Explaining recessions with definitions?

Nick Rowe is an excellent educator, and always has really nice "parables" to explain some point; this recent one is about the excess demand for money (the medium of exchange) causing recessions.

But it's a just-so story. The only way agents can satisfy their demand for goods is through monetary exchange of money earned through monetary exchange, and satisfying that demand is defined as equilibrium. Therefore non-equilibrium (i.e. recession) is effectively defined as insufficient monetary exchange (i.e. excess demand for money).

Actually, I could use the same exact system (with the same effects) but have a recession defined completely differently: agents huddling in a particular corner of state space.

When Nick says the agents get an excess demand for money, I'd say agents decide to occupy a particular corner of the available opportunity set (state space) that involves holding (not spending) as much money, cutting off a segment of it. Agents no longer fully explore the state space and entropy is no longer maximized. This generalizes to exactly the same generalization Nick makes:

It is not an excessive desire to accumulate assets that causes recessions; it is an excessive demand for one particular asset (the medium of exchange) relative to other assets. It's about the composition of their portfolios of assets, not about the total size of that portfolio.

There is a maximum entropy distribution (subject to some constraints) over assets (portfolio), and deviations from it represent a loss of (information) entropy. I've suggested before that this kind of correlation in state space is a possible description of a recession. Notably, I don't define this as a recession. I just look at the consequences and note that it describes a recession without getting into the details of why agents have decided to correlate in a corner of state space. 

Here's an example where one agent on the Wicksellian circle decides to have an excess demand for "money" (you can imagine goods flowing in the opposite direction):

The key point here is that we've abstracted what Nick defines as an excess demand for money (observable only as a recession) as a correlation in state space. Nick defines a specific correlation in state space as an excess demand for money, whereas we leave it open.

That's because looking at the data, it's hard to say exactly what it is humans are doing as an economy heads into a recession. Job Openings take a hit (as well as hires) before unemployment begins to rise. Of course, that could be defined as firms having an excess demand for money (i.e. not spending it on employees). However, that doesn't add much information unless somehow giving firms money would cause them to put out more job openings. Does it? That seems like an empirical question, not one answered by a logical parable. And of course you could characterize a decline in conceptions as an excess demand for money (i.e. not spending it on a baby). 

But now we have a question of why the excess demand for money shows up first in conceptions and then later in hires and job openings (with the latter coming in different orders in different recessions). Why does this excess demand for money show up last in wages firms pay employees? Firms first hold back on hiring, and then hold back on raises (actually it's wage acceleration) — but both could be characterized as an "excess demand for money" by firms. Nick's definition of a recession is now seriously lacking in explanatory power for the details. Is demand for some kinds of money (i.e. reduced spending on certain things) different from other kinds? The correlation in state space framework doesn't necessarily restrict exactly how the firms correlate: they could first correlate in hiring decisions and then later in wage decisions. Different parts of state space are going to be different and there's no reason to expect them to behave in the same way.

In Nick's example (assuming that world actually existed for a moment), what if data showed the recession first showed up as a decline in banana production, and then later apples and cherries? As constructed, the model could only explain a recession where the onset of the recession was the same across each fruit. You could add in ad hoc delays to the production of each good (i.e. apples take longer to grow than bananas, so banana production is more pro-cyclical).

I've noted this before, but I see this as a general problem with people who study macro — mainstream to heterodox, econophysics to complexity: defining a recession. Your conceptual framework should not define what a recession is. A recession is one of the main subjects of study of the field of macro. Defining what a recession is assumes the answer. Now in some cases assuming the answer and trying to work out what the theory has to look like to produce that answer is a useful theoretical tool. But it's a useful theoretical tool for finding the answer, not explaining the answer.

In the previous link, I came up with what I thought was a good analogy to assuming what a recession is in order to explain it:

If I said I was a doctor studying Alzheimer's and my conceptual framework included a tenet that Alzheimer's disease was defined by amyloid plaque build-up (rather than, say, the stereotypical symptom of memory loss) and lo and behold I put up some micrographs of amyloid plaque build-up in a neuron and said that caused Alzheimer's ... exactly what is my conceptual framework helping me understand?

Nick defines a recession as the excess demand for money, and lo and behold his parable shows that an excess demand for money produces a recession!

But recessions in data are defined by a bunch of people squinting at it (NBER) or heuristics like two consecutive quarters of negative GDP growth. If a recession is an excess demand for money, why does it only last two quarters? That's a joke, but you can see what I'm getting at. The excess demand for money explanation basically shifts the question to why people have excess demand for money for short periods where it manifests in reduced spending in different amounts on different things at different times. That is to say: it's no explanation. 

Yield curve inversion and a future recession

There was a recent article out on the internet about yield curve inversion. Using the spread between Moody's AAA rate (blue, a decent proxy for the 10-year rate with less noise) and the 3-month secondary market rate (purple) we can see that from the 1950s until today, a low spread has been associated with recessions:

However, in the aftermath of the Great Depression, inversion of this measure wasn't a good indicator. It's only become an indicator since the 1950s. The past few recessions have all been preceded by a closing of this measure, but the degree of closing has gotten smaller since the 80s (actual inversion before the 90s has turned into just entering there error band):

Looking at the recent data and assuming the dynamic equilibrium model is correct along with a linear trend in rate increases, we see that the indicator will enter the error band sometime before 2020:

However, the period of time the spread spends inside that error band ranges from a few months to a year (yield curve inversion is usually described as being an indicator a recession will happen within a year). So unless we have other data, we won't be able to predict the timing of this future recession. We do have other indicators, and this extrapolation is consistent with them.

