…doesn’t invalidate the person making the prediction. Nouriel Roubini, who correctly predicted that the housing market would crater in 2007 has decided to make his critics eat crow (yes, there’s some dense economics here, but wait until the end–there’s a point to this madness):
Indeed a year ago when this scholar – and a few other experts such as Bob Shiller and others – argued that the biggest housing bubble in US history would end up in the worst housing bust and recession in 50 years and that home prices would fall by 20% those views were considered as coming from the moon. When this author – and others – first spoke of a fall in home prices of 20% people replied very skeptically that home prices had never fallen nationally year over year since the Great Depression (actually they had already in the 1990-91 recession based on the Case-Shiller index); thus, there was no chance of a 20% fall, the consensus claimed. Now that home prices are starting to fall sharply Goldman Sachs is predicting a fall of 15% in home prices and 30% plus in some areas. While Bob Shiller is now – correctly – arguing that to bring back the price to rental ratio to its long terms average home prices may have to fall as much as 50%, not just 15-20%, in many housing markets.
A year ago when this scholar started to talk about the coming “subprime” disaster and its financial fallout and the risk of a credit crunch, the “subprime” term was unknown even to 99% of market participants; today it is a household term around the world.
It goes on like that for a while. Now for the smackdown (italics mine):
Was this author wrong on his 2007 recession call? The exact timing may have been slightly off as he expected a recession by Q2 of 2007; but his substantial call about an impending hard landing is still likely to be right. With housing and capex spending falling and the US saving-less and debt-burdened consumer is on the ropes (latest weekly data point: October same store sales are falling relative to September) one cannot exclude a growth rate of close to zero by Q4 of this year and a full fledged hard landing by early 2008.
Petty critics of this blogger keep on hammering (in comments on this blog) that the recession did not occur by Q2 of 2007. But, as the Bible put it: “Why do you notice the splinter in your brother’s eye, but do not perceive the wooden beam in your own eye?” Indeed, most of these soft landing optimists kept on predicting a modest housing slump that would bottom out by early 2007; they kept on repeating the mantra of subprime as a “niche problem” that would “remain contained”; they dismissed concerned about a severe financial contagion and the risk of a liquidity and credit crunch; they kept on predicting sustained growth rates above 3% while the economy sharply slowed down since H2 of 2006 and were then forced to revise downward their growth forecasts quarter after quarter; and they kept on saying that the rest of the economy would be sheltered from the biggest housing bust in US history and that it would achieve a “soft landing”. So these optimists got four predictions out of five totally wrong; while this analyst got so far four predictions out of five exactly right in timing and magnitude. And, as for the fifth, there is increasing consensus among a growing rank of distinguished experts that the likelihood of a hard landing is significantly rising.
If Roubini is off by a quarter for the hard landing, and if modern political discourse holds true to form, he, no doubt, will be criticized for being off by a quarter–if the bottoming out happens in Q2 or Q4 of 2008, he will have been shown to be ‘wrong.’ This would be absurd, since the overall contours of his predictions are dead on. Roubini again (italics mine):
So those – this author and a few other bears in academia and markets – who were accused a year ago of being on the moon have been proven to be fully grounded on planet Earth in their bearish views about housing, credit, financial markets and the economy. While those who lived in a Goldilocks bubble ended up looking now like the true lunatics. Luckily the housing bubble and the credit bubble and the delusional bubble has now burst and such folks living in moon dream-land will soon get a reality check and crash back to planet Earth.
Now why did I go through all of this? Because doesn’t this remind you of the Iraq war, where those who thought it was a bad idea were dismissed out of hand–even though it turns out that we were right on target:
- The Kurds in the north would exacerbate tensions with Turkey.
- Iran would gain in influence.
- The country would dissolve into sectarian violence, given the Bush administration’s overtly stated opposition to nation-building, which was absolutely vital.
- Acquiring access to oil and reconstruction contracts through a long-term occupation was a primary goal of the Bush administration.
- It would strengthen, not weaken, militant Islamic groups.
- The civilian carnage and breakdown of order would lead to a humanitarian crisis.
- Last one: there were no weapons of mass destruction.
Yet, even at this late date, those who opposed the war are still not taken seriously. I feel Roubini’s pain….
An aside: This also applies to global warming. After all, climatologists were wrong: the polar ice cap is melting faster than predicted…