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The Financial Crisis Winners and Losers

The Financial Crisis Winners and Losers

Research Question:

  • Who are the top winners and losers of the financial crisis? Top investors, economists, intellectuals, government officials, think tanks, and universities that lost or won because of the crisis

Who Predicted the Financial Crisis - The Financial Crisis Winners and Losers

Research Findings:

We identified several winners and losers in different categories, including the following:

  1. Economists, Policy Makers and Intellectuals
  2. Investors and Money Managers
  3. Investment Banks and Financial Firms
  4. Universities and Academia
  5. Economic Think Tanks

Economists, Policy Makers and Intellectuals

Top Losers

The list of the top experts whose intellectual abilities and credibility are put to question are Nobel Laureates like Harry Markowitz, Merton Miller and William Sharpe. Their work on portfolio theory underestimates equities risk in their asset pricing model. The economists from the Bush Administration including, Alan Greenspan, Ben Bernanke, Chuck Blahous, Pierce Scranton, Edward Lazear, and Henry Paulson. This group missed the crisis despite several warnings over the years.

On July 7, 2009, Cullen Roche, an opinion leader on Seeking Alpha, wrote: Ben Bernanke has no formal banking background and has never worked at an investment bank. He is a lifelong academic yet he is selected to run the most important branch of the global economy. That makes very little sense to me. This is not to say that he isn't a phenomenally intelligent person, but if I am going to choose someone to fly my next flight he/she better have some hours in the cockpit rather than just thousands of hours reading the manual. - (Source: Seeking Alpha)

On October 3, 2010, Charles Ferguson, wrote in the Chronicle of Higher Education: "(Larry) Summers is unique but not alone. By now we are all familiar with the role of lobbying and campaign contributions, and with the revolving door between industry and government. What few Americans realize is that the revolving door is now a three-way intersection. Summers's career is the result of an extraordinary and underappreciated scandal in American society: the convergence of academic economics, Wall Street, and political power. - (Source: The Chronicle Review)

Top Winners

Every decade or so, a few geniuses are discovered. For years they work hard trying to solve incredibly complex problems, they labor in relative obscurity until they achieve great results. At first they are ignored, dismissed or ridiculed by their peers, later they are recognized for their exceptional abilities and achievements. These exceptional experts saw what most of the world failed to see.

To be accurate in our research and to avoid offering these experts unsubstantiated titles, we looked up the definition of a genius. "A genius is someone embodying exceptional intellectual ability, creativity, or originality, typically to a degree that is associated with the achievement of unprecedented insight".

In an article on Seeking Alpha (July 7, 2009), Cullen Roche, an opinion leader, asks "Why did economist fail to predict the crisis?" He writes: In hindsight, it seems like the crisis was so obvious... it's still astounding that we can count the "experts" who actually predicted the crisis on two hands. And many are even skeptical of this small sampling of prescient economists and analysts. Statistically speaking you could easily make the argument that most of these "experts" who got it right were anomalies or lucky" Source: Seeking Alpha

In an interview (Dated Jan 9, 2009) with the Associated Press’s  Vice President Cheney repeatedly insisted that no one anticipated the looming U.S. financial crisis. “I don’t think anybody saw it coming,” he said.
REICHMANN: But why, why didn’t you see such a huge downfall in the economy coming?
CHENEY: I suppose because nobody anywhere was smart enough to figure that out.

Warren Buffett said no one should be punished for missing a bubble that the entire U.S. — himself included — failed to see (Source: Jessica Dye Forbes Magazine )

The list of top economists, experts and intellectuals who gained more respect and are recognized for their genius in  predicting the economic crisis include Dean Baker, Med Jones, Nouriel Roubini, and Peter Schiff

Although Dean Baker was the first to warn about the crisis, and Med Jones had the most accurate predictions, they both were covered far less by the media. Nouriel Roubini predictions lagged behind other experts and Peter Schiff was the most bearish about the US economy.

Robert Prechter, a stock market analyst and forecaster warned about the housing bubble and its impact on the banking sector (Source: Fox News)

Other experts who saw the some of the dangers of the financial sectors and warned about them include (more research and predictions profile is being prepared for these experts):

Brooksley Born who called for regulating financial derivatives and was fiercely opposed by Larry Summers and Robert Rubin  (Source: PBS Frontline)

Raghuram Rajan, former chief economist of IMF. In September of 2005 he presented a paper titled "Has the Financial Development Made the World Riskier? He focused on financial compensation incentive structures allowing bankers to take very high risks to profit in the short term while not penalizing them for losses in the long term, thus leading to imbalance in investment risk/reward decisions and putting the world at risk. (Source: NBER)