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Update 26 June 2018

I've done a better analysis of the estimate of the US recession onset via the yield curve inversion indicator by aggregating several different measures of the spread (collected here). I looked at the median (yellow), average (blue), and a principal component analysis (green). These gave nearly identical results:

Since those were practically identical, I used the mean median for the subsequent calculations. I then extracted the slope of the approach to the three previous recessions (early 1990s, early 2000s, and the "Great Recession" of 2008, dropping the first year after the start of the previous recession) using a linear model, and used that slope to estimate the most likely recession onset (first quarter of the NBER recession) for a future recession (assuming the current decline in spreads will eventually lead to a recession). That value is 2019.7 ± 0.3 (two standard deviation error). This is what the current approach to the recession looks like in that context (the previous three recessions are shown in blue, yellow, and green and labeled by the end of the NBER quarter — i.e. 0.5 is the end of calendar Q2):

The blue band represents the 90% confidence on the single prediction errors of the linear model (dashed line). Since the declaration of an NBER recession typically lags the first indications of a recession in unemployment and JOLTS data, we should be seeing the first signs in those data series in the next 6 months to a year. Since we are already seeing some signs in the JOLTS data, these indicators all seem consistent.

Note that the above analysis in this update is "model agnostic" in the sense that it just relies on the empirical regularity of a trend towards yield curve inversion between recessions, but no specific model of how yield curve inversion works or which way causality goes. It does imply a certain inevitability of a recession. Since the mean spread rose to about 3 percentage points after each recession, and the slope is -0.36 percentage point per year, this implies about 8.3 years between recessions — which is what a Poisson process estimate says based simply on the frequency of recessions (λ ~ 0.126/y, or an inter-arrival time of 7.9 years as mentioned here).

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Update 3 July 2018

Apparently I mislabeled the variables medianData and meanData in my code, switching them up. Anyway, the above result uses the median, not the mean (average). I also added post-forecast daily data in red, which is more rapidly updated than the monthly data time series.

Recessions and special snowflakes

The 1991, 2001, and 2008 recessions.

My issues with Dirk Bezemer's academic credibility seem to have nudged the Post Keynesian hornets' nest such that they seemed to assume I was attacking Post Keynesianism in general, which I gladly took on because one thing that I really do dislike is cult-like adherence to ideology regardless of what that ideology is. But first let me clarify a few things.

• My own work here would probably best qualify as Marxist econophysics if we're putting labels on things in the sense that Marx today would probably be a neoclassical economist but think of the results as sucky and doomed to end in revolution. I'm uncertain about the inevitability revolution, so in my own work I suggest a lot of neoclassical economics is often a fine description of reality empirically but the results are sucky and unavoidable.
• I really don't have any problems with many thinkers associated with Post-Keynesianism (Robinson, Minksy, Godley & Lavoie), but rather the fans that try to turn a bunch of disparate ideas into a "school" and make claims about these beatified economists they likely would not themselves. Various Post Keynesian supporters have told me that Post Keynesianism is well-defined and then proceeded to give me a novel set of commandments not listed by the previous person to do so. The definition I'm going by is Marc Lavoie's [1] because it is the only one that seems to be a stable kernel.
• Monetarism at least has hyperinflation as an empirical success; Post Keynesian empirical work is limited at best (and the right data might not even be available). As I suggested to Jo Michell on Twitter, it feels like a band that has logos and merch designs before they've played any gigs.

If you want to argue with these things, please do note that I am most convinced by theoretical curves passing through data points or their point-estimate equivalents.

Now that is out of the way, one of the other things I noticed in the trolling, I mean, discussion is that people have a lot of different stories about how different recessions happen. These stories are told with the kind of conviction that looks awkward in the context of several people telling different stories starring the same heroes and the same villains (or with the heroes and villains interchanged). The film Rashomon comes to mind. On the other hand Post Keynesian economics explains every recession, but every recession is a special snowflake with entirely different causes.

Now this isn't just a Post-Keynesian phenomenon, but is in fact extremely common from random men mansplaining the early 90s recession to economists giving what they think are unassailable descriptions of the Volcker Fed causing the 1980s recessions. The diversity of post hoc ergo propter hoc arguments identifying the cause of recessions is more likely a result of the fact that most of the time series take a turn for the bad in a recession weighted by politics [pdf].

This suggests an interesting hypothesis. Maybe the 90s recession was caused by the preceding saving and loan crisis, the 2000s recession by the dot-com bust, and the 2008 recession by the housing crisis ... but what if instead these recessions are caused by some other factor and the recession process simply undermines everything (with the news reporting on the largest collection of things that were undermined)? Like an avalanche taking everything with it, the oncoming recession undermines every source of growth if they are a bubble or not. Sure, this is just basic common sense in causal analysis: you observe X and Y seem to cause Z, but what if W causes X and Y? But I think it might be even more helpful in this case.

