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Munich Personal RePEc Archive
“No One Saw This Coming”:Understanding Financial Crisis ThroughAccounting Models
Bezemer, Dirk JGroningen University16. June 2009Online at
http://mpra.ub.uni-muenchen.de/15892/
MPRA Paper No. 15892, posted 16. June 2009 / 14:58
 
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“No One Saw This Coming”Understanding Financial Crisis Through Accounting Models*Dirk J Bezemer**University of Groningen
ABSTRACT (78 words)This paper presents evidence that accounting (or flow-of-fund) macroeconomic models helpedanticipate the credit crisis and economic recession. Equilibrium models ubiquitous in mainstreampolicy 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 onrevising methods of financial stability assessment. Overall, the paper is a plea for research into thelink between accounting concepts and practices and macro economic outcomes.Keywords: credit crisis, recession, prediction, macroeconomics, flow of funds, financialization,neoclassical economics, accounting research
* This papers has benefited from conversations with (in alphabetical order) Arno Mong Daastoel, GeoffreyGardiner, Michael Hudson, Gunnar Tomasson and Richard Werner.**d.j.bezemer@rug.nlPostal address: University of Groningen, Faculty of EconomicsPO Box 800, 9700 AV Groningen, The Netherlands. Phone/ Fax: 0031 -50 3633799/7337.
 
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“No One Saw This Coming”Understanding Financial Crisis Through Accounting Models
“She was asking me if these things are so large, how come everyone missed it?”
 Luis Garicano on the Queen’s visit to LSE, November 2008
“The financial crisis will hopefully stimulate a revival of accounting scholarship aimed at understanding therelationship between accounting practice and the macro political and economic environment in which itoperates.”
Patricia Arnold, June 2009
1. Introduction
On March 14, 2008, Robert Rubin spoke at a session at the Brookings Institution in Washington,stating that "few, if any people anticipated the sort of meltdown that we are seeing in the creditmarkets at present”. Rubin is a former US Treasury Secretary, member of the top management teamat Citigroup bank and one of the top Democratic Party policy advisers. On 9 December of that yearGlenn Stevens, Governor of the Reserve Bank of Australia commented on the “internationalfinancial turmoil through which we have lived over the past almost year and a half, and the intensityof the events since mid September this year”. He went on to assert: “I do not know anyone whopredicted this course of events. This should give us cause to reflect on how hard a job it is to makegenuinely useful forecasts. What we have seen is truly a ‘tail’ outcome – the kind of outcome thatthe routine forecasting process never predicts. But it has occurred, it has implications, and so wemust reflect on it” (RBA 2008). And in an April 9, 2009 lecture Nout Wellink - chairman of theBasel Committee that formulates banking stability rules and president of the Dutch branch of theEuropean Central Bank - told his audience that “[n]o one foresaw the volume of the currentavalanche”.These are three examples of the idea that ‘no one saw this coming’. This has been a commonview from the very beginning of the credit crisis, shared from the upper echelons of the globalfinancial and policy hierarchy and in academia to the general public. It continues to be publicised,as documented in more detail in the next section. And yet it would be premature to ask “Why did
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