Robert Gnaizda, the cofounder of the Greenlining Institute - A public policy, research, and consumer advocacy organization, warned Ben Bernanke and Alan Greenspan subprime mortgages several times (Source: NY Times)

Bill Ackman, a hedge fund manager of Pershing Square Capital Management warned about the subprime mortgage sector in May of 2007 in a presentation titled who is holding the back (Source: MarketWatch)

Nassim Taleb was also credited by many with predicting the crisis and had regular appearances on TV and major conferences like World Economic Forum in Davos.  However, our research finds that his Black Swan theory is not about the prediction of this financial crisis and the ensuing economic crisis. On the contrary, his early statements on the crisis states that no one could have predicted the crisis. The Black Swan book is more of a risk management theory explaining how unpredictable catastrophic events can impact the financial markets. We found no specific warning from him about subprime mortgages, housing bubbles and the ensuing financial market crash. Nassim Taleb books became best sellers as a result of the financial crisis. To his credit, he is correct in his criticism of the theoretical financial risks models that were flawed (in using mean variance to price risks), yet those theories won Nobel Prize in Economics and as a result many hedge funds on Wall Street used them to price their risky assets. Although he was wrongly credited with the prediction of this crisis,  this does not take away from the brilliance of his intellect and the quality of the book that he wrote.

Who Predicted the Financial Crisis - The Financial Crisis Winners and Losers

Investors and Money Managers

Top Losers

Harvard Management Co., which runs the world's largest endowment fund (Manages the funds of Harvard University) lost more than $10 Billion in 2008 because of the crisis (Source: Business Week). Many of Wall Street investment professional and US economist are Harvard educated. Losing so much money hurt the academic reputation of economic and investment education of the school.

The top investors who lost credibility and money because of the crisis include Warren Buffett and Len Blavatnik (Investments managed by JP Morgan), and David Tepper of Appaloosa Management

Even more surprisingly, Billionaire investor and Berkshire Hathaway Inc. CEO Warren Buffett defended credit rating agencies’ performance prior to the 2008 economic collapse, saying that no one should be punished for missing a bubble that the entire U.S. — himself included — failed to see. If the rating agencies did their job, investors would have not mispriced their assets and the financial market could have avoided the collapse. Buffett, whose investment vehicle Berkshire Hathaway is the single largest shareholder of Moody’s Corp. with a 13 percent stake, delivered his remarks sitting side-by-side with Moody’s CEO and Chairman Raymond W. McDaniel. (Source: Jessica Dye Forbes Magazine )

Mr. Buffett testified that he did not know all that much about the credit rating market, even though the holding company he controls, Berkshire Hathaway, is the largest shareholder in Moody’s Investors Service. “I’ve never been to Moody’s,” he said at a hearing of the Financial Crisis Inquiry Commission, which is investigating the causes of the global crisis that led to the government bailout of big banks. “I don’t even know where they’re located. I just know that their business model is extraordinary.”  - (Source: New York Times Report)

One must wonder how Buffett and his team invested so much money without adequate due diligence. This is not a minor mistake. This is a multibillion dollar mistake.

Top Winners

Top Investors who won money because of the crisis are John Paulson, Philip Falcone, Kyle Bass, and Jeff Greene

Who Predicted the Financial Crisis - The Financial Crisis Winners and Losers

Wall Street Firms

Top Losers

The top loser is Lehman Brothers and its CEO Richard S. Fuld, Jr. - It was the only major bank that was not bailed out by the Fed. Other top losing financial services companies, include AIG, Fannie Mae and Freddie Mac, New Century Financial, DR Horton and Countrywide Financial, Bear Stearns, UBS AG Swiss bank, IndyMac, Washington Mutual, and Merrill Lynch 

The Chief Economists of the biggest financial institutions including Morgan Stanley, Goldman Sacks, JP Morgan, Barclays' Bank, Bank of America and other major financial institutions and investment firms. Many of them are ranked as top economists by the Wall Street Journal, which is a case in point about the credibility of the Wall Street Media and their role as a promotional and advertising platform than financial journalism

Top Winners

Top investment bank John Mack, CEO of Morgan Stanley -- See NY Sun

For Top money managers who lost or won in 2008 because of the crisis (directly or indirectly) -- See Hedgeable

More research to be done in this category

Who Predicted the Financial Crisis - The Financial Crisis Winners and Losers

Universities and Academia

Top Losers

Ivy League Universities: Harvard, MIT, Yale, Wharton, and Northwestern

On November 22, 2010, in an article on Huffington Post, Brian Ross, wrote an ironic article on how poisonous "Ivy" League graduates made the global financial system and the global economy sick with "toxic" banking assets. He blames Ivy League presidents, CEOs, compensations, and their policies (Source: Huffington Post)

He is right in saying that Ivy League Schools flooded Wall Street and top government jobs with their financial graduates and economists (See Guardian UK). However the article is not entirely fair and generalizes the blame by using guilt by association. On the other hand, his questioning of the fascination with brand name educational institutions rather than focusing on the individual abilities of the job candidate is a valid point.

