I worry that this sort of comment starts us once again on the path of picking out someone who was right once or produced the opinion over and over again until, like flipping a coin, that person was right. The wonder records of mutual funds are completely explained by the continually increasing market. That just makes those predictors fortunate, not necessarily insightful. Same thing with the doom crew. Sooner or later it will turn out to have been a great thing to have bought gold, or whatever. Most of us don't actually want to become economic experts like Dean. We would like to put some money away and have it magically turn into enough to live on when we are old. In the mean time, we would like to enjoy life, our families, laugh at stupidities etc. Turns out, that is a recipe for letting those whose life plans involve stealing and artificially inflating their own worth for their own gain to empty the piggy bank. None of us care if they wish to gamble with their money - but we very much oppose them gambling with ours. Enforcing this scheme with laws as was done after the Depression seems only to have had short term effects.

«worth noting that all the optimists completely the missed the bubble and the impact that it's collapse would have on the economy.»

WINNERS, as those sell-side economists will have a richly rewarded career, as they knew which side their bread is buttered and provided cover for a lot of wealth transfers by other WINNERS like Mozilo and Cayne and friends.

«At least some of the pessimists, most notably Nouriel Roubini,»

Also Michael Hudson since at least 2003:

http://www.counterpunch.org/schaefer07122003.html

«recognized that the conditions for a serious crisis were being created years ago.»

LOSERS who will be ostracized by the Real American business and academic community for not being sell-side economists.

:-)

The real optimists in Nocera's piece - Zandi and Eisenbeis - are in the financial industry. Could there be some correlation here and perhaps a simple way of assigning weight to economic predictions?

Do not be deceived, swindled or hoodwinked.

No one has ANY ability to forecast ANYTHING with ANY reliability.

No one.

This does not mean that there is not a thriving marketplace for oracles offering these services and fools buying them.

It is a conceit of human ego, pride, vanity and folly that the future can be predicted and controlled in any meaningful way.

Obama should take your advice and fire Larry Summers.

Google "An Economy on Thin Ice" article by Volcker, 2005.

Only the willfully deluded failed to see something very bad coming.

Of course, Volcker's solution is to hammer the working class.

Blissex wrote, Also Michael Hudson since at least 2003:

Note that Hudson is one of the rare people who understand both land economics (which Dean unfortunately doesn't) and the credit system.

some guy in a cube wrote, It is a conceit of human ego, pride, vanity and folly that the future can be predicted and controlled in any meaningful way.

That's nonsense.

Certain things, it is true, cannot be predicted. Like the stock market in the short run.

Other things are quite predictable, even if there are always error bars.

Dean predicted the collapse of both the late 1990s tech bubble and the recent housing bubble. He was able to do so because he saw enormous imbalances in fundamentals.

Opponents of the decision to invade Iraq predicted that it would be a strategic disaster for the US. Again, they ("we", I should say) were able to look at "fundamentals," this time in the realm of history, not economics.

"Other things are quite predictable, even if there are always error bars."

When tossing a coin, one can forecast that heads will come up prior to the next toss, and actually be proven correct occasionally. Such awe-inspiring wisdom fails in your category of "quite predictable" events, but (apart from any macro-economic implications) who cares about these?

My assertion, which you attempted to dismiss but failed to disprove, is that meaningful future events are impossible to predict.

What is a meaningful event? By definition, it is something you never saw coming.

"Of course, Volcker's solution is to hammer the working class."

Nothing new there - breaking the power of unions may have been a primary objective of Volcker's policy when he was Fed chairman. Volcker is considered a hero by many "liberal" economists, despite this and the fact that the banking and S&L crisis of the late 80's was generated during his tenure.

"My assertion, which you attempted to dismiss but failed to disprove, is that meaningful future events are impossible to predict.

What is a meaningful event? By definition, it is something you never saw coming."

So you're saying that unpredictable events are unpredictable. What a waste of our time.

One problem is the one-sidedness of the predictive criteria. A bias towards pessimism would have predisposed one to predict the bursting of the bubble, and to predict bad news ahead. Who successfully predicted both the bust and the previous upturn?

some guy in a cube wrote, When tossing a coin, one can forecast that heads will come up prior to the next toss, and actually be proven correct occasionally.

Yes, I know.

That doesn't mean that every claim about the future falls in that class of predictions.

As I said, some predictiions fall in that class, e.g. short-term stock market behavior.

Other predictions, however, don't. One such prediction was Dean's claim, years ago, that home prices couldn't maintain the short-term trend they were on. And as I pointed out, another prediction was that the invasion of Iraq was going to be a strategic disaster.

Paul Yarbles wrote, So you're saying that unpredictable events are unpredictable. What a waste of our time.

Agreed.

Min wrote, One problem is the one-sidedness of the predictive criteria. A bias towards pessimism would have predisposed one to predict the bursting of the bubble, and to predict bad news ahead. Who successfully predicted both the bust and the previous upturn?

That's not right. The eventual collapse of the housing bubble was easy to predict, because of the underlying principles: home prices couldn't maintain an imbalance with respect to fundamentals forever. The same principle re imbalances and historical trends (as well as very simple fundamentals of asset pricing) also allowed Dean to see that the tech bubble of the late 1990s couldn't go on forever.

