Economists Who Dominated the GFC Predictions

On the first anniversary of the collapse of Lehman Brothers, this piece sums up the cause to the GFC, as predicted by 5 economists who subscribe to the line of economic thinking we promote: land rent theory.

Dirk Bezener, the academic who collated the 12 economists who predicted the GFC, wrote in the Financial Times Why Some Economists Could See the Financial Crisis :

Glenn Stevens, governor of the Reserve Bank of Australia, said: “I do not know anyone who predicted this course of events. But it has occurred, it has implications, and so we must reflect on it.” We must indeed.

I undertook a study of the models used by those who did see it coming.* They include Kurt Richebächer, an investment newsletter writer, who wrote in 2001 that “the new housing bubble – together with the bond and stock bubbles – will [inevitably] implode in the foreseeable future, plunging the US economy into a protracted, deep recession”; and in 2006, when the housing market turned, that “all remaining questions pertain solely to [the] speed, depth and duration of the economy’s downturn”. Wynne Godley of the Levy Economics Institute wrote in 2006 that “the small slowdown in the rate at which US household debt levels are rising resulting from the house price decline, will immediately lead to a sustained growth recession before 2010”.

Michael Hudson of the University of Missouri wrote in 2006 that “debt deflation will shrink the ‘real’ economy, drive down real wages, and push our debt-ridden economy into Japan-style stagnation or worse”. Importantly, these and other analysts not only foresaw and timed the end of the credit boom, but also perceived this would inevitably produce recession in the US. How did they do it?

Central to the contrarians’ thinking is an accounting of financial flows (of credit, interest, profit and wages) and stocks (debt and wealth) in the economy, as well as a sharp distinction between the real economy and the financial sector (including property). In these “flow-of-funds” models, liquidity generated in the financial sector flows to companies, households and the government as they borrow. This may facilitate fixed-capital investment, production and consumption, but also asset-price inflation and debt growth. Liquidity returns to the financial sector as investment or in debt service and fees.

Neo-classical economists only focus on two factors of production – capital and labour. Bezener misses the big one in his flow-of-funds analogy. The imperative question is – what was the money was borrowed for?

Land – predominantly. Land values in Australia are twice as big as the ASX.

Fred Harrison wrote in his 1997 analysis – The Chaos Makers

By 2007 Britain and most of the other industrially advanced economies will be in the throes of frenzied activity in the land market equal to what happened in 1988/9. Land prices will be near their 18-year peak, driven by an exponential growth rate, on the verge of collapse that will presage the global depression of 2010. The two events will not be coincidental: the peak in land prices not merely signalling the looming recession but being the primary cause of it.

Fred should be given his due respect, especially as his Power in the Land (1984) also predicted the 1987/8 downturn using the 18 year land cycle. See one of his best videos on the GFC.

Who else used the role of land in their interpretation of business cycles to do what the most high profile economists in the world failed to do?

Fred Foldvary utilised this important knowledgebase to release The Recession of 2008 (2007).

Australian land valuer Bryan Kavanagh was also overlooked. He predicted the GFC in 2001, and gave similar strong indications of the danger of the bubble economy in his 2005 Unlocking the Riches of OZ and countless newspaper articles

Phil Anderson was another who borrowed upon the 18 year land cycle and warned people about the Real Estate Bust of 2010 at this sellout 2007 event. See his book below and his predictions.

Gavin Putland took the land turnover theory further in From the Subprime to the Terrigenous: Recession begins at home. Here he showed that 32 out of the 40 countries studied had a drop in land turnover 9 quarters before the recession. All had a property crash before the recession kicked in.

A downturn in the property market, especially in turnover (sales) of properties, is a leading indicator of recession, with a lead time of up to 9 quarters for turnover, or up to 8 quarters for values. Of all the countries in which a conspicuous fall in turnover was documented, there was no case in which the onset of recession preceded the fall in turnover, and only one case (Taiwan) in which the onset of recession seems to have been in the same quarter as the fall in turnover; and in the one case (Italy) in which recession preceded the downturn in property values, it did not precede the downturn in turnover.

In summary:
Drop in land turnover -> drop in land price -> cash flow pressures (flow-of-funds) -> recession.

It is not enough to criticise property speculators or banks. We must dig deeper to restructure the tax system so that productive activities are given greater incentive than paper flipping speculative intent.

Elsewise, the next bankers bailout will be upon us without structural adjustments. As critics of the process of globalisation may well note, what this land value capture reform calls for is a Structural Adjustment Program targeting speculative excesses in return for lower overall taxation; in effect turning around the Washington Consensus model of enforcing privatisation of key infrastructure in return for high interest bearing loans.

The flow-of-funds can be reversed from the top downwards by capturing and sharing the ever increasing value of the earth and earth-like monopolies (ie telco’s or DNA patents) in lieu of income and indirect taxation. Asset bubbles are unable to develop when the land rents are collected.

Within a short period of time society will be back on a more even keel, with everyone paying according to the natural advantages we see fit to use in our daily activities.

Five economists predicted the GFC using the 18 year land cycle theory. This theory is known as Geonomics or Georgism. Did any other economic theories so dominate Mr Bezener’s list?

Surely there will be a time when the role of land, economic rent and tax leakage gets taken seriously.

You can read about this unique economic perspective in detail via:

Both books are available from our bookshop

See 3 economists (Prof Michael Hudson, Steve Keen and Bryan Kavanagh) who predicted the GFC at Lifting the Lid on the GFC – Wed Oct 14th, Melbourne Town Hall


  1. kjr15-09-2009

    The only model “modern” economists have is a “Star Trek”-model. When they don’t understand that taking debt to pay rent leads to disaster, how can they understand anything else..

  2. North Queensland State01-11-2015

    Australian economist, Steve Keen predicted the GFC mainly because he ignored the non-reality focused models of current neoclassical economist who ignore private debt. The GFC was mainly a private debt fueled crisis that ran out of fuel (Saturated Private Debt Levels + unpunished financial corruption). Have modern economist changed their models to suite reality.? Economics is now a religion NOT a science.

    Read Steve Keen here and get a dose of economic reality:-

  3. Karl Fitzgerald
    Karl Fitzgerald09-11-2015

    Steve Keen has spoken at a number of events we have organised. We prefer to step behind the veil of debt and ask what is the money actually borrowed for? Most is for the land component of residential housing. So we agree debt is a problem, though we differ on how to reform it. Land Value Tax acts as a counter-weight to mortgage debt, whilst also inspiring productive entrepreneurialism over speculation.

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