Now I'm not saying housing bubbles are a good thing as long as there's no recession, and it seems very likely the size of the US housing market boom contributed to the magnitude of the 2008 recession. Economic bubbles and even sustainable booms likely add snow to the eventual avalanche. But the idea that recessions pop bubbles (instead of popping bubbles causing recessions) helps us understand a few things:

• There is as yet no consensus in economic theory as to what a recession is, and even the disparate theories individually do not describe recessions with a great deal of empirical accuracy
• Several so-called housing bubbles (including many places in the US and in Norway) seem to have picked right back up and continued in the aftermath of the Great Recession
• Australia seems to be having a continuing housing boom/bubble, but no recession meant no crisis
• The theories of collapsing over-investment often are independent of what the over-investment is being invested in (e.g. over-investment in infrastructure, tulip bulbs, dot-com stocks, places to live, industry stocks). 

That last point is one of the more curious aspects. You would imagine over-investment in housing (employing millions of people and producing real assets) would be different than over-investment in random internet start-ups (employing only thousands of people and producing intellectual property). However, the two boom-bust cycles only differed by roughly a factor of 2 in scale. You could replace "housing" with "credit card debt", "corporate bonds", or "student loans" and the bubble analysis would be mostly unchanged. In fact, there are many stories ongoing today (the most common being a stock/asset bubble) that would likely be seen in the aftermath of a future recession as evidence that over-investment caused it [2]. The "dot com" or "[Dow Jones] industrial" adjectives in the market crashes are just adjectives -- not critical components of the analysis. Now this could be evidence that financial crises are universal processes, but another possible interpretation is that there's a universal process behind them — a recession cutting the booms off. An analogy:

Even though a drunk at a bar is being cut-off by last call, last call wasn't caused by how drunk he is. His drinking binge was ended by a separate process. 

I am not in any way saying this is conclusive evidence [3], but rather serves best as a palliative for confirmation bias and post hoc ergo propter hoc reasoning. Maybe each recession is a special, unique snowflake: the result of a process that starts when air with water in it reaches a certain temperature.

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Footnotes:

[1] Marc Lavoie (pdf, H/T Jo Michell):

Essential Post-Keynesian Features (Lavoie 2006)

• The principle of effective demand

(demand-led economies)

– Both in the short and in the long run

• The importance and irreversibility of time

– Historical time

– Dynamics, the traverse

– Path dependence, multiple equilibria

– Tracking financial stocks

[2] And whoever wrote those analyses would be lauded as the ones that predicted the crisis.

[3] For one: what the @#&* is this underlying process? I am sympathetic to it being a more social process than economic one, but I'm really not convinced by anything at this point.

Japan's new recession

Scott Sumner has up a series of posts (here, here, here, here and here) that question the meaningfulness of the word 'recession' if, as the media (and OECD) says, Japan has entered a recession. In one of those posts, Sumner has two definitions of recession that show economic analysts use a variety of indicators to determine whether a recession has happened. Sumner advocates a view that stresses unemployment.

Changes in unemployment do seem to be a strong recession indicator in the US, but some of these are a bit weird if you think about them. For example the 1990s recession ends at an unemployment level that the 2000s recession reaches at its peak. That makes me think that absolute unemployment is not a reliable indicator.

In the information transfer model, unemployment appears to be the result of a spontaneous coordination that breaks the market mechanism. The rapid climbs in unemployment appear to be mass panic and require some sort of human behavior model that can't be explained by macroeconomic variables. The information transfer model, however, does appear to have a pretty solid definition of recession that even has an analogy in terms of avalanches. I look at what I called "nominal shocks" -- they are the difference between where NGDP is and where it 'should be' based on the change in the price level alone. The method is described here and I discuss the usefulness of the indicator in the case of low inflation here.

Japan has been experiencing outright deflation over the past couple decades ... which could make you mis-interpret falling NGDP (or very slow growth) as a recession. Using the method above, we can figure out that Japan has been experiencing an average 'nominal shock' of +0.96% since 1994. The economy has been 'growing' despite deflation [corrected]. Here is a graph of these nominal shocks with OECD recessions indicated in red:

If you split up the second to last recession, you get evidence for the LA Times claim of four recessions since 2008 that Sumner ridicules in one of the linked posts above.

The recessions are all fairly obvious sustained negative deviations (or pairs of deviations) except the one that happens in 2004. In any case, there is a pretty solid case for 2014 to be a recession. If the ITM ruled economics, I'd throw out the 2004 recession and possibly split up the recession in 2011-2012:

The other thing to note is that the two VAT increases (vertical lines in the previous two graphs) precede large negative shocks and associated recessions.

...

