Now that a full-scale economic crisis is upon us, many are left asking the complicated but necessary question of how did we get here. While there are numerous individuals and institutions who deserve their share of the blame, it is also important to recognize those issued warnings about the fragility of the financial system and sounded the alarm about an impending collapse before it all came crashing down.
Below is the beginning of our look at some of the figures--politicians, economists, pundits--whose observations about our financial situation have come to seem all too prescient. Please check back as more names are added to our list and by all means let us know who else deserves credit for having seen our current meltdown coming.
Nouriel Roubini, NYU professor of economics: from "The Rising Risk of a Systemic Financial Meltdown: The Twelve Steps to Financial Disaster" (subscription req'd), February 5, 2008
Sixth, it is possible that some large regional or even national bank that is very exposed to mortgages, residential and commercial, will go bankrupt. Thus some big banks may join the 200 plus subprime lenders that have gone bankrupt.[...]
Ninth, the "shadow banking system" (as defined by the PIMCO folks) or more precisely the "shadow financial system" (as it is composed by non-bank financial institutions) will soon get into serious trouble.[...]
Tenth, stock markets in the US and abroad will start pricing a severe US recession - rather than a mild recession - and a sharp global economic slowdown.[...]
A near global economic recession will ensue as the financial and credit losses and the credit crunch spread around the world. Panic, fire sales, cascading fall in asset prices will exacerbate the financial and real economic distress as a number of large and systemically important financial institutions go bankrupt. 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, BBC News, "Buffett Warns On Investment 'Time Bomb,'" March 4, 2003
[Derivatives are] financial weapons of mass destruction.[...]
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.
Nassim Nicholas Taleb, from his book The Black Swan The Impact of the Highly Improbable, April 2007
Globalization creates interlocking fragility, while reducing volatility and giving the appearance of stability. In other words it creates devastating Black Swans. We have never lived before under the threat of a global collapse. Financial Institutions have been merging into a smaller number of very large banks. Almost all banks are interrelated. So the financial ecology is swelling into gigantic, incestuous, bureaucratic banks - when one fails, they all fall. The increased concentration among banks seems to have the effect of making financial crises less likely, but when they happen they are more global in scale and hit us very hard. We have moved from a diversified ecology of small banks, with varied lending policies, to a more homogeneous framework of firms that all resemble one another. True, we now have fewer failures, but when they occur ....I shiver at the thought.[...]
The government-sponsored institution Fannie Mae, when I look at its risks, seems to be sitting on a barrel of dynamite, vulnerable to the slightest hiccup. But not to worry: their large staff of scientists deemed these events 'unlikely'.
Byron Dorgan, Senator (D-ND): New York Times, "Washington's Invisible Hand," September 26, 2008 Dorgan's comment on McCain adviser Phil Gramm's deregulation efforts back in 1999:
I think we will look back in 10 years' time and say we should not have done this, but we did because we forgot the lessons of the past and that that which is true in the 1930s is true in 2010.
Joseph Stiglitz, Nobel Prize-winning economist: Washington Post, "The Iraq War Will Cost Us $3 Trillion, and Much More," March 9, 2008
We face an economic downturn that's likely to be the worst in more than a quarter-century.
Until recently, many marveled at the way the United States could spend hundreds of billions of dollars on oil and blow through hundreds of billions more in Iraq with what seemed to be strikingly little short-run impact on the economy. But there's no great mystery here. 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.
Paul Krugman, New York Times columnist
Krugman has been warning about the dangers of the housing bubble for years, and the terrible toll it could take on the economy when it pops. Here is a Krugman warning from August 29, 2005:
These days Mr. Greenspan expresses concern about the financial risks created by "the prevalence of interest-only loans and the introduction of more-exotic forms of adjustable-rate mortgages." But last year he encouraged families to take on those very risks, touting the advantages of adjustable-rate mortgages and declaring that "American consumers might benefit if lenders provided greater mortgage product alternatives to the traditional fixed-rate mortgage.
If Mr. Greenspan had said two years ago what he's saying now, people might have borrowed less and bought more wisely. But he didn't, and now it's too late. There are signs that the housing market either has peaked already or soon will. And it will be up to Mr. Greenspan's successor to manage the bubble's aftermath.
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.
When companies that rack up huge hidden debts and traders who illicitly amass mountains of risk are exposed, Wall Street's big players rush to cut their losses and collect on their debts. If that kind of rush were ever to result in a shortage of cash, it would paralyze the financial system. Stock markets would tumble and banks would close, putting the savings of households at risk.