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.
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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."
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