I remember the first time I interviewed a relatively unknown economist named Nouriel Roubini. It was 2005, and as we sat in his New York University office, he laid out his scary vision of the future. Roubini is a specialist in the flow of money around the world and the crises that (sometimes) result. But on that day he wanted to talk about the U.S. housing market.
Homeowners, he said, had become too used to financing their lifestyles with money siphoned from overvalued homes. This housing bubble would pop, he warned, and send the world into a vicious recession, possibly even a depression. I remember leaving his office both stunned and confused. Only after calling a few leading economists was I reassured that this Roubini guy was expressing a fringe view that merited little attention. Like a lot of reporters that year, I turned around a tongue-in-cheek story about Dr. Doom and his scary (but probably best ignored) world view. Oops!
A few years later, I interviewed Richard Wolff, who is probably America's most prominent Marxist economist (though it's not a hugely competitive field). Wolff also walked me through his view of the next few years. He explained that the puncturing of the housing bubble, then apparent, would lead to a crisis much deeper than anyone understood: it would fracture American confidence in capitalism; the economy would stay stalled for a long time; and there would be global chaos. This time, I didn't even bother calling other economists to check out Wolff's story. The guy was a Marxist! Days later, Lehman Brothers collapsed.
Once the crisis hit, it became popular to scour the past for apocalyptic predictions that had come true. While many gloomy forecasts came from the left — notably Paul Krugman and Dean Baker — there was one particularly prescient voice from the right. As early as 2004, Peter Schiff, a libertarian investor, was arguing that the housing-fueled economic boom was a bubble waiting to burst.
But these successful prognosticators, among others, didn't just take a bow in 2008. Many predicted that the U.S. economy would worsen or, at best, stall. Perhaps grasping for hope, many smart people, including, apparently, President Obama, spent 2009 thinking those doomsday callers had just been lucky. Maybe they were right about the crisis, but they were surely far too pessimistic about the recovery. Oops again!
For nearly a decade, it turns out, the most accurate forecasts have come from the fringe. So it's upsetting to learn that many of those same Cassandras now believe, for different reasons, that we are on the brink of another catastrophe that may be far worse. Wolff, the Marxist, fears that China may be entering a significant slowdown, which, combined with Europe's all-but-inevitable recession, could send the world into an economic tailspin.
Roubini, now one of the world's most visible economic thinkers, has a similar view, though he sees the timing differently, with the worst coming in 2013 or 2014, when China will face a situation like the one the United States experienced in 2008. Its banks, he says, will reveal huge investments in nonsensical bubble projects. The world will question China's solvency, and the subsequent chaos will destroy whatever fragile recovery is under way. Schiff also paints a dire picture, but for essentially the opposite reason, saying America's indebtedness and currency policy will cause another crash.
It's much less lonely being a doomsayer these days. Steve Hanke, an economist at Johns Hopkins, says there's a 50 percent chance of a recession this year. Lakshman Achuthan, of the eerily accurate Economic Cycle Research Institute, predicts a return of double-digit unemployment. They are downright rosy compared to George Soros, who has warned of violent riots throughout the world and a possible total global financial collapse. I really hope these guys are wrong.
After all, they're not infallible. In 2005, Roubini's dark view was fairly vague — something bad was going to happen (either quickly and painfully, or slowly and not so bad) between then and 2025. And one specific aspect of his forecast — that U.S. Treasury-bond interest rates would skyrocket and set off a panic — never actually happened. Schiff and Wolff can't both be right, because their core views pretty much cancel each other out. And anyway, they've all been predicting turmoil for ages.
The economy is so complex that any forecaster must construct a simplified model that is an inexact fit for reality. Some models explain some periods better than others, but no model explains everything correctly. Choosing just one can be like choosing a religion — you ignore the faults in your own belief system and don't pay much attention to the good ideas in someone else's.
The problem is that there's no perfect model. It's clear now that even the mainstream view can be shockingly incompetent. The widely held consensus just before the crisis went something like this: the Fed, through the visionary leadership of Alan Greenspan, had figured out how to get permanent, healthy economic growth without fear of inflation. Globalized trade and finance had spread risk widely. Forget forecasts; we couldn't even nail the present.
The mainstream view now reflects more gloom. The Blue Chip forecast — the average of 50 top economic prognosticators — predicts that the United States and world economies will inevitably recover. But the growth won't necessarily feel like growth — it will be slow, and millions will stay unemployed for many years. The big difference is that in 2006, most were blind to the impending disaster. Now it's all we can see. The most fringe forecaster today might be the relatively unknown economist Ed Yardeni, who says that corporation are about to start spending again and that the economy will start growing at a healthy clip. Let's hope that the fringe is right.