03 Dec 2008

The Predictive Power of Austrian Business Cycle Theory (in the right hands)

All Posts No Comments

In a previous post, I asked (partially in jest) if I had gone into the wrong profession, because the performance of economists before and during this financial crisis has been so abysmal. It’s not even that we disagree on how to fix things; we can’t even agree on what’s wrong. (For example, Tyler Cowen and Alex Tabarrok are having serious disagreements over whether there even is a “credit crunch,” and Alex Tabarrok and I are having serious disagreements over whether there even is serious liquidity injection occurring.) The icing on the cake was the recent announcement by the NBER that the US has been in recession for the last twelve months. And as the news story explained, in the prior two recessions, the NBER couldn’t make up its mind until after the recession was over.

However, sometimes my self-deprecating humor backfires. From the comments, it appeared some readers thought that I was beating myself up over this. Au contraire. I have known we were in a recession–whether “official” or not–for quite some time. In fact, I have been amused that when I write op eds for various outlets, my editors would strike out comments where I say “especially in the midst of a recession” or such. (BTW, they stopped doing that months ago. They are more attuned to reality than the NBER.)

And, as a token for those who cherish falsifiable predictions, I want to remind everyone of my October 2007 article entitled, “The Worst Recession in 25 Years?” which itself was based on my July 2007 forecast (pdf) in which I wrote:

From 2001 – 2004, the Federal Reserve enacted a cheap credit policy, resulting in a negative inflation-adjusted fed funds rate throughout the period. This artificial monetary stimulus—not seen since the Carter Administration—has sown the seeds of a contraction that will hit by 2Q 2008. The concerns of an asset bubble in real estate and (to a lesser extent) the stock market are entirely justified. Though not always a harbinger of bad times, the recent current account deficits also provide a clear warning.

Since I have been so apologetic on this blog for my early teasing of Peter Schiff’s views on international trade, I thought I should at least balance it out by pointing out when I was dead-on.

Comments are closed.