Bleg: Which Austrians called the Panic of 2008?

February 20, 2009

by Sandy Ikeda

A comment from Laeeth Isharc on an earlier post raises a fair but, at least for me, uncomfortable point:

…Austrians/Hayekians might perhaps be within a minority of economists able to foresee the disastrous consequences of the inevitable bust…. But I don’t recall seeing a single piece by Austrian economists in the academic or policy world warning about the dangers of such a policy in the contemporary context.

So help me out: Who, if anyone, firmly within the Austrian camp — let’s say associated with NYU, GMU, WVU or current members of the SDAE — called this latest boom and bust? I certainly didn’t.

I’ll be generous in interpretting “call” (i.e., exact timing and magnitudes not essential — so pattern predictions are OK), but please respond with references to published writings, including articles and, I guess, blog posts.

35 Responses to “Bleg: Which Austrians called the Panic of 2008?”

  1. John Hall Says:

    I would say that lots recognized the problems with the housing bubble. Mark Thornton, for example.
    http://www.lewrockwell.com/thornton/thornton27.html

    In the investment/blogging arena, I would point to Peter Schiff and Mike Shedlock as prominent examples (though they apparently aren’t getting along these days).
    http://crooksandliars.com/john-amato/peter-schiff-was-right
    http://globaleconomicanalysis.blogspot.com/2007/03/foolproof-recession-indicators.html

    I would also add Paul Kasriel
    http://web-xp2a-pws.ntrs.com/content//media/attachment/data/econ_research/0704/document/ec042007.pdf
    and probably James Grant (from Grant’s Interest Rate Observer), though I don’t have a specific link.

    In general, Austrians tend to suffer the Peter Schiff problem which is either you get one part right (that the US would bust) and you miss the other side of it (that everyone else would too) or they are just perpetually bearish (which he has a gnack for).
    The best approach to investing for the Austrian is tactical asset allocation with a trend following bent. Check out this for TAA:
    http://papers.ssrn.com/sol3/papers.cfm?abstract_id=962461
    and you can try Michael Covel’s Trend Following for an intro to that (note that he quotes Hayek favorably).

    I got out of equities in October 2007 in all my long-term accounts and recommended everyone I talked with to put their money in bonds. I was mainly following the Faber TAA article and Mish.

  2. Murraymises Says:

    I don’t know about the academic world, but at least two professional investment advisers in the Austrian camp, Peter Schiff and Michael Shedlock, called the crash; Ron Paul didn’t do to badly either.

  3. Bill R Says:

    Mises.org has a bailout reader ( http://mises.org/story/3128 ) with a section on various aspects of the crises. The “Housing Bubble” and “Who Predicted This?” sections being most relevant to your query. Also lewrockwell.com has a “Depression Reader” covering the same terrain ( http://www.lewrockwell.com/orig9/recession-reader.html ). I don’t know about their academic or institutional associations.

    I’d also point out Austrian investor Peter Schiff’s amazing video if you are one of the few who hasn’t seen it yet. It’s great because he goes head-to-head with prominent supply sider Art Laffer and right wing Keynesian Ben Stein and not so famous (well perhaps now he is for being a laughing jackass on youtube) but hard core Keynesian investor Mike Norman. http://www.youtube.com/watch?v=2I0QN-FYkpw

    As for “more academic” calls I wouldn’t know where to start. Perhaps drop off an email to Peter Boettke or Lawrence White?

    It does point to an interesting sociological situation though. I think that Austrian practitioners are more willing to “put themselves out there” because 1) they have to, and 2) Academics in general are perhaps less willing to engage in “crass” market timing and endure the possible ridicule from colleagues.

    How many “mainstream” academics were there spouting off predictions even though most of them believe a business cycle is totally unavoidable? Not much I’d guess.

    I just think it’s two different career paths with different incentives.

  4. Sandy Ikeda Says:

    Thanks, Hume. But what about from the the policy or academic world? Again, with references, please.

    ADDENDUM: For some reason your comments aren’t being posted as they are made, so I apologize to John Hall, Bill R, and others for not mentioning them. This response is heartening and useful. Thanks!

  5. Mike Says:

    I think we need to be very careful about defining what we mean by “calling” the current recession.

    Back when I was in graduate school, the joke was that Austrians have called seven of the last four recessions.

    Have Schiff, Paul, etc. been pessimistic for many years and finally a problem came? Or did the accurately predict the time and shape of this particular recession?

