Making predictions is a time-honored American tradition. Being right can make a career (see Meredith Whitney’s warning on bank stocks in 2007), but being wrong can bring scorn (see Meredith Whitney on a muni bond collapse in 2010).
Financial professionals, politicians and members of the media have provided plenty of examples of prognostications gone wrong over the years. From the Great Depression (Irving Fisher) to the auto business (Business Week magazine) to the state of the mortgage industry (Rep. Barney Frank), there is no shortage of examples.
Here, then, is AdvisorOne’s list of the Top 10 Terrible Predictions About Economy.
10. RAVI BATRA, 1987
Book: “The Great Depression of 1990”
An economics professor at Southern Methodist University who churns out best-selling books, Ravi Batra is known for his predictions. Some have been close to the mark, like those made in the early 1980s that foresaw low inflation, cheap oil and a spate of mergers later in that decade. Others, like the spectacular failure in the title of his 1987 book, have left much to be desired. The New York Times reported that 40 publishers rejected that book. Maybe it should have been 41.
9. ALAN GREENSPAN, 2005
Touted derivatives as risk free
Alan Greenspan was the head of the Fed for nearly two decades. When he appeared before Congress to testify on the state of the economy, his vague answers were studied and interpreted by the economists, the media and financial professionals. A mistimed cough could move markets. Maybe more attention should have been paid to statements like this one Greenspan made in 2005, in which he saw no risks in derivatives, the financial instruments that helped topple the economy in 2008:
“The use of a growing array of derivatives and the related application of more-sophisticated approaches to measuring and managing risk are key factors underpinning the greater resilience of our largest financial institutions … Derivatives have permitted the unbundling of financial risks.”
8. JOSEPH CASSANO, AIG financial products head, 2007
Sang the praises of credit default swaps
Of all the arcane products developed by the financial services industry, credit default swaps might be the most complicated.
Why, even Cassano claimed it was all the auditors’ fault when things went south for AIG, the largest insurance company in the U.S., leading to a $182 billion taxpayer bailout in 2008. It made Cassano’s 2007 statement seem quaint:
“It is hard for us, without being flippant, to even see a scenario within any kind of realm of reason that would see us losing one dollar in any of these [credit default swap] transactions.”
A scant year later no imagination was necessary. The problem was all too real.
7. PRESIDENT GEORGE H.W. BUSH, 1988
“Read my lips, no new taxes.”
The first President Bush was firmly part of the “Reagan Revolution.” The anti-tax fervor of the country could not be ignored by any politician, and certainly not the vice president to the “Great Communicator” himself.
So what else was a candidate to do at the 1988 GOP convention? Bush’s pledge drove the party faithful wild and helped him get elected.
Alas, a sinking economy and his backing of tax increases doomed his presidency to a single term as Bill Clinton used the vow against him.
He probably wished there weren’t any lip readers.
6. JAMES GLASSMAN and KEVIN HASSETT, 1999
Book: “Dow 36,000”
In 1999, the future of the U.S. economy looked bright. The Dow was soaring and even a prediction of it reaching 36,000 didn’t seem totally crazy.
It turns out it was. A little bump in the road called the dot.com bubble slowed the market. And Glassman has written since that the world economy and the U.S. had changed, rendering his prediction obsolete. Oh well, that has stopped the executive director of the George W. Bush Institute from writing books advising a new generation of investors to be cautious.
As for Hassett, he continued making predictions, including another failed prognostication in 2008:
“The Federal Reserve and Congress have delivered a ton of economic stimulus, and that stimulus is set to juice up an economy that has been weak, but not terrible. If everything goes according to plan, the economy will grow faster in the second half of the year, and a recession will have been avoided.”
Live and learn. Or not.
5. MEREDITH WHITNEY, 2010
Predicted collapse of muni bond market in 2011