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Tales From The Future. I picked my nickname because many advisors and investors claim they can predict the future of the (stock) markets and somehow pick the winners. I don't. I usually do not engage in short-term trading and myopic analysis (quarter by quarter, without looking at the big... More
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  • Easy Money Blowback: The Man Nobody Wanted To Hear In 2003 Who Predicted The 2007 Crisis - And What He And Other Correct Forecasters Are Talking About Now 0 comments
    Oct 14, 2013 4:09 PM

    People likely have heard of Nouriel Roubini and Nassim Taleb (basically the two academic rock stars predicting/commenting the 2007 subprime crisis in financial and general mass media), but there were others outside of the spotlight - or I should rather say even more out of the spotlight because both Roubini and Taleb were largely ignored in the mainstream before the events finally unfolded for good in 2008.

    A few readers might have heard of Robert Shiller (NYSE:USA) and Steve Keen (Australia). Steve Keen even assembled a short table collecting academics and other observers who (including himself and Shiller) correctly predicted the last financial crisis using different economic models, see here:

    ((On a personal note, following Robert Shiller, Peter Schiff, Marc Faber, Steve Keen and others pre-2007 helped me a lot preparing and navigating the waters in 2008.))

    But very few (at least that's my impression) investors have even heard of William White. He's not included in Keen's list. I would therefore like to take the opportunity and link to this interesting article on the fifth anniversary of the crisis:

    William White predicted the approaching financial crisis years before 2007's subprime meltdown. But central bankers preferred to listen to his great rival Alan Greenspan instead, with devastating consequences for the global economy.

    Readers might argue that's all history now. But we still live with the consequences and the central banks' actions following the crisis.

    Interestingly, The Economist discussed White's new papers about central banks and unintended consequences (also see my previous Instablogs on monetary policy) back in 2012:

    As Thomas Kuhn argued in The Structure of Scientific Revolutions, new ideas are rarely accepted by an establishment that did not create them. Thus the mainstream has decided to either ignore or ridicule those who dared to be right. The persecution of Raghuram Rajan for his concerns about post-crisis monetary policy should be understood in this context.

    Most recently, we have William White, a brilliant Canadian economist who used to do research at the Bank of England and the BIS before taking over the Economic Development and Review Committee at the OECD. He is not, in other words, a nut who hides in the woods with gold bricks and canned food. Moreover, he (along with his colleague Claudio Borio), presented one of the earliest and most thoughtful warnings of the financial crisis back in 2003. Anyone with a brain ought to take him seriously, especially when he bucks the conventional wisdom. Thus, this correspondent was very excited to find (via Ed Harrison) that Mr White has just released a thoughtful new paper on the possible "unintended consequences" of actions taken by the big central banks since the crisis. One of its best features is its discussion of the recent literature, including two of the most interesting papers to have been written about the interaction between monetary policy and the financial system since 2007.

    This is (still) highly recommended reading as most stock markets are enjoying their nominal high watermarks post-2007 - and the crisis just looks like a grey area from a rather distant 2008 past:

    (click to enlarge)

    (Source: )

    This of course doesn't mean the next crisis has to be around the corner or turn out as violent as 2008 (which was an outlier), but it makes more sense to keep your eyes open regarding stock market valuation in 2014-2016. Statistically speaking, the boom cycles post World War II rarely lasted longer than 45 to 60 months.

    I suspect the next crisis will again emerge in the financial sector or a sudden collapse/demand change in private debt - remember the "Minsky moment" in the last crisis was pinned by many around August 2007, over a year before the stocks markets actually tumbled.

    ((As Steve Keen pointed out, the role of changes in private debt (also linked to shadow banks) is still undervalued in mainstream economics)).

    In ending, I will just quote two interesting excerpts from White's paper:

    A) Violent Credit Swings, Bubble Pops and Shadow Banking

    Credit expansions of this sort, if not restrained by sufficiently high policy rates, eventually run into two other constraints. The first of these is a shortage of capital, which results in leverage ratios rising to uncomfortable levels. The second is a shortage of longer term and reliable funding to support the credit expansion. Indeed, Kaminska (2012) contends that this latter problem is a "terminal disease" affecting banking, and was greatly aggravated by the secular fall in interest rates. However, banks took aggressive steps to confront both problems, thus allowing them to continue to meet the demand for credit expansion promoted by low borrowing costs. As noted above, this implied a deeper eventual downturn than otherwise given both larger "malinvestments" and also a structurally weakened financial sector.


    there is the issue of serial bubbles. Mention was made above of the successively more aggressive efforts made by central banks, since the middle 1980's, either to preempt downturns (eg: after the stock market crash of 1987) or to respond to downturns (eg; 1991, 2001 and 2008). What cannot be ignored is the possibility that each of those actions simply set the stage for the next "boom and bust" cycle, fuelled by ever declining credit standards and ever expanding debt accumulation.


    Finally, the way the shadow banking system has evolved implies that the end of the "boom" phase can occur very precipitously. Longer term lending tends increasingly to depend on short term funding. Because such funds are not covered by deposit insurance schemes, "runs" can occur quickly when confidence erodes in the solvency of the counterparts. In effect, the famous "Minsky moment" is likely to be shorter, harder to predict, and even more self fulfilling than Minsky suggested. The failure of Bear Sterns and Lehmans provide good examples of these dangers. As well, the shadow banking system has an increasingly international flavor. This not only reduces transparency and the quality of regulatory oversight, but also produces a degree of "balance sheet" exposure that could easily precipitate or aggravate foreign exchange crises.

    and B) General Conclusions on ultra easy monetary policy: is argued in this paper, that the capacity of such policies to stimulate "strong, sustainable and balanced growth" in the global economy is limited. Moreover, ultra easy monetary policies have a wide variety of undesirable medium term effects ‐ the unintended consequences. They create malinvestments in the real economy, threaten the health of financial institutions and the functioning of financial markets, constrain the "independent " pursuit of price stability by central banks, encourage governments to refrain from confronting sovereign debt problems in a timely way, and redistribute income and wealth in a highly regressive fashion. While each medium term effect on its own might be questioned, considered all together they support strongly the proposition that aggressive monetary easing in economic downturns is not "a free lunch".

    So, when is the next bubble about to pop? Hard to say. In contrast to Taleb's "Black Swan" thesis other academics are at least trying to predict the next crisis more accurately, for example, Mr. Sornette:

    In summary: It's worth keeping an eye on the academic works of William White, Steve Keen (channeling Minsky *) and Didier Sornette and least but not least recent Nobel Prize laureate Robert Shiller (as well as market commentators Peter Schiff and Marc Faber, both of them unfortunately have an unfair, ill-gotten reputation as two permabears who get it right every now and then like a broken clock twice a day, this is far from the truth) - these six economists certainly forecast the last major crisis better than Yanet Jellen:


    * See Keen's crash course below on Minsky and the importance of private and total debt/GDP aggregates among other topics covered:

    In this context, I would like to post the total debt/GDP graph again (figures for 2011). Listed are major mature economies only, China is missing. Japan, the UK and Ireland all had total debt levels above 500% (!):

    (click to enlarge)

    ( Source: )

    Now we can all figure what will happen once interest rates rise again...

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