Missing Links

It Didn’t Happen

The dollar didn't crash. Tariffs didn't come roaring back. The world's growing economies didn't grind to a halt. And other scary tales that failed to come true during the crisis.


Just a few months ago, the consensus among influential thinkers was that the economic crisis would unleash a wave of geopolitical plagues. Xenophobic outbursts, civil wars, collapsing currencies, protectionism, international conflicts, and street riots were only some of the dire consequences expected by the experts.

It didn’t happen. Although the crash did cause severe economic damage and widespread human suffering, and though the world did change in important ways for the worse — the International Monetary Fund, for example, estimates that the global economy’s new and permanent trajectory is a 10 percent lower rate of GDP growth than before the crisis — the scary predictions for the most part failed to materialize.

Sadly, the same experts who failed to foresee the economic crisis were also blindsided by the speed of the recovery. More than a year into the crisis, we now know just how off they were. From telling us about the imminent collapse of the international financial system to prophecies of a 10-year recession, here are six of the most common predictions about the crisis that have been proven wrong:

The international financial system will collapse. It didn’t. As Lehman Brothers, Bear Stearns, and Fannie Mae and Freddie Mac crashed, as Citigroup and many other pillars of the financial system teetered on the brink, and as stock markets everywhere entered into free fall, the wise men predicted a total system meltdown. The economy has "fallen off a cliff," warned investment guru Warren Buffett. Fellow financial wizard George Soros agreed, noting the world economy was on "life support," calling the turbulence more severe than during the Great Depression, and comparing the situation to the demise of the Soviet Union.

The natural corollary of such doomsday scenarios was the possibility that depositors would lose access to the funds in their bank accounts. From there to visions of martial law imposed to control street protests and the looting of bank offices was just an easy step for thousands of Internet-fueled conspiracy theorists. Even today, the financial system is still frail, banks are still failing, credit is scarce, and risks abound. But the financial system is working, and the perception that it is too unsafe to use or that it can suddenly crash out of existence has largely dissipated.

The economic crisis will last for at least two years and maybe even a decade. It didn’t. By fall of 2009, the economies of the United States, Europe, and Japan had begun to grow again, and many of the largest developing economies, such as China, India, and Brazil, were growing at an even faster pace. This was surely a far cry from the doom-laden — and widely echoed — prophecies of economist Nouriel Roubini. In late 2008 he warned that radical governmental actions at best would prevent "what will now be an ugly and nasty two-year recession and financial crisis from turning into a systemic meltdown and a decade-long economic depression." Roubini was far from the only pessimist. "The danger," warned Harvard University’s Kenneth Rogoff, another distinguished economist, in the fall of 2008, "is that instead of having a few bad years, we’ll have another lost decade." It turned out that radical policy reactions were far more effective than anyone had expected in shortening the life of the recession.

The U.S. dollar will crash. It didn’t. Instead, the American currency’s value increased 20 percent between July 2008 and March 2009, at the height of the crisis. At first, investors from around the world sought refuge in the U.S. dollar. Then, as the U.S. government bailed out troubled companies and stimulated the economy with aggressive public spending, the U.S. fiscal deficit skyrocketed and anxieties about a dollar devaluation mounted. By the second half of 2009, the U.S. currency had lost value. But devaluation has not turned out to be the catastrophic crash predicted by the pessimists. Rather, as Financial Times columnist Martin Wolf noted, "The dollar’s correction is not just natural; it is helpful. It will lower the risk of deflation in the U.S. and facilitate the correction of the global ‘imbalances’ that helped cause the crisis."

Protectionism will surge. It didn’t. Trade flows did drop dramatically in late 2008 and early 2009, but they started to grow again in the second half of 2009 as economies recovered. Pascal Lamy, director-general of the World Trade Organization, had warned that the global financial crisis was bound to lead to surges in protectionism as governments sought to blame foreigners for their problems. "That is exactly what happened in the 1930s when [protectionism] was the virus that spread the crisis all over the place," he said in October 2008, echoing a widely held sentiment among trade experts. And it is true that many governments dabbled in protectionism, including not only the U.S. Congress’s much-derided "Buy American" provision, but also measures such as increased tariffs or import restrictions imposed in 17 of the G-20 countries. Yet one year later, a report from the European Union concluded that "a widespread and systemic escalation of protectionism has been prevented." The protectionist temptation is always there, and a meaningful increase in trade barriers cannot be ruled out. But it has not happened yet.

The crisis in rich countries will drag down developing ones. It didn’t. As the economies of America and Europe screeched to a halt during the nightmarish first quarter of 2009, China’s economy accelerated, part of a broader trend in which emerging markets fared better through the crisis than the world’s most advanced economies. As the rich countries entered a deep recession and the woes of the U.S. financial market affected banking systems everywhere, the idea that emerging economies could "decouple" from the advanced ones was widely mocked.

But decouple they did. Some emerging economies relied on their domestic markets, others on exports to other growing countries (China, for example, displaced the United States last year as Brazil’s top export market). Still others had ample foreign reserves, low exposure to toxic financial assets, or, like Chile, had taken measures in anticipation of an eventual global slowdown. Not all developing countries managed to escape the worst of the crisis — and many, such as Mexico and Iran, were deeply hurt — but many others managed to avoid the fate of the advanced economies.

Violent political turmoil will become more common. It didn’t. Electorates did punish governments for the economic hard times. But this was mostly in Europe and mostly peaceful and democratic. "There will be blood," prophesied Harvard historian Niall Ferguson last spring. "A crisis of this magnitude is bound to increase political [conflict] … It is bound to destabilize some countries. It will cause civil wars to break out that have been dormant. It will topple governments that were moderate and bring in governments that are extreme. These things are pretty predictable."

No, it turns out: They aren’t.

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