Forecasts of the economic disaster
Filed in archive risk by leon on October 13, 2008
With forecasts that the world is headed for its worst recession in 25 years, if it's lucky, the Huffington Post has run a timely piece on the ones who predicted the economic firestorm.
They include New York University economics professor Nouriel Roubini ("A 1987 style stock market crash could occur leading to further panic and severe financial and economic distress. In this meltdown scenario US and global financial markets will experience their most severe crisis in the last quarter of a century"), Warren Buffett five years ago ("Derivatives generate reported earnings that are often wildly overstated and based on estimates whose inaccuracy may not be exposed for many years ...Large amounts of risk have becomes concentrated in the hands of relatively few derivatives dealers ... which can trigger serious systematic problems"), Joseph Stiglitz ("The economy's weaknesses were concealed by the Federal Reserve, which pumped in liquidity, and by regulators that looked away as loans were handed out well beyond borrowers' ability to repay them. Meanwhile, banks and credit-rating agencies pretended that financial alchemy could convert bad mortgages into AAA assets, and the Fed looked the other way as the U.S. household-savings rate plummeted to zero. It's a bleak picture. The total loss from this economic downturn - measured by the disparity between the economy's actual output and its potential output - is likely to be the greatest since the Great Depression), and Paul Krugman back in 2005 ("How bad will that aftermath be? The U.S. economy is currently suffering from twin imbalances. On one side, domestic spending is swollen by the housing bubble, which has led both to a huge surge in construction and to high consumer spending, as people extract equity from their homes. On the other side, we have a huge trade deficit, which we cover by selling bonds to foreigners. As I like to say, these days Americans make a living by selling each other houses, paid for with money borrowed from China. One way or another, the economy will eventually eliminate both imbalances."
No one listened and now we pay the price.
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