PS I did the fit to the Japanese price level after subtracting out the two big VAT increases that show up in the data and it looks pretty good:

An information equilibrium history of the Great Recession

I mentioned at the beginning of this year on my book website that I was thinking about writing another book about the macro history of the US as told through dynamic information equilibrium and the resulting economic seismograms. I've been collecting the various models on this blog to put them together into graphics that tell at least one version of history. Previously, I've given evidence that women entering the workforce leads nearly every other measure of growth and inflation in the 70s and 80s. Lately, I've been working on the Great Recession. Here's the seismogram (click to enlarge):

Red-orange indicates negative (i.e. bad) shocks, while blue indicates positive (i.e. good) shocks (rising unemployment is "bad", but rising income is "good"). The labels are identified in footnote [1].

While much of the focus of commentary about the recession was on the Lehman collapse and the Fed meetings immediately preceding it (along with the fall in the stock markets as measured by the S&P 500), these actually come in the middle of the recession process . The first thing that happens by far is the drop in hires in construction (labeled "HIR 2300" based on the JOLTS code) in mid-2006. Around that time, Paul Krugman (e.g.) was talking about a housing bubble deflating (he had been forecasting it earlier in mid-2005) [2]. The shock to housing starts (HS) doesn't come until later (though the shock to starts occurs over a longer period, you can see that hires begin to decline just before housing starts begin to decline).  The drop in construction hires also comes right before the halt in the Fed rate increases that had started in 2004.

Before the NBER-defined recession gets underway, there's a drop in conceptions (per this NBER working paper) that's roughly coincident with (but genuinely followed by) two Fed conference calls in 2007 about the financial markets reeling in the collapsing housing bubble (the negative shock to the Case Shiller index) as well as the first Fed rate cut. The rest of the stuff that is associated with a recession in the media (stock market drops, GDP declining, unemployment rate rising) all come much later during the NBER-defined recession.

Personal income (PI) continues to climb ahead of its typical pace through most of 2007, and wage growth continues to increase (i.e. accelerate) almost until the NBER recession end.

While I've heard many stories about excessive debt being a cause behind the Great Recession, most of the negative shocks to debt measures come later (i.e. debt became a problem because of the recession). Although not shown in this graph, consumer credit takes a hit only as the NBER recession is ending. This is not to say that debt levels didn't contribute to the size of the recession (i.e. making it worse), but rather that they didn't contribute to its timing (i.e causality).

Any causality analysis would put construction hires at the beginning of the story, but oddly the shock to construction job openings comes along with the rest recession — barely leading the shock to job openings of all kinds. In fact, there's a surge in openings around the same time. It's the largest difference in timing for all the JOLTS sectors. That is to say jobs were still being advertised in 2006 (until 2008), just fewer were being hired. This doesn't indicate a pessimism about the housing market (which seems like it would show a fall in openings), but rather a labor shortage of some kind. Were employers unwilling to raise wages? Unemployment had reached its lowest level since before the 2001 recession, so maybe there was a genuine shortage of workers.

Was it xenophobia?

I am going to offer a speculative answer that I do not think I have ever seen offered as a possible reason for the Great Recession: xenophobia. There were a series of protests from March of 2006 to against anti-immigrant legislation being introduced (some of which passed, and in various jurisdictions E-verify was mandated in 2006 to prevent employers from hiring undocumented workers). The shock to construction hires begins right around the same time as those March protests, and every year since 2004 saw a decrease in immigration from Mexico:

The linked article doesn't get this causality right:

Immigration from Mexico dropped after the U.S. housing market (and construction employment) collapsed in 2006. By 2007, gross inflows from Mexico dipped to 280,000; they continued to fall to 150,000 in 2009 and were even lower in 2010.

According to their data, immigration started dropping before 2006 (the peak is in 2004), but given noise in the data and the annual temporal resolution the best we can say is that construction employment and immigration from Mexico dropped approximately concurrently.

I have written before on how much of an effect a drop of 2 million people in the labor force due to immigration restrictions would cause — about 1 trillion dollars in NGDP. Assuming a linear trend past 2007 in the increase in just undocumented immigrants (using Pew data), by 2009 there were 1.8 million fewer undocumented immigrants (11.3 million) than would be expected by the trend (13.1 million). While there would need to be more detail added (accounting for the decline in documented immigration as well as fraction of those two populations in the labor force), this gives us an order of magnitude that is not trivial compared to the size of the Great Recession.

Again, this is speculative. However it is not implausible that the anti-immigrant sentiment of the mid-2000s ended the "housing bubble". Employers continued to look for workers in construction, but suddenly were unable to hire as many starting in 2006 due to declining immigration. The worst hit states in the housing crash were California, Arizona, Nevada, and Florida — the first three being major destinations for documented and undocumented immigrants from Mexico. Since even undocumented immigrants spend money at the same grocery stores you do, sales decline. Declining construction hires is followed by fewer housing starts, and when a new family can't find a bigger house with more rooms they'll not only delay having children but opt to hold off on that house. Housing prices decline from their peak, but by now the general economic outlook is mediocre enough that the Fed starts to lower interest rates in 2007. Pessimism sets in along with the rest of the recession and a financial crisis that goes global. 

