Who Could Have Foreseen The Crash OF 2008?

Many economists understood that the crash in 2008 was inevitable and would have global consequences.Nouriel Roubini,Paul Krugman George Soros,Robert Shiller,Stehen Roach,Robert Wescott and Joe Stiglitz had dire forcasts for the country and most were worried about the housing bubble.Nouriel Roubini focused on the risk posed by global imbalances to sudden adjustment of exchange rates.But these forecasts were an inconvenience:too much money was being made by too many people for their warnings to be heard.

Those who had engineered the bubble(Paulson led Goldman Sachs to the heights of leverage...Bernanke allowed the issuance of subprime mortgages to continue) maintained their faith in the ability of markets to self-correct--until they had to confront the reality of  a massive collapse. As late as March 2007,Bernanke claimed that the impact on the broader economy and financial markets of the problems in the subprime market seems likely to be contained.The housing bubble was unsustainable according to Stiglitz.When it burst,domestic aggregate demand declined considerably and shifted money from those who would have spent it to those who don't(upper 10% of incomes).The global aggregate demand  was weak at this time and caused more problems for any recovery.Developing countries accumulated reserves in the billions to protect themselves from a high level of global volatility in the era of deregulation.A half trillion was set aside in these reserves each year before the crash.The U.S. economy with its debt-based consumption became the world's customer but it wasn't sustainable.

The crisis quickly became global as nearly a quarter of U.S. mortgages had gone abroad. Global financial markets have become closely interlinked.Two of the top three beneficiaries of the U.S.government bailout of AIG were foreign banks.Spain and the United Kingdom had housing bubbles.Iceland  has 300,000 people and three banks that took on $176 billion in bought assets that is eleven times the country's GDP. It became the first developed country to turn to the IMF for help.Developing countries suffered from the decrease in "remittances"  that helped their individual economies.

Today the underlining trend in the U.S. is the move away from manufacturing into the service sector.This is partly due to the success in increasing productivity; so a small fraction of the population can produce all the toys,cars,and TVs that even the most materialistic and profligate society might buy.Globalization has meant the locus of production has moved to China,India and other developing countries.We can't go back to where we were before the crash.America must deal with the underlining problems and can't rely on the Federal Reserve as we have done in the past.An era of regulation must return because the "free market" can't correct itself today without government intervention.

More from "Freefall" in the coming days.