Home > economics profession, Eurozone Crisis, financial crisis, neoclassical economics > The Premonitory Five: Godley, Wray, Forstater, Mosler and Bell

The Premonitory Five: Godley, Wray, Forstater, Mosler and Bell

from Edward Fullbrook

The neoclassical mainstream won infamy for remaining oblivious of the impending Global Financial Collapse, whereas Keen, Roubini, Baker and Hudson won fame for analytically foreseeing it and giving ample warning.  Now a “policy note” from the Levy Economics Institute documents analytical warnings of the European Union’s current debt crisis given separately a decade or more ago by five economists:  Wynne Godley (1997), L. Randall Wray (1998), Mathew Forstater (1999), Warren Mosler (2001) and Stephanie Bell (2002).  Below are relevant passages from each of the five.  These two huge examples illustrate how economics could serve, rather than dis-serve, society if the profession were to become in the main science-based rather than faith-based. 

Wynne Godley (1997):

[I]f a government stops having its own currency, it doesn’t just give up “control over monetary policy” as normally understood; its spending powers also become constrained in an entirely new way. If a government does not have its own central bank on which it can draw cheques freely, its expenditures can be financed only by borrowing in the open market in competition with businesses, and this may prove excessively expensive or even impossible, particularly under “conditions of extreme emergency.” . . . [I]f Europe is not to have a full-scale budget of its own under the new arrangements it will still have, by default, a fiscal stance of its own made up of the individual budgets of component states. The danger, then, is that the budgetary restraint to which governments are individually committed will impart a disinflationary bias that locks Europe as a whole into a depression it is powerless to lift.

L. Randall Wray (1998, pp. 91–92):

Under the EMU, monetary policy is supposed to be divorced from fiscal policy, with a great degree of monetary policy independence in order to focus on the primary objective of price stability. Fiscal policy, in turn will be tightly constrained by criteria which dictate maximum deficit-to-GDP and debt-to-deficit ratios. . . . Most importantly, as Goodhart recognizes, this will be the world’s first modern experiment on a wide scale that would attempt to break the link between a government and its currency. . . . 

As currently designed, the EMU will have a central bank (the ECB) but it will not have any fiscal branch. This would be much like a US which operated with a Fed, but with only individual state treasuries. It will be as if each EMU member country were to attempt to operate fiscal policy in a foreign currency; deficit spending will require borrowing in that foreign currency according to the dictates of private markets.


Mathew Forstater (1999, p. 33):

Under the EMU, if investors are at all hesitant about any one member’s debt, they can buy another member’s debt without incurring currency risk, since there is no exchange rate variability among the currencies of member countries. Because member nations now are dependent on investors for funding their expenditure, failure to attract investors results in an inability to spend. Furthermore, should a member’s revenues fail to keep pace with expenditures due to an economic slowdown, investors will likely demand a budget that is balanced, most likely through spending cuts. In other words, market forces can demand pro-cyclical fiscal policy during a recession, compounding recessionary influences.

Warren Mosler (2001):

History and logic dictate that the credit sensitive euro-12 national governments and banking system will be tested. The market’s arrows will inflict an initially narrow liquidity crisis, which will immediately infect and rapidly arrest the entire euro payments system. Only the inevitable, currently prohibited, direct intervention of the ECB will be capable of performing the resurrection, and from the ashes of that fallen flaming star an immortal sovereign currency will no doubt emerge.

Stephanie Bell (2002):

Countries that wish to compete for benchmark status, or to improve the terms on which they borrow, will have an incentive to reduce fiscal deficits or strive for budget surpluses. In countries where this becomes the overriding policy objective, we should not be surprised to find relatively little attention paid to the stabilization of output and employment. In contrast, countries that attempt to eschew the principles of “sound” finance may find that they are unable to run large, countercyclical deficits, as lenders refuse to provide sufficient credit on desirable terms. Until something is done to enable memberstatesto avert these financial constraints (e.g., political union and the establishment of a federal [EU] budget or the establishment of a new lending institution, designed to aid member states in pursuing a broad set of policy objectives), the prospects for stabilization in the Eurozone appear grim.


Bell, S. 2002. “Convergence Going In, Divergence Coming Out: Default Risk Premiums and the Prospects for Stabilization in the Eurozone.”Working Paper No. 24. Kansas City, Mo.: Center for Full Employment and Price Stability. April.

Forstater, M. 1999. “The European Economic and Monetary Union: Introduction.” Eastern Economic Journal 25, no. 1 (Winter). 

Godley, W. 1997. “Curried Emu—The Meal that Fails to Nourish.” Observer (London), August 31. 

Mosler, W. 2001. “Rites of Passage.” Epicoalition.org, May 1. 

Wray, L. R. 1998. Understanding Modern Money: The Key to Full Employment and Price Stability. Northampton, Mass.: Edward Elgar Publishing.

