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The FT is asking an interesting question:
“Why did no one see the crisis coming?” Queen Elizabeth asked last year. “A failure of the collective imagination of many bright people” who were all “doing their job properly on its own merit”, was the answer many of those bright people gave in a letter to the Queen last week.
If the economics profession could not warn the public about the credit crunch and the recession, what is the profession’s raison d’etre? Did this reflect, as some claim, that economics has gone astray with models that no longer help understand economic reality but rather distort it? Did such models even contribute to the crisis?
What’s your opinion? Did we trust econcomists in more matters than we should? Who should we trust in the future?
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The problem is not that economists did not foresee this crisis, although they could have done a better job at that! The problem is that too many areas of live became ‘economic’ and therefore followed different rules than they used to. Social policy, health, education, … all became economic policy. We need to change this! then we can leave the economists to their models.
yes, economists got it wrong and should take the blame. And shouldn’t give political advise in the future!
I believe everybody knew what was going to happen long time ago, but nobody wanted to do anything because it was unavoidable. I have friends in the construction and in banking that were telling me about the crush few years ago, and they are not politics or in higher positions (that you are supposed to know better). I can say that this problem has been created by the greed of some, like banks. These entities had seen the bussiness of their lives in all these economic wellbeing and tried to get more benefit of it with the “easy” credits. No one liked this idea (politics or economics were agaisnt it) but everybody is sold to the banks, so nobody said anything. Eerybody knew that the banks were the ones to blame from the beginning and nobody said anything till now that it’s too obvious.
Maybe we all expected too much from economists who we thought had everything ‘under control’.
But on the other hand none of them complained saying hold on a minute, we simply cannot oversee the whole situation. Maybe this mess is a mixture of the natural limits of the subject and the naturally unlimited vanity of some people.
If the right economic concepts had been applied (asymmetric information in financial markets, irrational exuberance etc.), you could have seen it coming. However, hardly anyone did, apart from Roubini and some other guys.
It’s mainly because economists are usually better in isolating effects rather than seeing the aggregate package. That does not mean that economics is not useful. By understanding the mechanisms how markets work, which factors drive behaviours etc. economists can for example certainly contribute to good policy making.
Assessing the whole packages is one of the mst difficult tasks and often goes wrong. Therefore, it’s all about understanding markets rather than predicting the future. By the way, other professions have similar problems of being analytically strong but poor in forecasting (think of meteorologists or physicists).
The paradox is that the preceding bull market and related crash may occur only because there is a generally prevailing consensus that the bull market is justified by then prevailing circumstances (usually, some “new paradigm”) and that a crash is thus impossible. Thus a failure to foresee is a necessary condition to crash; and a crash that is foreseen cannot occur. The maligned economists – together with consumers, Government, investors et al – acceded to the consensus thus satisfying the required condition to a crash. The question posed is thus a little like asking why rain is wet. In that great Zen phrase of the market “it is what it is”.
Well said Edmond. The thing is that history very often repeats itself and that everybody claiming that they changed history, for instance by getting rid of the business cycle, should be met with suspicion!