    As an aside, this question needs to be asked of economists other than Austrians. I’ve heard people make the charge, for instance, that Roubini was simply pessimistic long enough to see his “predictions” come true.

  6. Bob Murphy Says:

    Here’s four people that relied on ABCT to call the housing boom before many others:

    * Mark Thornton (June 2004)
    * Frank Shostak (August 2005)
    * Stefan Karlsson (November 2004)
    * Robert Wenzel (sometime in 2004)

  7. Carl Marks Says:

    http://www.lewrockwell.com/orig9/recession-reader.html

    Under the section entitled “We Told You So”

  8. Bill R Says:

    “… they are just perpetually bearish (which he has a gnack for)”

    “Back when I was in graduate school, the joke was that Austrians have called seven of the last four recessions.”

    Addressing the “stopped clock” criticism…I would just remark that even in more precise sciences prediction is difficult. Take medicine for example we all know that smoking is bad but even doctors can’t predict when (or even if) a stroke will occur for a number of reasons. But an educated person would still say that smoking is bad for your overall health.

    Austrians, in particular, should share Mike’s aversion toward precise prediction. It’s the “mainstreamers” that really should be lamenting this crisis and its affect on their “science”. Take Milton Friedman’s (following in Irving Fisher’s footsteps) statement and compare it to Mark Thornton (in Mises’ footsteps)

    Friedman states about economics: “Its task is to provide a system of generalizations that can be used to make correct predictions about the consequences of any change in circumstances. Its performance is to be judged by the precision. scope, and conformity with experience of the predictions it yields. In short, positive economics is, or can be, an “objective” science, in precisely the same sense as any of the physical sciences.” The next sentence adds a caveat but Friedman certainly places prediction itself as a cornerstone of economic science.
    http://members.shaw.ca/compilerpress1/Anno%20Friedman%20Positive.htm

    Now Thornton quoting Mises: “Austrian economist Ludwig von Mises rejected the general notion of forecasting
    and claims that economics can only provide qualitative predictions about particular
    polices” http://mises.org/journals/scholar/Thornton6.pdf

    Thornton also remarks in another must read paper which focuses on the merits of prediction specifically:

    “Representing nearly polar-opposite views, Fisher placed prediction at the heart of his science and yet had no foresight of the Great
    Depression, while Mises cast economic forecasting outside the realm of economic
    science and yet was able to predict the depression and accurately describe the pitfalls of Fisher’s monetary system in 1928. As such, this comparison provides evidence both on the merits of Mises’s contributions and the likelihood of their ultimate triumph” http://www.mises.org/journals/scholar/Thornton16.pdf

  9. Sandy Ikeda Says:

    Earler, I failed to mention the Mises Institute. I certainly didn’t mean to. Good site, Carl (and Bill R).

  10. RickC Says:

    Robert P. Prechter has an old article up at Mises today, first published in 04, that seems prescient. http//www.mises.org/story/3329

    It’s titled Jaguar Inflation.

    I too had been thinking about this issue. I guess doom and gloomers, sooner or later, will be proven right. What separates the the prescient people from the simple pessimists is in the particulars of their analysis. Right?

    I happen to find the Austrians, as a group, more insightful re: why the collapse is happening. Even given that though, there seems to be just too many factors/variables involved to expect anyone to have called it accurately down to the month or quarter.

    Right now, seeing where we are and where the Obama policies seem to be taking us, the frustrating thing to me is how completely the Austrian school prescriptions for recovery are being ignored.

  11. Bill R Says:

    Oh and to further see the state of the neoclassical economics see Bob Murphy’s latest blog post. The authors he links to are apparently now saying that stock markets in 1929 were undervalued! It seems that prediction only matters when it confirms neoclassical theory.
    http://consultingbyrpm.com/blog/2009/02/stock-market-in-1929-was-under-valued.html

    Hmmm…pretty axiomatic. At least Austrians base their theory on the human action axiom. The neo-classicals base it on…well…whatever gets them tenure???.