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Update 6 November 2018

A correspondent sent me a link to some work by Kevin Erdmann about how there was actually an under-supply of housing going into the 2008 recession. Now Erdmann is writing for Mercatus which generally means there is a possibility of an ideological slant or at least a particular view of how economies work. Here, that reasoning is an attempt to say there was no housing bubble because there was a "fundamental" reason (short supply). But then, there was a limited supply of tulip bulbs as well. If there was no housing bubble, then it's arguable that the Fed had unnecessarily tight monetary policy (i.e. the desired conclusion in this case). Seeing as monetary policy tends to lag other measures, it's probably not the cause (but may e.g. contribute to the broader conditions and the depth of the recession).

I also want to emphasize that it is almost entirely unlikely the shock to construction hires was the only causal factor. I see it more as a trigger or a straw that broke the camel's back — in an environment of higher interest rates and general pressure from policymakers to cool the housing market, a sudden shock to labor supply makes that "cooling" suddenly look worse in a way that could change one's outlook. In the information equilibrium approach, it's sudden coordinated action (e.g. panicking) causing agents to cluster in the state space that causes recessions. Sometimes that coordinating signal is the Fed, but it could easily be shock to labor supply due to an unwarranted immigration freak out.

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Footnotes:

[1] The labels are:

HIR 2300: JOLTS hires, construction (JTS2300HIR)
HS: Housing Starts (HOUST)
C/F: Conceptions/fertility
Case Shiller: Case Shiller housing price index (also here)
HIR: JOLTS hires
HIR-ext: Extended JOLTS hires data
JOR 2300: JOLTS job openings, construction (JTS2300JOR)
Debt growth: Growth of debt (All Sectors; Debt Securities and Loans; Liability, Level)
JOR: JOLTS Job opening rate
JOR Barnichon: Job openings in data from Barnichon (2010) [pdf]
QUR: JOLTS quits
SP500: S&P 500
U: U3 unemployment rate
PI: Personal income
PCE: Personal consumption expenditures
NGDP: Nominal Gross Domestic Product
W: Wage growth (Atlanta Fed)
Debt to GDP: Ratio of previous debt measure to NGDP
CLF: Civilian labor force (CLF16OV)

The arrows on the top of the diagram indicate the two Fed meetings (black arrows) prior to the Lehman collapse (red arrow). The arrows on the bottom of the diagram show the first Fed rate increase since the 2001 recession, the beginning of the period of steady rates (mid-2006 to mid-2007) as well as the first rate cut going into the 2008 recession.

[2] I'm not tying to make any point here about "who saw the crisis coming" — only citing some news that I remembered from the time for context.

JOLTS forecasts and leading indicators update

The latest JOLTS data is out today, so it's once again time to see how the forecasts are doing (last month had a lot of data revisions). The model of the "Great Recession" showed that JOLTS hires were a leading indicator of that recession, however an attempt to glean data from the early 2000s recession had JOLTS openings as the leading indicator (which should be taken with a grain of salt because the time series starts mid-recession making the timing estimates uncertain). If we are seeing the leading indicators of a recession with the latest data, then it looks like job openings are the one to watch:

The data is deviating from the forecast that assumes no recession, and the counterfactual recession shock is (still) showing a likely downturn with the latest data. I might even go out on a limb and say the 2019 recession is underway — having begun sometime this year. However the other JOLTS measures remain consistent with the no-recession forecast, only hinting at a future recession by a negative bias to the error:

The Beveridge curve (of unemployment versus job openings) is another way to represent the deviation in the job openings data (unemployment per the links above is a lagging indicator by almost a year):

There is another "Beveridge curve" (now I'm just referring to the whole class of relationships between labor market measures as "Beveridge curves", which I believe is not standard in economics but would be the kind of thing that physicists might say (e.g.)) that was inspired by Nick Bunker's article anticipating the data release from today. While I don't believe in the way he frames the data (his description of a declining "vacancy yield" in terms of possibly changing conditions is, in the dynamic equilibrium model, a normal result of equilibrium) his look at hires and vacancies prompted me to look at the two measures together:

Since hires and openings (vacancies) are positively correlated, this results in a proportional relationship between the two rates (a negative correlation between openings and unemployment results in inverse proportionality). Recessions can cause the economy to move from one equilibrium (gray line) to another. This measure probably won't be as good of a representation because the timing of recession shocks (green and purple dots) are closer (a few months) than for openings and unemployment rate (almost a year in the previous graph) and the series are correlated leading to less of a dynamic range and more "backtracking" along the paths (i.e. both fall in a recession).

Overall, the picture appears to be a looming recession with job openings (vacancies) showing the first signs — but also the only signs.

...

PS The details of the model are described in my paper up at SSRN.

Letter to Dirk Bezemer

Update 07 May 2018: Professor Bezemer has responded via email; my original post appears below.

Dr Smith,

I received your questions. You might have waited for the answer, which is below, before putting them on https://informationtransfereconomics.blogspot.nl/2018/05/letter-to-dirk-bezemer.html.  Could you please post this answer there; I do not not have the necessary profile credentials. 

My work on this topic appeared in two published articles in the Journal of Economic Issues and in Accounting, Organizations and Society, which I will refer to as the JEI article and the AOS article. It appears you never saw the AOS article. They are available at http://www.economicsofcreditanddebt.org/my-research/

I summarized the projections and warnings of twelve economists in the JEI article in a table. Because it is a table, I slightly condensed some of their quotes, but I quote them in full in the texts. In fairness to your concerns, I agree that the quotation marks should not have been in the table since I shortened their text, hence it is not their literal text. If you read the two articles, you will see their views are represented fairly. I checked in 2009 with all those still alive. 

The “Godley and others in April 2007” source is indeed "The US Economy: What's Next" by Godley et al (2007). This article is not in the reference list since I did not include that reference in the article text (that is, I wrote ‘Godley and others in April 2007 predicted’ instead of ‘Godley et al (2007) in April 2007 predicted’). I agree that isn’t helpful if you want to know where Godley and others in April 2007 wrote what they did. But I do not imply that the quote should be found in one of the later sources that I do give, as you imply.

The first quote in the table is from Godley and Zezza’s (2006) Debt and Lending: A Cri de Coeur, as I write in the text of the AOs article. You should read the paragraph where I write “When house prices started to fall…” and onwards to see my full discussion of Godley and Zezza’s (2006) projection, and compare this to the text in the table to see that I quote fairly.

Godley’s quote cannot be construed as a prediction of the global financial crisis. Godley foresaw the US recession but not the global crisis, to my knowledge. I never claimed he did.

There is no problem in the fact that Godley et al note the collapse is already underway. That does not detract from their correct projection of consequences of the crisis that was underway, which at that time many still saw as a bad but local housing market crisis. It is the perception of the macro consequences that makes their analysis remarkable, don’t you think?

I cite and discuss Michael Hudson’s full quote in my AOS article. Read the paragraph starting “Hudson wrote …”.

Steve Keen’s projection (like Godley’s) was made on the assumption of unchanged policy. Australia however implemented a housing credit expansion program and suffered a major growth slowdown which fell only just short of a technical recession (one quarter negative growth, not two). So Keen’s assessment of recession was overtaken by later policy facts, as can always happen; but his reasoning at the time was correct and consistent with the near-recession. I write about all this in the AOS article. Read the text starting “In January 2009 the IMF revised …”.

On page 7 in the JEI article I write that the Madsen and of Sorensen analysis is ‘on Denmark’ and on page 8 on the ‘Danish recession’, contrary to your impression that ‘the reference to Denmark is left out’. 

Sorensen and others discussed in the JEI do not use an accounting model; those who - formally or substantially – do, are discussed in the AOS article. Sorenson expecting housing bubbles to adjust in the US, UK, Denmark, Norway and Netherlands. He was correct for four of those five. It is indeed interesting that Norwegian prices have only dipped but not materially declined after 2008. The housing bubble in the Netherlands has popped, contrary to your impression. After 2009-2013 there was a 20% house price fall (and two recessions).

Dirk Bezemer

_____________

It appears I have to attempt to contact Dirk Bezemer directly for people to take my claims seriously that Bezemer has misquoted and fabricated quotes in his papers claiming that some economists using "accounting" or "flow of funds" models were able to predict the global financial crisis and widespread recession. I believe this kind of controversy is best to keep in the open instead of being conducted through private email. The point of publication is in part to put academics and researchers on the record as well as hold them publicly accountable. However, I have written an email to Professor Bezemer at the only email address I have for him (listed in his unpublished paper). In the interest of open discussion, I reproduce that email below.

I am also contacting the editors as voxeu.org, the New York Times, and the Journal of Economic Issues.

____________

Professor Bezemer,

I am writing to inform you that your unpublished article “No One Saw This Coming” Understanding Financial Crisis Through Accounting Models (Ref. [1] with links here and here) cited in e.g. a voxeu.org article and the published article The Credit Crisis and Recession as a Paradigm Test, Journal of Economic Issues, 45:1, 1-18, DOI: 10.2753/JEI0021-3624450101 (Ref. [2]) appear to misquote material from their claimed sources and take quotes out of context to build a misleading account of predicting the global financial crisis and widespread recession. The abstracts of both articles allude to "the" crisis and "the" recession. From the former [1]:

This paper presents evidence that accounting (or flow-of-fund) macroeconomic models helped anticipate the credit crisis and economic recession. Equilibrium models ubiquitous in mainstream policy and research did not. This study identifies core differences, traces their intellectual pedigrees, and includes case studies of both types of models. It so provides constructive recommendations on revising methods of financial stability assessment. Overall, the paper is a plea for research into the link between accounting concepts and practices and macro economic outcomes.

From the latter [2]:

This paper contributes to the debate on what economics can learn from the credit crisis and recession. It asks what are the elements in the mainstream paradigm that caused many economists to misjudge the state of the economy so dramatically in the years leading up to the 2007 credit crisis and the 2008-2009 recession. It scrutinizes the work of twelve economists who warned of the crisis and identifies, as the common elements in their thinking, financial assets, debt, the flow of funds and behavioral assumptions on uncertainty, bounded rationality and non-optimizing behavior. These are then contrasted to mainstream thinking. The conclusion is that economics, if it is to be relevant to reality, should stop neglecting money, wealth and debt, and turn away from an individualistic view and toward a systemic view of the economy.

Emphasis added. A few of the quotes used to support this claim appear to point to local housing bubbles (i.e. Australia, Norway) which never actually "popped" (Australia still has not had a recession since 1991 as of May 2018). But more problematically, several of the quotes listed in tables in [1] and [2] are not direct quotes, but rather are constructed using several different phrases across one or more paragraphs — and are taken out of context (both in terms of the narrative and the models used by the economist cited). One case (Godley) a quote does not appear in the cited reference Godley (2007a) or Godley (2007b).

I am providing documentation of my findings for five of the twelve economists listed in Table 1 in each article (six of the seventeen quotes). I haven't checked the remaining quotes, but I feel a sufficient critical mass of misquotes has been obtained to bring this to your attention. In the following, I use bold type to indicate the selectively quoted material in the context of the source material. It seems to me a retraction of the articles (as well as the voxeu.org article based on these papers) are required.

Sincerely,

Jason Smith, Phd

...

Wynne Godley

Bezemer's purported quotes of Wynne Godley are:

“The small slowdown in the rate at which US household debt levels are rising resulting form the house price decline, will immediately lead to a …sustained growth recession … before 2010”. (2006). “Unemployment [will] start to rise significantly and does not come down again.” (2007)

These quotes appear in a table at the end of the unpublished paper [1] (p. 51) as well as in the text (p. 36), but neither of these quotes appear in the cited references to Godley. They also appear in a Table in the published version [2]. The second quote doesn't appear in any form in any of the cited papers that could be construed as Godley (2007) — which is great for Godley as unemployment in the US has since fallen to levels unseen in almost two decades. [update 20180504 (from comments)] The quote does appear in an article that isn't cited titled "The US Economy: What's Next" Godley et al (2007):

In reaching provisional conclusions about the future growth rate of output and the future configuration of the three financial balances, we have used revised assumptions about output in the rest of the world because of lower U.S. growth than in the CBO scenario (based on the solution of a world model) and the performance of the stock market. The major conclusion is that output growth slows down almost to zero sometime between now and 2008 and then recovers toward 3 percent or thereabouts in 2009–10. However, by the end of the period, the level of output is still far (about 3 percent) below that in the CBO’s projection, which implies that unemployment starts to rise significantly and does not come down again.

Proper citation would show e.g. "... [U]nemployment [will start] to rise significantly and does not come down again."  Changing the tense of verbs, especially regarding quotes supporting arguments for accurate predictions, is at best sloppy. However, the context of the article and the quote is set by its first line:

The collapse in the subprime mortgage market, along with multiple signals of distress in the broader housing market, has already drawn forth a large body of comment.

Godley et al are noting the collapse is already underway, so this cannot be construed as a prediction of the housing crisis, and additionally cannot be construed as a prediction of the global financial crisis or global recession, but rather a national US recession.

[end update 20180504]

The first quote is constructed from a few words in a much longer passage in Godley (2006):

It could easily happen that, if house prices stop rising or if the financial-obligations ratio published by the Fed continues to rise, the debt-to-income ratio will slow down during the next few years, much as it did in the late 1980s and early 1990s. ... 

The results are a bit surprising, since the apparently quite small differences between debt levels in the four scenarios generate such huge differences in the lending flows. In particular, Scenario 4, the lowest projection, shows that the debt percentage only has to level off slowly and then fall very slightly for the flow of net lending to fall from 15 percent of income in 2005 to 5 percent in 2010. ...

The average growth rates for 2005–10 come out at 3.3 percent, 2.6 percent, 1.8 percent, and 1.4 percent. The last three projections imply sustained growth recessions—very severe ones in the case of the last two. ...

Is it plausible to suppose that the growth of GDP would slow down so much just because of a fall in lending of this size? Figure 7, which shows past (and projected Scenario 4) figures for net lending combined with successive, overlapping three-year growth rates, suggests that it could. Major slowdowns in past periods have often been accompanied by falls in net lending.

The quote does not make clear that Godley had made several projections of average growth from 2005 to 2010. One of the projections of an average of 2.6% RGDP growth claimed as a "recession" is actually better than the past 5 years of US economic growth (2013-2018) of 2.3% or 2.4% (percent change or log-difference) and there has been no recession. Godley is clearly referring to a recession of average growth rates over several years, and not a cataclysmic event. Additionally, actual RGDP growth from 2005-2010 was 0.7% which is below 1.4%, and as big as the difference between Godley's first two scenarios (3.3% and 2.6%). Godley is referring tot he US, and not a global financial crisis or widespread recession.

Michael Hudson

Michael Hudson is an economist at the University of Missouri, Kansas City. Bezemer claims he said:

“Debt deflation will shrink the “real” economy, drive down real wages, and push our debt-ridden economy into Japan-style stagnation or worse.” (2006)

Like in the case of Godley, this quote [pdf] leaves out modifiers and is taken out of context (it doesn't use the term "debt deflation" but rather "debt-service"):

But homeowners are not the only ones who will pay. The overall economy likely will shrink as well. That $200 billion that flowed into the “real” economy in 2004 is already spent, with no future capital gains in the works to fuel more such easy money. Rising debt-service payments will further divert income from new consumer spending. Taken together, these factors will further shrink the “real” economy, drive down those already declining real wages, and push our debt-ridden economy into Japan-style stagnation or worse.

