investment bank Bear Stearns reveals it has made huge losses in two of its hedge funds.
August – Banks around the world begin to disclose that they too have large holdings in mortgage-backed securities.
September – British bank Northern Rock requests emergency funds, prompting a run on the bank.
Steve Keen on 14 September published, with the Centre for Policy Development, a 79 page report “Deeper in Debt”, analyzing the causes of the financial breakdown in the US and the possibility of it spreading to Australia.
October – Citigroup reports subprime related losses of $40bn.
George Soros in early November in a lecture at New York University said that after decades of overspending the U.S. economy is “on the verge of a very serious economic correction”
Wynne Godley and others in November 2007 predicted “a significant drop in borrowing and private expenditure in the coming quarters, with severe consequences for growth and unemployment”.
George Soros in January at Davos said:
The current crisis is not only the bust that follows the housing boom,… It’s basically the end of a 60-year period of continuing credit expansion based on the dollar as the reserve currency.
March — Bear Stearns collapses and, days later, is sold to JP Morgan Chase for just $2 a share.
September 14 – Mortgage lenders Fannie Mae and Freddie Mac are rescued in one of the largest bailouts in US history.
September 15 — Lehman brothers files for bankruptcy, prompting panic as investors had assumed the US government would prevent a bank of Lehman’s size – it was the US fourth largest investment bank – from going under.
As Merril Lynch approaches insolvency, it is bought by Bank of America for $50bn.
September 16 — Credit rating agencies downgrade status of AIG, America’s largest insurer. The US Federal Reserve loans the AIG $85bn and takes an 80 per cent stake.
September 19 – Henry Paulson, then US treasury secretary, unveils plan to use taxpayers’ money to stabilise firms and buy up toxic assets.
September. 29: Dow suffers largest ever one-day drop.
September to October – In the space of a month, banks around the world, notably HBOS, Royal Bank of Scotland,Washington Mutual, Fortis, Hypo Real Estate and Landsbanki, collapse.
October. 6: Dow drops below 10,000 for the first time since 2004.
October. 9: Dow falls below 9,000.
November. 19: Dow drops below 8,000 for first time since 2003.
November 25 US Fed announces further $800bn stimulus.
November 28 The IMF approved a $2.1bn loan for Iceland.
January. 29: US jobless claims hit all-time high.
March - Stock markets hit record lows, wiping out gains made since 1997. The Dow drops below 7,000.
* In compiling the Foresight Timeline, much use has been made of Dirk Bezemer’s outstanding paper ‘“No One Saw This Coming”: Understanding Financial Crisis Through Accounting Models’. Bibliographic details may be found therein.
Short bios of the twelve shortlisted economists, the selection criteria used for the shortlist and background about the prize can be read here.
This Award is named in honour of the American revolutionary hero Paul Revere, who rode through the night to warn of the approaching British army. In this its inagural year, it will be awarded to the 3 economists who first and most clearly saw the Gobal Financial Collapse coming and whose work is most likely to prevent another GFC in the future.
To its great shame, the economics establishment has attempted to evade responsibility for the Global Financial Collapse by calling it an unpredictable, “Black Swan” event. That assertion is manifestly untrue. Numerous non-neoclassical economists foresaw the crisis and warned the public (usually at the cost of ridicule) of its approach. The Revere Award aims to give these economists the professional and public recognition that they deserve, to encourage others to utilize their methods, and – most important — to increase the likelihood that, for the benefit of humankind, empirically responsible economists will be listened to in the future
97 people have been nominated for the award. Some of these did not fit the requirement stated in the original announcement of the award, that the nominees should be economists(broadly interpreted) and to have publicly warned of this particular collapse, not collapses in general. From those nominees who filled these requirements and through consultation with this blog’s community of authors, a shortlist of 12 has been selected. All of them are worthy of our special regard. If any of them had been listened to by the powers that be, a colossal amount of human misery would have been avoided.
Criteria used in the selection included the following:
- that the prediction was not whimsical or lucky, but was driven by theories, methods, and tools that are clearly within the domain of ‘economic thought’;
- that the forecast could be replicated given similar data;
- that the forecast was made public, and
- that the methods and tools used will spur the development of economics such that the subject gains rather than loses traction as a result of the crisis.
As with the Dynamite Prize, which attracted over 7,500 mostly economist voters –, the ballot will be conducted by PollDaddy.
You may vote for three of the shortlist nominees.
The prize will be awarded jointly to the three economists receiving the most votes.
But before voting (the ballot box opens in a few hours), please consult the post Foresight and Fait Accompli: Two Timelines for the Global Financial Collapse.
Shortlist for the Revere Award for Economics
Dean Baker, formerly a professor at Bucknell University, is co-director of the Center for Economic and Policy Research in Washington. He is the author of many research papers, an economics columnist for the Guardian, a weekly online commentary on economic reporting, and several books, most recently False Profits: Recovering from the Bubble Economy.
Wynne Godley is professor emeritus of applied economics at Cambridge University and more recently a Distinguished Scholar at the Levy Economics Institute of Bard College, New York. He is noted for his research that uses accounting macroeconomic models to reveal structural imbalances.
Michael Hudson is a Distinguished Research Professor of Economics at the University of Missouri (Kansas City), president of the Institute for the Study of Long-term Economic Trends and a Wall Street financial analyst. He has long been a critic of growth induced by asset-price inflation.
Steve Keen is a professor of economics and finance at the University of Western Sydney and a specialist in financial instability. His analytical framework draws on Minsky, Fisher and Keynes. Beginning with the 2001 publication of his book Debunking Economics, he gained international prominence through his mathematically oriented attack on the neoclassical mainstream, his explanation of why the latter is such a poor guide to the way the economy actually works and his hypothesis of financial instability.
Paul Krugman is Professor of Economics at Princeton University, winner in 2008 of the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel and op-ed columnist for The New York Times.
Jakob Brøchner Madsen was a professor of economics at the University of Copenhagen until 2006, when he moved to Monash University in Denmark.
Ann Pettifor is the author of several books on debt and international finance. Beginning in 2000, she headed the New Economics Foundation’s research unit on global macro-economics. Currently she is executive director of Advocacy International, which undertakes research and advises governments and organisations on matters relating to international finance and sustainable development.
Kurt Richebächer (1918–2007) was chief economist for Dresdner Bank from 1964 to 1977, when he left it for private consultancy. He wrote one of the longest-standing investment newsletters, “The Richebächer Letter,” in which he warned against the bubble in technology stocks in the late ’90s. Paul Volker, former Chairman of the US Federal Reserve, once remarked that the challenge for today’s central bankers “is to prove Kurt Richebächer wrong.” He died on August 24, 2007, two weeks before the collapse began.
Nouriel Roubini is Professor of Economics and International Business at the Stern School of Business, New York University, Research Associate at the NBER and Research Fellow with the CEPR. He is a former advisor to the U.S. Treasury Department and former member of the White House Council of Economic Advisers. He runs the Roubini Global Economics Monitor and the blog Roubini Global Economics.
Robert Shiller is a Yale economics professor. Like Richebächer he warned against the dotcom bubble.
George Soros, legendary financier and founder of a global network of charitable foundations, has authored numerous books on finance and economics, including The Crisis of Global Capitalism (1998). Like Richebächer and Shiller, he warned against the dotcom bubble. His analysis identifies fundamental instabilities in capitalism, most notably — and reminiscent of Keynes — the reflexivity of markets.
Joseph Stiglitz holds chairs at Columbia University and Manchester University and in 2001 received the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel. He is know for his critical views of globalization, free-mrket fundamentalism, the IMF and the World Bank.