As for the flip-side, Barry Ritholtz wants to know why so many academic
economists were oblivious:
My explanation is there were systemic failures in economics as a discipline, at
least as it is employed in the real world. Note that these are not theoretical
critiques (i.e., Keynesians versus Monetarists), but rather, these are broader
inquiries as to why so many working economists were so utterly clueless about
all of the red flags for so long. The inherent biases of working on Wall Street
go along to explain why those economists were so awful — but I have less of an
explanation as to why so many academic economists were so blind. Perhaps it is
the profession itself.
As far as Central Bankers were concerned, they too missed the warning signs —
but there were several notable exceptions to this to, including the Bank of
England’s concerns about a credit crunch and a collapse in asset prices.
Ideas? I have a few. Here are my top 10 indictments as to why professional
economists missed the crises until it was too late:
1. An inherent upward bias is built into ALL Wall Street research —
including economic research;
2. Ideological rigidity prevented creative thinking;
3. Non-critical acceptance of official data from BEA, BLS, Commerce led to
only a passing familiarity with reality;
4. Institutional rejection of negative analyses remains endemic;
5. Traditional (non-behavioral) economic analysis seems to have difficulty
with human irrationality;
6. Political Bias; (Right wing during GOP Presidencies; Left Wing during
DEM Presidencies);
7. Corporate bias — Stock option compensation — skewed views too optimistic;
8. “Timing” is very different from Analysis;
9. Factoring in excessive leverage and liquidity is exceedingly difficult
from a traditional economic perspective (Derivatives especially);
10. Herding instinct is powerful;
Economics as a discipline does not seem to be particularly introspective. In my
opinion, the sooner the profession develops some self doubt, recognizes its own
failings and shortcomings, the faster they will be able to recognize the
failing constructs of the profession and fix them. The Efficient Market
Hypothesis, homo economicus, the deification of markets, all need an open
public review and a good thrashing.
There were many professions that did not distinguish themselves in the lead up
to the housing boom and bust, financial bust, the credit crisis, and the
recession. Economics is near the very top of that list.
<http://www.ritholtz.com/blog/2009/01/why-economists-suck/>
Shane
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