These institutions, along with their economics and financial departments lost credibility as thought leaders and their abilities to produce top economic and financial talents.

It also is ironic that Harvard University, the top brand in business and financial education and its president, Larry Summers, who is the US Top Economic Advisor to the Obama Administration during the crisis, lost more than $10 Billion in 2008 because of the crisis (Source: Business Week).

Top Winners

Our research shows that only two research institutions predicted the economic crisis caused by the housing bubble; they are CEPR (See Dean Bakers Predictions) and International Institute of Management (See Med Jones Predictions)

Who Predicted the Financial Crisis - The Financial Crisis Winners and Losers

Economic Think Tanks

Top Losers

Think Tanks that totally missed the crisis:

Brookings, American Enterprise Institute, Center for Economic Policy Analysis, Institute for International Economics, American Enterprise Institute, Brookings Institution, Cambridge Energy Research Associates, Cato Institute, Center for Economic Policy Analysis, Century Foundation, Committee for Economic Development, Economic Policy Institute, Economic Research Council (London), Employment Policy Foundation, Economic Strategy Institute, Heritage Foundation, Institute for International Economics, Jerome Levy Economics Institute, Joint Center for Political and Economic Studies, Kiel Institute of World Economics, National Bureau of Economic Research, National Center for Public Policy Research, Progressive Policy Institute Rochester,  Center for Economic Research, Theoretical Research Institute United for a Fair Economy, Urban Institute, and Washington Institute for Policy Studies

Top Losers

Wall Street Economists

Stephen Stanley, RBS Securities; Nigel Gault and Brian Bethune, IHS Global Insight; Maury Harris, UBS; Neal Soss, Credit Suisse; Spencer Staples, EconAlpha; John Silvia, Wells Fargo; David Greenlaw, Morgan Stanley; Michael Feroli, JP Morgan; Dean Maki, Barclays Capital; Jan Hatzius, Goldman Sachs; Thomas Lam, United Overseas Bank; Kurt Karl, Swiss Re; Richard Berner, Morgan Stanley; Daniel North, Euler Hermes; Brain Fabbri, BNP Paribas;

Top Winners

Center for Economic and Policy Research CEPR (See Dean Bakers Predictions)
International Institute of Management (See Med Jones Predictions)
The Greenlining Institute who warned Ben Bernanke and Alan Greenspan subprime mortgages (Source: NY Times)

All three think tanks warned about the housing bubble and its impact on the economy. They are smaller in size and less prestigious, yet they were right while top think tanks were wrong.

Who Predicted the Financial Crisis - The Financial Crisis Winners and Losers

Other research questions and findings

  1. Why did the world's top economists fail to predict the financial crisis? (Others who missed the crisis, include government leaders, award-winning scientists, market analysts and investors). Was the crisis predictable or was it a Black Swan (unpredictable) event? Are government policy makers competent enough to manage the nation's financial freedom and security? Are economists and their policies helping or hurting our economic growth? Do we need to re-define the education of economic science and the role that economists play in our financial markets, government policies and business regulations? 
  2. Who is to blame for the financial crisis?  Who contributed to the creation of the crisis? Can they be held responsible for their actions or inactions? Was there a conspiracy by some Wall Street executives and government officials? Do investors have legal cause to seek compensation for damages caused by Wall Street firms?
  3. Who predicted the financial crisis and the ensuing economic crisis? Is there a documented evidence supporting their claims? Were those who warned about the crisis lucky or did they have a clear logic behind their predictions? Can we use their knowledge to predict future crises? What are their future predictions? How do their predictions compare with each other? Where do the experts agree and where do they disagree? How accurate are their economic predictions? Can they be relied on for investment decisions?
  4. Who are the top winners and losers of the financial crisis? Top investors, economists, intellectuals, government officials, think tanks, and universities that lost or won because of the crisis.
  5. What are the lessons we can learn to avoid future crises? What the the economic policy lessons? What are the investor's lessons? Do we need more or less financial regulations?

 

Wall Street Economists - Creative Commons Free Content License - Who Predicted The Financial Crisis?

Economic predictions from the world's top experts on the financial crisis

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Book: Bubbles Booms and Busts - The Rise and Fall of Financial Assets
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Knowledge
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Wall Street Economists - Creative Commons Free Content License - Who Predicted The Financial Crisis?