Back on August 29, I wrote a diary, "Who Could Have Foreseen The Housing Bubble Collapse? Dean Baker, That's Who--In 2002". It was my intention to follow that up with some further posts on others who saw it coming. Imagine how happy I was to discover that someone else had done it for me-Dutch economist Dirk Bezemer, writing in the Financial Times on September 7, "Why some economists could see the crisis coming". What's more, he has a much more detailed explanation in a 51-page paper, "'No One Saw This Coming': Understanding Financial Crisis Through Accounting Models" (pdf). Long story short, Bezemer set out to find those who had been right in predicting the financial meltdown, not just randomly, but because of a well-reasoned argument. He found eight examples-including Baker-and analyzed what they had in common. He discovered that they all relied on accounting models that looked at the economy in terms of stocks and flows, in sharp contrast to the standard macro-economic models that actually have no way of predicting a financial crisis, since their programming does not allow for the possibility. That's the short argument, so that you don't have to read the rest of my diary. If you want a better understand of what the above means, however, it would be a good idea to jump to the flip.
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