  1. robert r locke
    July 20, 2012 at 12:53 pm

    I have no quarrel with what the people quoted in this post say. But I do have one with the ex post facto way economists go about dealing with us. It is always, since there are so many opinions in their ranks,possible to go back and find an economist who got it right. The trick is to know who has it right before it happens, and there we seem to be struck because economics is not a predictive science. A second point, economists are always talking about themselves and to each other, as if something significant was going on within their ranks. And they do not talk to anybody else because they are not economists. It is an unjustified exclusivity that must be ended. Let in the light. Intelligent people are so intimidated that they preface very perceptive remarks with “I’m not an economist, but…”

    • GrkStav
      October 18, 2014 at 3:31 am

      How do you envision any economist to convince you that he/she has it right before it happens other than him/her providing you with a reasoned and evidence-based prediction? Secondly, how do you envision economists “talking to” non-economists exactly?

  2. guest
    July 20, 2012 at 2:25 pm

    There is an even earlier article by Wynne Godley, published in 1992 with the same message:

    Maastricht and all that, LRB Vol. 14 No. 19 · 8 October 1992

    available at


  3. July 20, 2012 at 4:25 pm

    Edward Fullbrook: ” These two huge examples illustrate how economics could serve, rather than dis-serve, society if the profession were to become in the main science-based rather than faith-based.”

    First it needs to be FACT-based. The first fact is that money is created as a debt to a bank, spent, earned and then is lent again as existing money. The logic of why “twice-lent money” leads to periodic monetary crises is simple enough but the economists on this Forum, with the exception of Peter Earl, seem determined ignore it.


    robert r locke: “I’m not an economist but… ”

    I expect all professions are insular and don’t like to be shown up as incompetent. The same applies to religions and ideologies of all kinds. Economics, in my view, is an insular ideology devoted to maintaining the fraud of the banking and political control system.

    My Money as Debt movie (2006) predicted the Great Crash. Money as Debt II (2009) provided a clear and unique explanation WHY it happened and Money as Debt III (2011) illustrates in detail how a radical change in WHAT MONEY IS, is the only real solution.

    Peter Earl’s Review:

    My theories are presented in animated feature movies, watched for free online by millions worldwide in many languages. It would be nice if economists took me seriously but I am NOT relying on it.

    • BT London
      July 21, 2012 at 6:58 am

      Paul – Bank loans create credit (deposits) as well as debt (the loan agreement) – expanding a bank’s balance sheet. The credit then circulates between accounts as money. Repayment of loans destroys both credit and debt, decreasing a bank’s balance sheet. There is no ‘twice-lent’ credit. New credit is created with every bank loan. Cash and reserves are only a tiny proportion of the stock of credit. Reserves serve mainly to settle transactions between banks/central bank/treasury. Cash is almost irrelevant these days in a macroeconomic sense.

      Debt is actually a useful and naturally evolved way of creating money. Why give a monopoly on money creation to the government when you can give everyone access to newly created money through borrowing from bank? Our current system ensures newly created money (credit) goes into investments by either the government or private individuals or business. Investment is the main driver of human social progress. Importantly, there is nothing to stop the government – with the cooperation of the central bank – from borrowing unlimited amounts at very low interest rates (even zero real interest rates) to fund its spending under our system. The only reason this does not happen is political pressure on governments from the private sector actors who want to do this investment themselves.

      • davetaylor1
        October 20, 2014 at 9:10 am

        This sounds like an economist talking! Totally missing the point that what is true of a banking transaction in isolation is not true of it as a flow in which 95% or more is buying not human services and produced commodities but more debt for gambling on the future. (This in the forms of stocks and shares, real insurance saving for services not yet needed, and derivatives supposedly insuring not individual repayments but flows of repayments.

        Individual debts may be written off when they have been repaid (with interest and bank charges) with wages paid in debt money (hence Paul’s “twice lent money” portrayed mathematically not as – + – = 2- but as – x – = + ). But if the stock market goes “up” so does 95% plus of the amount of the circulating debt money, and we have a monetary crisis if it goes down. (Not to say a long term real crisis when foreigners buy national assets like our land, property and institutions like Manchester United and Cadbury’s with foreign debt money, using our incomes to buy on hire purchase what under existing legislation are now considered their bank’s and eventually their assets).

        BT, almost the only thing I agree with you about is that “Debt is actually a useful and naturally evolved way of creating money”. Money, whether in coin, paper, electronic or income entitlement form, is not debt but a representation of debt – an IOU – so the more you have the more you owe. Even if we earn our keep, we never start with a zero debt balance. Personally, I’m an advocate of honest money, and of gratitude to those of us who, by supplying what we need, honour rather than exploit our IOU’s.

      • October 20, 2014 at 5:56 pm

        Poorer people borrow money on a time schedule and richer people keep it indefinitely as savings.

        This makes the rate of payment of previous debts dependent on the rate of creation of new debts. Therefore, whenever the rate of creation of new debt slows down for any reason, people lose their homes to foreclosure by mathematical certainty. Naturally, the weakest economic players fail first so we can call it a “sub-prime” crisis and not THE DESIGN OF THE SYSTEM.


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