Haas Prof: Predicting Global Economic Crises Won't Be Easy

A question that kept coming up in the wake of last year's global economic meltdown was "why didn't we see it coming?" New research from the Haas School of Business at Berkeley suggests that the answer is a complicated one, and that the next time we face a global economic crisis, we may not see that one coming, either.

"Cross-Country Causes and Consequences of the 2008 Crisis: Early Warning," is co-authored by Haas professor Andrew Rose and Mark M. Spiegel of the Federal Reserve bank of San Francisco.

The authors found that the causes of the crisis may have differed across countries. While inflated real estate and subprime mortgage lending was largely blamed for the U.S. economic meltdown, countries such as Japan and Germany had no such downturns in the housing market -- but they also faced a serious economic crisis.
Furthermore, looking at pre-existing conditions in a variety of countries did not help the authors identify the common factors that would be necessary for an early warning system. The authors write, "Overall, our results suggest that measurable pre-existing conditions across countries had little common impact on the relative severity of these countries' crisis experience."

The authors concluded that the crisis also could have been a "global shock," unrelated to the factors they studied, such as countries' GDPs and credit ratings. They also posited that the shock may have started in one country, then spread to others.

So what do we know from the study? That we still don't know how to predict future global crises. Rose said in a Haas press release, "Politicians seek a magic instrument to prevent another serious economic crisis, but our findings show there is no mechanical easy way to predict major downturns in the future."

Image courtesy of Flickr user fLeMmA, CC 2.0.