Maybe. I’m willing to give an “I was wrong, you were right” about Iraq. I’m not as willing to give an “I was wrong all the financial doomsayers were right” about the financial crisis. I was pretty worried about the housing bubble, that was clearly a bad thing (you even agree with Jane Galt from years ago on that) but I didn’t believe that it would cause problems nearly this big. So for the very few people who predicted that, they were right. For people who seem to think that this vindicates them on a whole range of leftist economic points, not so much.

More generally, the point that housing bubble was the product of international financial imbalances was common ground – it’s Bernanke’s “global savings glut” analysis. The point of dispute was between those who correctly used terms like “bubble” and “imbalance” and those who thought that the housing boom was great and that the capital flows were a rational global allocation (or, in Bernanke’s case, a rational response to a Chinese domestic economic problem of excess savings).

Coming back to the original post, here at CT, just about all of our regular quasi-libertarian commenters has pulled the “inexact prediction” gambit. Sebastian was a late entry, but he completes the set I think.

Holbo: it was Arthur who said, “We’ll call it a draw,” not the Black Knight. Strikes me as probably the only time I’ll spot a miffed pop-culture reference in your posts…

Opportunity duly seized upon ;]

but if you didn’t think that there was a crisis forming, then what would there have been to trade off? And if you did think there was a crisis forming, isn’t there an important sense in which you can be considered to have been “right” and people who disagreed with you “wrong”?

It would have taken a dramatically tighter money policy to keep that particular bubble from forming, especially with all of the “everyone should own their own home” policy that was coming from both the left and the right at the time. And even then you haven’t demonstrated that it would have stopped the bubble from forming, as bubbles seem to be a pretty common occurrence in all sorts of different economic structures. This is especially true as the crisis in Europe is much less tied to the housing bubble and much more tied to other risky asset investments suggesting that there is something more to this than Americans and housing prices.

Now dramatically tighter monetary policy may have prevented the housing bubble, but at what cost? If approaching German levels of unemployment for a short period of time is indicative of a disaster in the US (and I would suggest that it is), would it be better to have had that all along for the past six years?

Maybe it would have been. But at least for unemployment, we haven’t even gotten to the point now where a dramatically tighter monetary policy would have had has for 5 or 6 years. So again, economics is about tradeoffs. And we should be rather more explicit about what they are don’t you think?

Counterpoint: Predicting a financial crisis is almost the most interesting type of prediction you can make if you’re prepared to put your money where you’re mouth is, and the great thing is that you always do, in fact, get an answer about whether you’re right or wrong, in the form of money. Someone who had made this prediction and acted on it would definitely be in a position to say to Sebastian “If I’m not smart, how come I’m so rich?”. (and it is clearly not a situation like a casino game; it’s more like a racetrack)

Furthermore, implicit in the prediction “I think there’s going to be a financial crisis so I’m short SP500” is the prediction “I think that said financial crisis is going to arrive before the next big leg up, which would obviously kill my short futures position”. This isn’t a trivial prediction at all – someone who predicted in 1998 that dot com stocks were going to crash would have lost their shirt and their job (and several did).

I will also confidently predict that the sun will not have ceased to burn by 5 years from now, that wind will blow the leaves from the tree in front of my yard down the canyon, and that if you smoke for a long time you will eventually die of something. These predictions are accurate in an unuseful way.

“Money talks and bullshit walks” (proverb)

If you don’t like the current economic crisis now, you really wouldn’t like it if the US had engaged in policies along the lines of what is prescribed if you think the major problem is the dollar

Not at all true. Lots of people (Brad Setser, for one, I think) thought that the current crisis would take the shape of a dollar crash and back in 2002 were arguing for an overall tighter monetary policy stance[1] which would have prevented a bubble from forming. When the bubble was in full inflation, they didn’t have a “policy solution which would make things better”, but this isn’t their fault (just as I remember losing my temper in 2004/5 with you personally because you kept asking for “constructive solutions” in Iraq).

[1] Which would obviously have been much easier to accomodate if we hadn’t been trying to finance the Iraq War, by the way.

Daniel’s example is much closer to what you are talking about. “I don’t really know what is wrong, but I think something is so I’m shorting the S&P500.”

The problem with your example however is that it essentially gets to the point of “you are going to die”. It isn’t much of a prediction. We are all going to die. “At some point in the future there will be a financial crisis” isn’t a very interesting prediction because almost anyone can predict the virtually certain. I will also confidently predict that the sun will not have ceased to burn by 5 years from now, that wind will blow the leaves from the tree in front of my yard down the canyon, and that if you smoke for a long time you will eventually die of something. These predictions are accurate in an unuseful way.

Donald’s point “The Iraq War was virtually certain to be a disaster, but one reason we knew (or should have known) this was because there were so many different ways it could have gone wrong.” is correct, but it doesn’t extend to the economic analysis so easily as you (Holbo that is) seem to want it to. Donald’s point is correct when you have a policy choice. We don’t choose to have an economy, we choose certain policies about how governments interact with the economy. “This economy is a mess” is a perfectly acceptable broad based analysis, but isn’t very helpful. “This economy is a mess because of the policies which are leading to a high dollar and we should correct that by doing X” is a different proposition entirely.

If you don’t like the current economic crisis now, you really wouldn’t like it if the US had engaged in policies along the lines of what is prescribed if you think the major problem is the dollar. It would have been this crisis plus much worse due to a deliberate tightening of the credit market by the fed. And that is the problem. The fact that we have this crisis doesn’t add credibility to people whose policy prescriptions would have made the current crisis work.

I think it will become clearer if take the analogy back to the Iraq war. There was a broad judgment in 1992 and 1993 that Islamic Terrorism was a problem. This is the level of generality of “the Economy is in trouble” that you seem to be talking about.

Now some people thought we should deal with it entirely through police procedures.

Some people thought we needed to increase spying.

Some people thought we needed to invade Afghanistan.

Some people thought that after we needed to invade Afghanistan we also needed to invade Iraq.

All of these are policy choices, influenced by the general policy judgment that “Islamic Terrorism” is a problem. You can admit that Islamic Terrorism is a problem without agreeing that invading Iraq was a good way of dealing with the problem.

Put another way, the March 11, 2004 bombings in Madrid and the July 7 2005 bombings in London (suggesting that for some definitions of Islamic Terrorism it was indeed a problem) do not validate the invasion of Iraq (a particular policy choice about how to fix it) .

Likewise, the current economic crisis (suggesting that there is something wrong with the economy) does not validate the analysis of those who thought the problem was the dollar. Their prescription would have made things worse. Being right about the general problem just can’t be considered impressive when your prescription would have made things worse.

Oddly enough the same thing happened with the last boiler, the one before that and the one before it. And each time the people who sold me the boiler told me that this time I’d got a new model which was perfectly safe. It almost makes me wonder if there are other ways of heating my house.