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Financial crisis of 2007–2008

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Role of economic forecasting: NPOV
The former Governor of the [[Reserve Bank of India]], [[Raghuram Rajan]], had predicted the crisis in 2005 when he became chief economist at the [[International Monetary Fund]]. In 2005, at a celebration honouring [[Alan Greenspan]], who was about to retire as chairman of the [[US Federal Reserve]], Rajan delivered a controversial paper that was critical of the financial sector.<ref>Raghuram Rajan. "[http://www.nber.org/papers/w11728 Has Financial Development Made the World Riskier?]". [[National Bureau of Economic Research]]. November 2005. Retrieved on August 18, 2012.</ref> In that paper, "Has Financial Development Made the World Riskier?", Rajan "argued that disaster might loom."<ref name="WSJ">Justin Lahart. "[https://www.wsj.com/articles/SB123086154114948151 Mr Rajan Was Unpopular (But Prescient) at Greenspan Party]". ''[[Wall Street Journal]]''. January 2, 2009. Retrieved on August 18, 2012.</ref> Rajan argued that financial sector managers were encouraged to "take risks that generate severe adverse consequences with small probability but, in return, offer generous compensation the rest of the time. These risks are known as tail risks. But perhaps the most important concern is whether banks will be able to provide liquidity to financial markets so that if the tail risk does materialise, financial positions can be unwound and losses allocated so that the consequences to the real economy are minimised."
 
The financial crisis was not widely predicted by [[mainstream economics|mainstream economists]]. Karim Abadir, based on his work with Gabriel Talmain,<ref>{{cite web|url=https://doi.org/10.1111/1467-937X.00225|title="Aggregation, Persistence and Volatility in a Macro Model"|author1=KM Abadir|author2=G Talmain|date=2002|publisher=The Review of Economic Studies, Volume 69}}</ref> predicted the timing of the recession<ref>{{cite web|url=https://workspace.imperial.ac.uk/business-school/Public/people/Abadir/Interview-Recession-AlumniMag.jpg|title="Recession? What Recession?!"|author=KM Abadir|date=2008}}</ref> whose trigger had already started manifesting itself in the real economy from early 2007.<ref>{{cite web|url=http://www.rofea.org/index.php?journal=journal&page=article&op=view&path%5B%5D=58|title=Is the Economic Crisis Over (and Out)?|year=2011|publisher=Review of Economic Analysis.}}</ref> A number of [[heterodox economics|heterodox economists]] predicted the crisis, with varying arguments. Dirk Bezemer in his research<ref>{{cite web|url=http://mpra.ub.uni-muenchen.de/15892/|title="No One Saw This Coming": Understanding Financial Crisis Through Accounting Models|last=Bezemer|first=Dirk J|date=June 2009|publisher=Munich Personal RePEc Archive|accessdate=October 23, 2009}}</ref> credits (with supporting argument and estimates of timing) 12 economists with predicting the crisis: [[Dean Baker]] (US), [[Wynne Godley]] (UK), [[Fred Harrison (author)|Fred Harrison]] (UK), [[Michael Hudson (economist)|Michael Hudson]] (US), [[Eric Janszen]] (US), [[Steve Keen]] (Australia), [[Jakob Broechner Madsen|Jakob Brøchner Madsen]] & Jens Kjaer Sørensen (Denmark), [[Kurt Richebächer]] (US), [[Nouriel Roubini]] (US), [[Peter Schiff]] (US), and [[Robert Shiller]] (US). Examples of other experts who gave indications of a financial crisis have also been given.<ref>"Recession in America". The Economist, November 15, 2007.</ref><ref>Richard Berner, "Perfect Storm for the American Consumer". Morgan Stanley Global Economic Forum, November 12, 2007.</ref><ref>Kabir Chibber, "Goldman Sees Subprime Cutting $2&nbsp;Trillion in Lending". Bloomberg.com, November 16, 2007.</ref> Not surprisingly, theThe [[Austrian school|Austrian economic school]] regarded the crisis as a vindication and classic example of a predictable credit-fueled bubble that could not forestall the disregarded but inevitable effect of an artificial, manufactured laxity in monetary supply,<ref>[https://mises.org/journals/qjae/pdf/qjae13_1_1.pdf Austrian Business Cycle Theory and the Global Financial Crisis:: Confessions of a Mainstream Economist] by Jerry Tempelman</ref> a perspective that even former Fed Chair Alan Greenspan in Congressional testimony confessed himself forced to return to.<ref>{{cite news|url=http://www.msnbc.msn.com/id/27335454/ns/business-stocks_and_economy/t/greenspan-admits-mistake-helped-crisis/|agency=Associated Press|title=Greenspan admits ‘mistake’ that helped crisis|date=October 23, 2008}}</ref>
 
A cover story in ''[[BusinessWeek]]'' magazine claims that economists mostly failed to predict the worst international economic crisis since the [[Great Depression]] of the 1930s.<ref>{{cite web|last=Coy|first=Peter|url=http://www.businessweek.com/magazine/content/09_17/b4128026997269.htm?chan=top+news_economics+subindex+page_economics|title=Businessweek Magazine|work=BusinessWeek|date=April 16, 2009|accessdate=May 1, 2010}}</ref> The [[Wharton School of the University of Pennsylvania]]'s online business journal examines why economists failed to predict a major global financial crisis.<ref>{{cite web|url=http://knowledge.wharton.upenn.edu/article.cfm;jsessionid=a830ee2a1f18c5f62020347bf11442669617?articleid=2234 |title=Why Economists Failed to Predict the Financial Crisis |publisher=Knowledge.wharton.upenn.edu |accessdate=November 11, 2009 |deadurl=yes |archiveurl=https://web.archive.org/web/20100913044548/http://knowledge.wharton.upenn.edu/article.cfm%3Bjsessionid%3Da830ee2a1f18c5f62020347bf11442669617?articleid=2234 |archivedate=September 13, 2010 }} </ref> Popular articles published in the mass media have led the general public to believe that the majority of economists have failed in their obligation to predict the financial crisis. For example, an article in the New York Times informs that economist [[Nouriel Roubini]] warned of such crisis as early as September 2006, and the article goes on to state that the profession of economics is bad at predicting recessions.<ref>[https://www.nytimes.com/2008/08/17/magazine/17pessimist-t.html?pagewanted=all "Dr. Doom"], By Stephen Mihm, August 15, 2008, New York Times Magazine</ref> According to ''[[The Guardian]]'', Roubini was ridiculed for predicting a collapse of the housing market and worldwide recession, while ''The New York Times'' labelled him "Dr. Doom".<ref>{{cite news|url=https://www.theguardian.com/business/2009/jan/24/nouriel-roubini-credit-crunch|first=Emma|last=Brockes|title=He Told Us So|work=The Guardian|date=January 24, 2009|accessdate=May 1, 2010|location=London}}</ref>