They saw the crash coming

Before the financial meltdown of 2008, a handful of prophets raised warnings. Most people didn't listen. Why? Because most people have a hard time seeing outside the bubble of the present moment.

Mike Blake/Reuters
Luxury homes are sold prior to completion in Oceanside, Calif., a sign of better economic times.

You can’t say we weren’t warned. In the months and years before the 2008 financial meltdown, economic prophets saw trouble ahead. At first they politely begged to differ with the conventional wisdom that good times would roll on and on. Eventually, they were shouting from the rooftops.

As early as 1998, Brooksley Born of the Commodity Futures Trading Commission cautioned that financial derivatives were out of control. Throughout the early 2000s, William White of the Bank for International Settlements repeatedly advised central bankers (most directly in 2003 with Federal Reserve Chairman Alan Greenspan in the audience) that lax monetary policies and poor oversight were generating dangerous asset bubbles.

In 2003, Robert Shiller cautioned that the housing market was irrationally exuberant. Two years later, Nouriel Roubini said a devastating real estate bust was coming. That same year, Raghuram Rajan of the International Monetary Fund raised his voice about risky financial innovations. By then even Mr. Greenspan, the architect of the easy-money policies widely associated with the crash, was telling Congress he was worried, but his worry was the massive mortgage-backed securities trade fostered by Fannie Mae and Freddie Mac. 

By 2007 alarms were going off everywhere. Nassim Taleb said interconnected global finance was the “black swan” that could herald a once-in-a-lifetime meltdown. Sheila Bair of the Federal Deposit Insurance Corporation raised red flags about subprime lending. CNBC’s Jim Cramer ranted (he likes to rant) that the Fed needed to wake up.

Then came the crash. In a Monitor cover story, Mark Trumbull revisits September ’08, interviews key players, and extracts five lessons from that harrowing – and still reverberating – event. 

The pre-2008 warning was clear. How could we have missed it? “Everybody missed it,” Greenspan observed in 2010, “academia, the Federal Reserve, all regulators.” Which was not quite accurate. Everybody who could have done something missed it.

The problem with prophets is that, by definition, they don’t have standing. They are marginal characters, voices crying in the wilderness. Most of the time they predict apocalypses that never take place and days of reckoning that never dawn. We chuckle and call them Chicken Little or Dr. Doom. But when we slam into a brick wall, as happened in ’08, we wonder why we didn’t listen.

We don’t listen because most of us are convinced that the bubbles we live in – bubbles of sunshine or gloom – will last forever. But they don’t. Change is always around the corner.

This is where prophets come in. They burst our mental bubbles before hard reality does. But because we can’t be sure who is worth heeding and who is just ranting, it is probably best to adopt the prudent policy of the biblical Joseph, who prophesied about the future of the economy he was managing: Realize you are always in a bubble. And prepare for what comes next. 

John Yemma is editor of the Monitor. He can be reached at

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