From the very beginning of the credit crisis and the ensuing recession, it has become conventional wisdom that "no one saw this coming". Anatole Kaletsky (2008) wrote in the The Times of "those who failed to foresee the gravity of this crisis - a group that includes Mr King, Mr Brown, Alistair Darling, Alan Greenspan and almost every leading economist and financier in the world." Glenn Stevens (2008), Governor of the Reserve Bank of Australia, said:

"I do not know anyone who predicted this course of events. This should give us cause to reflect on how hard a job it is to make genuinely useful forecasts. What we have seen is truly a `tail' outcome - the kind of outcome that the routine forecasting process never predicts. But it has occurred, it has implications, and so we must reflect on it".

We must indeed.

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In Bezemer (2009), I document the models that got it right. The important question for economists is - how did they do it? What is the underlying model?

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The most detailed of these models, which has also been used to construct public projections and analyses, are "Flow of Funds" models of the US developed by Wynne Godley and associates at the Levy Economics Institute. These may serve as pars pro toto for the class of "Flow of Funds" models of real-financial interactions (e.g. also Werner, 1997; Graziani, 2003; Hudson, 2006; Keen, 2009). A simplified (closed-economy) representation in Godley (1999) consists of stocks and flows of a number of asset classes between four sectors (explicitly separating out the financial sector), with their properties and interrelations represented in over 60 equations (Table 1; see Godley 1999 for all symbols).