Research Findings:

To answer the preceding questions, we started with the obvious question: Who predicted the financial crisis. We Googled the question to identify specific prediction statements and warnings. We wanted concrete answers from credible experts. We did not consider generic theories and lucky guesses.

The following section summarizes our research results.

It is a globally accepted fact that top world governments, central banks, economists, investment bankers and financial journalists were caught off guard by the financial crisis and the ensuing economic crisis of 2008-2009. In the U.S. George Bush Administration, his top economic advisors, the Treasury Secretary, the Chairman of the Federal Reserve, and the world’s top investment banks did not foresee the financial collapse on Wall Street until it was too late. Only a few experts emerged with credible early warnings, but they were ignored, dismissed or ridiculed by everyone else. These experts are the subject of this research section

The Difficulty in Economic Forecasting

Financial Economics is a young and developing science. We’ve found evidence of conflicting theories, decision models and opinions from many award-winning and respected economists. Unlike other sciences, the difficulty with the economics comes mainly from the predictive function in managing the supply and demand and the need for financial economists to forecast future performance of financial assets based on very large number of variables, economic indicators and events.

On the topic of the difficulty in predicting future economic events, we looked at the top two most well-known investors and the top two most well-known economists

The Top Two Most Well-Known Investors

The first investor is George Soros. who became one of the world’s richest people by predicting the UK currency collapse and betting against it, and the second is Warren Buffett, who is known as the Oracle of Omaha for his ability to manage one of the highest performance investment funds until he was hit by the financial crisis.

George Soros acquired an ill-fated stake in Lehman Brothers just before the investment bank failed in 2008. (Source: Yahoo Finance )

Warren Buffet. the CEO of Berkshire Hathaway, and its investors lost billions of dollars during the financial crisis. In a May 2010 interview with the Financial Crisis Inquiry Commission (FCIC) that was created to examine the root cause of the Crisis, Warren Buffett. said no one saw the housing bubble. Buffett defended the role that Moody’s and other rating agencies played in the financial crisis, even as the industry missed the signs of an impending housing market collapse. In this particular case, I think they made virtually the same mistake everyone else made. — He said that he underestimated the impact of the crisis and by the time he realize it, it was too late for him to do something about it. — (Source: FCIC.GOV Video Testimony and CNN Money News Report )

One must wonder how the Oracle and the manager of one of the world’s largest investment funds, staffed with top economists and financial analysts, miss on systemic risks of such as large scale.

The Top Two Most Well-Known Economists

The US top economist, Ben Bernanke. the Federal Reserve Chairman, testified at the Financial Crisis Inquiry Commission (FCIC). He said: We knew all those numbers, of course. But a lot of smart people — and you asked the question about anticipation, people like Paul Volcker (Former Chairman of the Federal Reserve) and others thought it was going to cause a crisis. But they got it wrong. They thought it was going to cause a dollar crash. It didn’t do that. It caused a different kind of crisis. Just another example of how difficult it is to predict. (Source: FCIC.GOV )

His predecessor, Alan Greenspan called the financial crisis “a once-in-a-century event” whose consequences proved far more devastating than had been widely expected. “We all misjudged the risks involved,” he said. “Everybody missed it — academia, the Federal Reserve, all regulators.” — (Source: Bloomberg News )

Our Research Conclusions:

We believe that Alan Greenspan’s statement “Everybody missed it — academia, the Federal Reserve, all regulators.” is untrue. We found several credible early warnings and independently verified evidence outlining the risks.

Greenspan’s statement “a once-in-a-century event” is erroneous. The Great Depression 1928, was followed by several financial crises and bursting bubbles in the ’60’s, ’70’s and ’80’s in the US and other markets around the world, shows that either he is misinformed or suffers from selective memory bias.

In the investment world, there are several anecdotal evidences showing that some investors made a lot of money and profited from understanding key functions and relationships in financial economics. In the past, George Soros profited from predicting the UK currency collapse. The most recent example is John Paulson, who profited from betting on the burst of subprime mortgages at the heart of the housing bubble and 2008-2009 economic crisis.

There are also at least three documented cases of experts who foresaw the financial crisis and warned about its impact on the economy. To others, they seemed lucky, but the evidence suggests that these professionals knew something that others didn’t and they believed in it to the point of risking their reputation and careers.

Who are the experts who predicted the financial crisis and the ensuing economic crisis? What were their warnings?

To find the answers, we started by Googling the phrase: Who predicted the financial crisis. We found many news stories and articles. Most of the articles were marketing articles rather than investigative journalism. The few academic research papers that we found were written by those who missed the crisis. The research papers were either incomplete or contaminated with biases justifying why no one predicted the crisis.

As researchers we were skeptical too. But unlike our professors, who we cannot name here for obvious reasons, we did not have ego issues to stop us from keeping an open mind. We also were wary of the many marketing statements associated with some of the economists such as Nostradamus, Dr. Doom, Economic Gurus, Oracles or Prophets. We understand the need of PR professionals to promote their clients or writers to attract the attention of the readers. But rather than believing or disbelieving these articles, we focused on the predictive statements from the experts and their dates.

Our initial research identified three credible early warnings and we suspect that we will find more by the time we complete our research project. The most well documented predictions come from three experts. They are, in order of prediction date; Dean Baker, Med Jones and Peter Schiff

Housing Bubble Sitters — A warning by Dean Baker (August 25, 2005)

Who are these experts?

Dean Baker is an economist who warned about the crisis earlier than all the other experts, but was mostly ignored because he went silent on the topic in 2006 & 2007.

Med Jones. a strategy expert who is lesser known than the remaining expert but produced the most accurate predictions among them.

Nouriel Roubini is an economist and a media darling. He is the most popular among those who predicted the crisis, although recent journalistic investigation reports challenge the date and the content of his predictions. We are still reviewing evidence to determine whether to include him or remove him from the list. ( See notes below the next table )

Peter Schiff is an investment manager, also widely covered by the media and is most popular with the Tea Party. He was the economic advisor of Ron Paul — A Republican Presidential Candidate — and a Tea Party favorite.

The most bearish of the four is Peter Schiff. The least bearish is Med Jones.

The following table compares the first documented public warnings (and predictions) by each expert, their dates and sources: