Thursday, May 3, 2018

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  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

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, 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 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 article based on these papers) are required.


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 bubblhas 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.]


  1. Obviously Bezemer is the best to respond.

    2 points:

    The second Godley quote appears in

    Page 3, column 2.

    "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."

    Secondly, it doesn't mean that unemployment never comes down as you think you are implying, only that with the policy assumption, unemployment doesn't come back and hence policy needs to be changed.

    1. Wow. You PK/MMT people certainly stick together. Did you read the first line of the article you cite:

      "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."

      The housing crisis was already underway in the US, so this cannot count as a *prediction* of the housing crisis.

      This is also not the citation of Godley 2007 in Bezemer's article, but at least there is a source and it's an incorrect cite, with only a little bit of quote manipulation and being taken out of context (e.g. called a prediction of the housing crisis, but as Godley notes in the first sentence
      the housing crisis is already underway).

    2. Aww!

      Point being the quote is there. So change your text.

      Second, the predictions of unsustainable processes have been since some time, not the two quotes which you make it out to be.

      You know man, you've seen the work and tried hard to discredit them.

      So are you changing the text?

    3. I hope you enjoy the update.

      I have no intention of discrediting Godley, who seems completely above board — I like his work which uses some pretty simple models to make empirically testable forecasts.

      It is the Godley fan club (yourself and Bezemer included) which seems to see him as some sort of prophet and MMT or "accounting" models as the dawn of psychohistory.


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