Just for fun - how predictable was the current economic mess?

If you want to know how predictable the current economic mess was, here is what I blogged back in October 11, 2005.

We can look for high interest rates and very high inflation, probably accompanied with increased unemployment. This is likely to begin significantly occurring within a year or two from now. But if you are part of the investing class, you can invest in minerals and stay ahead of inflation.

Now ask yourself - if someone like myself with some finance and economics education but no experience in the financial industry could recognize what was happening nearly three years ago, how likely is it that the Wall Street Bankers and government economists and regulators didn't see it coming?

I thought it would be a little sooner, but the prime mover of the credit mess has been mortgage loans and mortgage-backed financial instruments. I did not then understand that Mortgages go into default and then foreclosure quite slowly. From the time that a mortgage holder finds himself unable to keep up the payments until the time the home is sold in foreclosure can take between six months and a year. After that, the financial industry is designed to deal with some defaults and foreclosures, so it took even longer for the number of them to build up to the point that they were threatening financial institutions.

So while I expected the problem to grow relatively slowly, this has been close to the outside of my expectations. The point is, though, that the direction was clear back in Fall of 2005, even before Alan Greenspan retired as chief of the Federal Reserve. Greenspan was still raising interest rates in the Fall of 2005 and would continue well into 2006.

So remember - the current economic mess is a direct result of conservative-driven deregulation of the financial economy, or as I have said repeatedly our current economic problems are the direct and inevitable result of the Reagan Revolution and the free market, small government, no regulation, low taxes ideology conservative movement.

One other thing to keep in mind - when the total failure George Bush says that the American economy is inherently strong, he is spreading uninformed "happy talk". An economy whose manufacturing sector is only 12% of the GDP, which depends on homebuilding of homes that are too pricey for the market to buy without artificially low interest rates for 40% of GDP and which is dominated by banking and financial institutions is not a strong economy. [Source Eric Margolis]

Depending primarily on homebuilding to keep the economy going is the equivalent of everyone making a living by taking in each other's laundry.

The current economic mess was highly predictable as Greenspan created two bubbles in order to manipulate the economy (dot com and housing.) Similarly it was predictable by experts that the invasion of Iraq would result in an insurgency problem that we did not have enough troops or a proper occupation and counterinsurgency strategy to handle. And it is clearly predictable that free unrestrained and unregulated financial markets always lead to larger and larger boom-and-bust cycles with the busts more than destroying any value created during the booms.

It's also clearly predictable that the economic mess America is currently in will not start magically clearing up in early 2009. There are too many fundamental problems that are not being addressed for that to happen, just as was true in the 1930's.