  12. Bogdan Enache Says:

    Still, some non-Austrian economists weren’t totally in the dark and had something to say on the issue, some of them even wrote a few books on the subject, see this summary by Bruce Bartlett

    http://www.forbes.com/2008/12/31/housing-bubble-crash-oped-cx_bb_0102bartlett.html

    and also John R. Talbott two books on this, one published in 2003 and the other one in 2006, both with some pretty straight forward titles

    http://www.john-talbott.com/


  13. I wouldn’t put him in the Austrian Camp, but trader and author Nicholas Taleb mentioned in his book The Black Swan (a philosophical and fantastic rail against mainstream economists seduced by risk calculation and predictions) the looming problem of CDO’s.

  14. Ravi Says:

    Interview with Roger Garrison in ’03.

    http://www.auburn.edu/~garriro/aenrg.htm

    Q9: In US they are in a big time credit expansion…what’s going on?

    The Federal Reserve and the Bush administration are simply fighting the market’s attempt to adjust to the excesses of the prior boom. But by fighting the market, they’re making things worse. The exceedingly low interest rates give no incentive for businesses to liquidate malinvested capital. Some capital has been committed to projects that are now not panning out. But why liquidate if you can carry the capital forward at low interest rates, hoping for better times? Also, the low interest rates are stimulating consumption. People are refinancing their mortgages and spending the windfall. The policy-induced spurt in consumption is even being seen as a sign of a new economic expansion. But, of course, it’s just the Federal Reserve trying to keep the market for recovering from the earlier expansion.

    Garrison in ’00:

    In fact, it’s probably fair to say that the popularity of business cycle theory is at low ebb on the eve of the bust. We’ve heard a lot lately about the “new economy”—the internet, the digital revolution, and just-in-time inventory management. I don’t deny that things have changed, but I doubt the changes somehow add up to perpetual prosperity….I think that the role of the Federal Reserve in engineering the Clinton expansion is not much in doubt.


  15. Last September, Gary North warned:

    “Presumably, you know better if you have been reading my warnings for over a year. Presumably, you are completely out of the stock market. If you are wise, you shorted the market no later than last November. But if you are still in the stock market, then you are in it because you have been listening to the mainstream media.”

    .

    By November I wished that I had followed his advice.

    I do not know if Gary North’s publications on LewRockwell.com satisfy Sandy’s criterion for a “policy world” worker. But he quotes Austrians frequently. I saw somewhere that he has a Ph.D. Don’t know if it is in economics.


  16. I put a link to North’s LewRockwell.com warning in my last post here, but the blogging software seems to have scrubbed it away.

    Let me try a different way.
    Warning by North

  17. Ross Williams Says:

    Antony Mueller March 2007 at Austrian Scholars conference with presentation on “Contemporary Applications of the Monetary Economics of the Misesian School”

    He called it pretty well, his timing was decent and he seemed spot on with the mechanism of it.


  18. Although, I firmly beleive that ancient Greeks were correct in pointing out that Hubris is amongst the greatest of mortal sins, there were plenty of folks of an Austrian bent that saw this coming, frankly including myself…with only one year of actual postings, but much writen prior and post 2007, restricted by professional occupation, please see http://www.eastonspointcapital.com what we are undergoing was as determined by the tenents of the “Austrian” school as the sun was certain to rise. The sad truth, however, is that it would have been less depressing to have been wrong.

  19. Greg Ransom Says:

    I was talking about the Greenspan created artificial boom and the coming bust on my “PrestoPundit” blog in 2004 and 2005 — talking about how below natural rate interest rates from the Fed had misdirected massive amounts of capital into the housing bubble, which I was living very directly here in Orange County, CA, and which was a daily topic in the Orange County Register.

    I then pointed out that the bust was upon us with the “popping” of the housing bubble in 2007 and the crashing of the housing, finance, real estate, and mortgage businesses here in Orange County — almost 2 years before the current recession was “officially” declared. The Fed, of course, had changed interest rate policy, and I’d tracked that each period on the “PrestoPundit” blog.

    I also blogged the false fear of “deflation” at the Fed across the early and mid-2000’s, with links to articles by George Selgin and others.

    I often pointed my readers to Roger Garrison’s articles on the trade cycle when I talked about the current artificial boom / inevitable bust cycle.

  20. Greg Ransom Says:

    Nicholas Taleb knows Austrian economics — and Taleb is on record recommending that every academic economist in the country should be fired, except for the Austrians. That’s his stated position.

    Taleb recommends a Hayekian/Austrian understanding of risk and entrepreneurship over that of “mainstream” economists in his current bestseller.

  21. Greg Ransom Says:

    Stephen Roach — chief economist at Morgan Stanley — gave an Austrian like analysis of what was happening in the Spring of 2005.