Bezemer leaves out the "further" and "already declining" modifiers that would detract from seeing this as an anticipation of a sudden crisis, but rather a general stagnation like the one Japan was experiencing at the time — similar to Godley's projections. Since Hudson is affiliated with the Levy Institute where Godley was a fellow, this quote should be seen in that context.

Steve Keen

Bezemer quotes Keen:

“Long before we manage to reverse the current rise in debt, the economy will be in a recession. On current data, we may already be in one.” (2006)

The source of the quote is here, and like the case of Godley it is constructed from phrases across several paragraphs (in bold):

The is the story behind Australia's private debt. It has been growing more than 4 per cent faster than our GDP for 53 years. Back in the 1960s, that meant very little - the ratio of debt to GDP would increase by no more than 1 per cent a year, and it was at comparatively trivial levels anyway. It grew from 27.3 per cent of GDP in 1966 to 28.2 per cent in 1967. 

Forty years later, that ratio is increasing ten times as fast. It is 147.1 per cent now. If the rate of growth doesn't slow down, it will crack 150 per cent of GDP by March 2007, and it will exceed 160 per cent of GDP by the end of 2007. We simply can't keep borrowing at that rate. We have to not merely stop the rise in debt, but reverse it. 

Unfortunately, long before we manage to do so, the economy will be in a recession. The reasons are simple: paying down excessive debt causes borrowers to stop spending - whether that means households that cancel order for the latest LCD TV, or firms that put off that planned expansion of capacity. Income plummets, but debt continues to rise, simply because of the effect of compound interest. The debt to GDP ratio starts to fall only when a substantial slab of income is devoted to paying debt, but that in turn means a serious recession. 

We have suffered two such debt-driven downturns since the end of WWII: the long 1973-1983 recession, when unemployment blew out from a mere 1.8 per cent to over 10 per cent; and the 1990 'recession we had to have', when unemployment exploded from 5.6 per cent to 10.6 per cent in just over 3 years. 

Both recessions were preceded by booms in which private debt rose to previously unheralded levels. During both, the ratio 'headed south', against its long term trend. But the momentum of debt meant that the turnaround in the ratio followed the start of the recession itself. It continued rising, for nine months after unemployment began to rise in 1973, and for a whole two years in 1990. 

So when will this recession begin? On current data, the domestic economy may already be in one - though the China boom has more than compensated for the domestic downturn. What can be done to avoid it? Unfortunately, almost nothing. We have two sources of spending power: what we earn and what we borrow. During a boom, borrowing adds to our spending power - and it's added massively in the last decade, as debt has blown out from 88 per cent of GDP at the end of 1997 to 147 per cent now. But during a slump, once we get on top of the momentum of debt, repayment of debt subtracts from our spending power. This feeds back on income itself, reducing its growth still further, because investment ends, consumer spending drops, and unemployment rises even more.

Keen is clearly talking about Australia; Australia's housing bubble (if it is one) still hasn't popped (despite even more recent warnings in 2016 about the possibility), and Australia has not had a recession in over a quarter century. The "current data" statement was not accurate, neither was the prediction about an Australian housing bubble. In fact, Keen's prediction is an example of a failed prediction, not a successful anticipation.

Jakob Brøchner Madsen and Jens Kjaer Sorensen

Bezemer's citation of Madsen (an economist now at Monash University) is at best confused. In the table at the end of the paper, Madsen is cited as:

“We are seeing large bubbles and if they bust, there is no backup. The outlook is very bad” (2005)

In the text, he is cited as saying in 2004 (not 2005):

“There is something completely wrong. We are seeing large bubbles and if they bust, there is no backup. House prices and shares are completely out of proportion. And it will go wrong. … The outlook is very bad for families in Denmark.”

Again, Madsen appears to be talking about Denmark and not the global financial crisis, and the reference to Denmark is left out.

Jens Sorensen, a grad student of Madsen's, is not a heterodox economist and the model he uses is not an accounting model per the title of Bezemer's unpublished paper. In fact, the model he uses is based on standard asset pricing (see e.g. Cochrane [pdf]) with a modification for bubbles. His anticipation of a global recession is actually more defensible as he looked at more data than just the US (including the UK, Norway, and the Netherlands). Bezemer quotes Sorensen:

“The bursting of this housing bubble will have a severe impact on the world economy and may even result in a recession” (2006). 

The quote from Sorensen's thesis [pdf] is actually

When the housing market is above its fundamental value the market at some point will have to adjust and follow the LR trend defined by theory and supported by historical data. The timing of such an adjustment is only dependent on a change in sentiment.  Bursting the bubble has previously and will have severe impact on the world economy and may even result in a recession.

While not as severe a misquote as the ones from Godley or Keen, the context significantly changes the meaning from an absolute prediction to a conditional one leaving the timing quite ambiguous. Additionally, the housing "bubbles" Sorensen cites in Norway and the Netherlands still have has not "popped" (continued warnings in 2017 at the links). [Corrected based on data from the Netherlands.]