Financial crisis was predicted. What's more interesting is who predicted it.

Like the Iraq disaster, the mortgage and credit crises were predictable and – in at least the case of the economic crash – predicted.  NPR reported yesterday on who predicted the latest mess and when.

Intro:  The subprime mortgage and credit crisis has inspired a new version of the old question:  What did they know and when did they know it?  Specifically, government regulators and the heads of Wall Street banks are being asked if the current turmoil was predictable.  Should they have seen what was coming and prepared for it, or can they be let off the hook because the financial crisis, however unfortunate, was unlikely and unforeseeable.  NPR … has the story of one man who says he saw it quite clearly and he can prove it.

NPR: If you go to a bookstore, you can find a copy of “The Trillion Dollar Meltdown” by banker and economic historian, Charles Morris.  The book lays out in precise detail what went wrong over the past few months in the global financial system.  He describes exactly what brought down Bear Stearns, why the US may be headed for recession, and why investors around the world are terrified.  But here’s the thing:  he wrote much of the book last spring months before the first hint of any problem, back when leading government and finance people were touting the rosiest of financial futures.  The book’s life began with an email Morris sent in early 2007 to Peter Osnos, the founder of Public Affairs Books.

Charles Morris:  I think we’re heading for the mother of all crashes to happen --  in the summer of 2008 was what I thought at the time.

NPR:  At the same time as that email – February and March of 2007 – Fed chairman, Ben Bernanke was telling Congress that the US has a goldilocks economy:  “Just perfect – the right amount of inflation and grown and employment.”  Financial journalist, Larry Kudlow, like many others talked about the glories of the US-led period of prosperity and capitalism.  You get the picture!  Leading voices in Washington and on Wall Street agreed.  The economy was going great and would only get greater.  So why did this guy, Charles Morris, think so differently?  He was in the perfect position.  He’s not just a writer, he ran a company that created the software that investment banks and hedge funds use to build these new, exotic credit instruments.  He saw how they used his software and thought…

Charles Morris:  … This is crazy!  I was sure that people weren’t keeping track of the trends so they had proper margins and collateral and so forth.

NPR:  Morris said that by 2007 he had warned every financial professional he knew.  Nobody listened then. But we now know that Morris was right.  Hedge funds, investment banks and many other big financial institutions had invested countless billions in brand new forms of debt.  Things with weird names like “synthetic collateralized debt obligation.”  You don’t know what that is?  Well, the banks hardly know!  They didn’t have any way, Morris says, of actually assessing the riskiness of all these new instruments.

Charles Morris:  Because you couldn’t possibly do it.  The volume of trading was so huge.

NPR:  Morris was certainly not the only person to see the credit crisis coming.  Some economists and leading investors predicted all of this.  But Morris had something they lacked:  publisher Peter Osnos.

Peter Osnos:  It’s not enough to be right, you also have to be readable.

NPR:  That was the key.  Morris was writing not for the professionals but for the rest of us.  And some might say that even though his book came out so quickly it’s still coming out too late.