  22. Greg Ransom Says:

    Greg Ip reported on a resurgence of interest in Austrian macro in June, 2007:

    http://blogs.wsj.com/economics/2007/06/25/amid-financial-excess-a-revival-of-austrian-economics-in-basel/

    Quotable:

    “Does the U.S. risk repeating the mistakes that led to the Great Depression? The Bank for International Settlements‘ annual report, released Sunday, suggests that it does, and offers a remedy steeped in the doctrine of Austrian economics.”

    The article referenced is here:

    http://www.bis.org/publ/arpdf/ar2007e.htm

    I was tracking such stuff on my “PrestoPundit” blog.

    Bartlett, who was a reader of my PrestoPundit blog, wrote about the housing bubble in 2005, as did Thomas Sowell, both of them linking the phenomena to Greenspan and the financial industry.

  23. Ivo Sarjanovic Says:

    Ref Taleb and the Austrians,
    I had the opportunity to ask Taleb directly after a seminar in May 2008 in Geneva if he found the Austrians interesting, given that I found several things in common tween the Austrian with him, and he answered was quite dissapointing to me as he said that certainly he found very interesting insights in Hayek but not much meat in others authors. I asked him which other Austrians he read and he said that he didnt remember the names but there was nothing really systematic outside Hayek.
    I’m curious to learn from Greg Ransom when/where Taleb endorses the Austrians (other than Hayek) cause he seemed to have changed his mind in the last months then.
    Thanks.

  24. James Kibler Says:

    Ivo-for Taleb’s endorsement of Austrians see his Econtalk podcast with Russ Roberts. http://www.econtalk.org

  25. Bob Murphy Says:

    Ivo,

    In the Black Swan Taleb cites a forthcoming RAE paper by Thomas Bundt and me. I hope we’re not the meatless ones he had in mind! (I emailed with Taleb for a bit in the summer of 2006 when I was going into the financial sector.)

  26. Greg Ransom Says:

    Taleb made the comment in a lecture at the Open University, a podcast available on iTunes.

    “I’m curious to learn from Greg Ransom when/where Taleb endorses the Austrians (other than Hayek) cause he seemed to have changed his mind in the last months then.”

  27. Peter Boettke Says:

    Sandy,

    Fred and I have multiple blog entries at the Austrian Economists going back 2 or 3 years talking about this issue. But we give credit to a very wise personal finance adviser Edward Weick, who predicted every single bad turn that has come to pass.

    Pete

  28. rog Says:

    Kurt Richebächer is another who warned of an impending recession – he was a life long friend of Paul Volcker

  29. Daniel Klein Says:

    “the next major bust, if there is no major interruption such as a global war, will be around 2008.”

    Fred E. Foldvary. 1997. The Business Cycle: A Georgist-Austrian Synthesis. American Journal of Economics and Sociology 56(4): 521-41, quote at p. 538.

    It appears that an html version is available online at:

    http://www.foldvary.net/works/geoaus.html

    The quotation given above appears in the conclusion.

    The paper must have been written about 1995-96, so Fred called it a good 12 years in advance.

    I have a pdf of the AJES article and can send to you upon request.

    /Dan Klein

  30. gcallah Says:

    Mike wrote:
    “I think we need to be very careful about defining what we mean by “calling” the current recession.

    “Have Schiff, Paul, etc. been pessimistic for many years and finally a problem came? Or did the accurately predict the time and shape of this particular recession?”

    A better criterion is: Did has the market retraced back down to below where it was when they started calling it overpriced? I think getting the “when” of the turn is mostly luck; however, I do think it’s possible to see “This market is NOW over-priced, but when it will turn God knows.”

  31. Barbar Says:

    Schiff lost a ton of money, because he thought the dollar would crash and that the US equity market would be especially hard hit. Sadly wrong on both counts.

  32. wkielak Says:

    Peter Schiff … correctly predicting 17 of the last 4 recessions

    More relevantly, did any Austrian correctly predict that Bernanke’s unconventional monetary intervention would stabilize the economy and avoid another Great depression? Did any Austrian predict that the US government would make a profit from its TARP investments?

  33. Jack Says:

    How can the government make a profit when the money they loaned out was created out of thin air? That’s like my cutting a piece of paper into 4 pieces, giving it to you, and you giving me back six pieces.


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