Bryan Caplan  

Crisis Prophet

Barney Frank Admits "Mistake"... Health Care, Education, Spendi...
Stiglitz is bragging about his amazing foresight:
Rereading some of my papers in preparing for the publication of the second volume of my Selected Works (to be published by Oxford University Press), I came across a paper, written almost two decades ago, commenting on the move--just beginning then--towards securitization.  I was struck by what I had written.
Well, to be more precise, he's bragging that unlike most of us, he noticed what was right in front of his nose:
But this crisis was totally avoidable. I warned roughly two decades ago of the need for greater government regulation of mortgage securitization.  I don't think my prediction showed any astounding brilliance. Others no doubt felt similarly. Economic theory--and historical experience--made the risks apparent.  Unfortunately, the call for the regulation of mortgage securitization reached deaf ears at that time. Let's hope that this time is different.  The next crisis may well be different than the present one, but I'd like to see appropriate regulations that make sure of it.
I suppose Stiglitz does deserve a little credit for highlighting bank incompetence.  But as Arnold's readers know, that's only one facet of a complex problem.  If anyone is the prophet of 2008, it's economic historian Robert Higgs.  Here's how he concluded Crisis and Leviathan way back in 1987:
[W]e do know something - at least abstractly - about the future.  We know that other great crises will come.  Whether they will be occasioned by foreign wars, economic collapse, or rampant terrorism, no one can predict with assurances.  Yet in one form of another, great crises will surely come again... When they do, governments almost certainly will gain new powers over economic and social affairs... For those who cherish individual liberty and a free society, the prospect is deeply disheartening.
Sadly, we got a trifecta of war, collapse, and terrorism.  And things have played out exactly as Higgs foretold.  Thank you, Bob, for being the forthright bearer of bad tidings.

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COMMENTS (7 to date)
Methinks writes:

Stiglitz is right about one thing - he's no great genius. Has he ever met a regulator? They don't have a clue what the entities they regulate actually do. If they were smart enough to figure it out, they would work for the entity rather than the regulator and make more money.

Sadly, we got a trifecta of war, collapse, and terrorism.

Why sadly? All of these things have been a part of the human experience for time immemorial and there's almost always a trifecta of war, collapse and terrorism somewhere in the world. Why are people constantly shocked by these things?

Mick writes:

Strangely he calls for more regulation, but completely ignored where the money came from. Its like the banks got greedy with capital sent by Jehovah God from the sky.

Unit writes:

So what happens to "pessimistic bias" now?

Liberal clásico writes:

It's quite curious how everybody -no matter of what they stand for- claims to have predicted the present crisis.

Personally, I tend to be skeptical about these I-said-it-long-time-ago. And this case is evident: if I knew that we were getting into a disastrous situation like this, I would have been asking for a solution long time ago. I would have written to politics, newspapers and so on. As far as I know, Mr. Stiglitz didn't.

Istorik Man writes:

You might object to his implied solutions and to his overall view of the world, but you have to admit that the block quote Stiglitz reprints here is spot on. Neither the blog post, nor the comments provide any argument to suggest otherwise.

The criticism I see here seems to be based on intellectual clan warfare, not rational critical thought.

Joseph K writes:

Stiglitz shows no particular foresight. Crises happen and economists rightly predict that we could've avoided them if we'd handled things better (exactly how we could've handled thing better is up for debate). All Stiglitz has shown is that he thought back then that under-regulation would cause problems. Now he still thinks that under-regulation has caused problems. The Stiglitz of today agrees with the Stiglitz of 20 years ago. He's reading the same bias into the situation 20 years ago that he sees now. All he's demonstrated is that he agrees with himself. This doesn't show that he's a prognosticator.

All that ultimately matters is whether his analysis of the problem is right or wrong. Is it under-regulation? Could we have solved the problem with the type of regulation he recommended? Perhaps. If we knew what was best and precisely what the future would bring. Alas, we don't. And this should teach us some humility instead of the self-congratulatory "I told you so," that Stiglitz is indulging in.

floccina writes:

So I guess that Stiglitz has been holding cash all these years just waing for this to happen and now he will get rich.

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