In terms of predicting the upswing---i.e., predicting the advent of bubbles---that's IMHO a much harder thing to do. Though there were some commentators who complained about the Fed's loose money policies.

Put another way: just because one thing is "up" and another is "down" doesn't mean the forces generating them are similar. So there's no basis in the claim that they both are equally amenable to study and prediction.

liberal: "Put another way: just because one thing is "up" and another is "down" doesn't mean the forces generating them are similar. So there's no basis in the claim that they both are equally amenable to study and prediction."

Well, I did not claim that. What I said was that a pessimistic bias, not necessarily predictive acumen, would predispose predictions of both the recent bust and bad news in the near future.

How can we distinguish acumen from pessimism? Well, someone with acumen would be more likely to predict an upturn successfully, no?

Min wrote,

What I said was that a pessimistic bias, not necessarily predictive acumen, would predispose predictions of both the recent bust and bad news in the near future.

That's just the wrong way to look at things.

The point isn't merely that Dean "predicted" the housing bubble burst; he cited a mechanism. "Pessimistic bias" is irrelevant.

Well, someone with acumen would be more likely to predict an upturn successfully, no?

No.

First, your terminology is wrong. The pre-crash "upturn" wasn't a vanilla "upturn"; it was a bubble.

Secondly, you apparently didn't read or understand my reply: predicting when a bubble occurs could be very difficult, because of the many interactive forces that converge to produce it. (In the present case, there's (a) easy money from the Fed, (b) a deterioration of lending standards, (c) a deterioration of regulation of the banking sector, (d) lack of other opportunities for "cheap money" to flow to.)

In contrast, the bursting of bubbles has relatively simple dynamics.

"So you're saying that unpredictable events are unpredictable. What a waste of our time."

Nice try, but that's not what I'm saying.

I could elaborate, but that would be a waste of MY time.

Besides, this is Dean's blog, and this thread is over.

Min: "What I said was that a pessimistic bias, not necessarily predictive acumen, would predispose predictions of both the recent bust and bad news in the near future."

Liberal: "That's just the wrong way to look at things."

Maybe so, but it is a competing hypothesis that fits the facts.

Liberal: "The point isn't merely that Dean "predicted" the housing bubble burst; he cited a mechanism. "Pessimistic bias" is irrelevant."

That is a reasonable argument. But first, I was not attacking Dean. As for citing a mechanism, we are talking about educated economists with different opinions. It would be a surprise if any of them could not give reasons for their opinions. Now, of course, we could look into their reasons and perceptions in more detail and conclude that those who missed the bust are incompetent. As yet, that argument has not been fleshed out.

Min: "Well, someone with acumen would be more likely to predict an upturn successfully, no?"

Liberal: "No."

You claim that upturns are harder to predict than downturns. That may be. But even if that is so, does acumen have nothing to do with predicting upturns?

Liberal: "First, your terminology is wrong. The pre-crash "upturn" wasn't a vanilla "upturn"; it was a bubble."

But it was still an upturn, right?

Liberal: "Secondly, you apparently didn't read or understand my reply:"

I have been online a long time. This kind of crosstalk is not unusual. I did not respond to everything that you said because you mischaracterized what I wrote. That kind of thing happens.

Liberal: "predicting when a bubble occurs could be very difficult, because of the many interactive forces that converge to produce it. (In the present case, there's (a) easy money from the Fed, (b) a deterioration of lending standards, (c) a deterioration of regulation of the banking sector, (d) lack of other opportunities for "cheap money" to flow to.)

"In contrast, the bursting of bubbles has relatively simple dynamics."

Apparently we have two relatively distinct groups of economists, the optimists and the pessimists. The optimists failed to predict the bust, and are more optimistic about the near future; the pessimists predicted the bust and are more pessimistic about the near future. (Surely there are some economists who do not fall into either camp, but Dean did not talk about them, did he?) Now it may be that the pessimists are better predictors, or it may be that they are pessimists. One thing that would disprove the latter hypothesis would be successful optimistic predictions by the current pessimists. That is the point that I was making.

Now it may also be that predicting the bust was so easy that any economist who failed to do so is incompetent. But that is irrelevant to my point.

Min wrote, As for citing a mechanism, we are talking about educated economists with different opinions. It would be a surprise if any of them could not give reasons for their opinions.

So? Dean illustrated his point with a valid mechanism. The other economists make invalid points.

Apparently we have two relatively distinct groups of economists, the optimists and the pessimists.

Apparently you seem to think that the most useful way to form a dichotomy here is "pessimist" and "optimist." Like a lot of what you write, that's would be wrong.

One thing that would disprove the latter hypothesis would be successful optimistic predictions by the current pessimists. That is the point that I was making.

Yes, and the point is unimportant.

The point, rather, is that there are two ways of deciding whether someone making predictions should be paid attention to:
(1) They have a good track record, in the sense of statistics.
(2) They're able to cite a mechanism, and the mechanism has been validated throughout history, and furthermore by events as they unfold.

Dean fell into (2) in the case of both the late 1990s tech bubble and the housing bubble.

(1) really isn't useful, because the class of events we're talking about usually don't occur often enough. And common data series with lots of observations, like short term movements of the stock market, are things that no one can predict.

some guy in a cube wrote, Nice try, but that's not what I'm saying.

Actually, it's exactly what you were saying.

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