The economics profession clings to the belief that it was saved by a couple of economists at the Bank for International Settlements who 'predicted' the crisis. This belief conveniently ignores that these economists were dismissed by the economics profession because their analysis was not backed by economic theory (these economists understood that making loans to individuals with no means for repayment is going to end up badly).
The economics profession clings to the belief that it was ambushed by the Queen of England when she asked why did the economics profession not see the crisis coming. No, it is a perfectly reasonable question to ask a profession that claims to have some insight into financial markets and the economy.
The economics profession clings to the belief that it has something to offer to solve the financial crisis it was not able to predict. We have tried the economic profession's voodoo remedies of zero interest rates, quantitative easing, austerity and fiscal stimulus policies as well as bailing out banks and increasing their book capital and none of these remedies has ended the financial crisis. It is quite apparent that the solution is not in economic textbooks or any economist's academic papers.
Speaking of academic papers written by economists, in defending the Bank of England's failure to understand that the Libor interest rate was being fiddled with, Mervyn King said
We had no evidence of wrongdoing (in that respect), none was supplied to us and the evidence that you cite here, there were plenty of academic articles that looked into it and said we cannot see in the data any evidence of manipulation.These papers should be a source of embarrassment to the economics profession.
Regular readers know that the way Libor interest rates were calculated using self-certified submissions created the veil behind which Libor could be manipulated. Without disclosure of actual trades, how could anyone know if the submissions were fiddled with or not?
These papers may not be a source of embarrassment given how low the standard is for getting finance and economic papers published in the top journals.
For example, there are a number of papers that talk about informationally insensitive debt and claim that demand deposits are an example. Everyone, except the finance professors and economists who reviewed the articles apparently, knows that demand deposits up to $250,000 are guaranteed by the government. The last time anyone checked, a government guarantee was information.
My guess is that if the finance professors and economists who reviewed and accepted these papers understood that a government guarantee was information, they would have rejected the papers as the author confuses sensitivity with the ease of assessing all the useful, relevant information on an investment.
As Jeremy Warner observed about the testimony given by the Bank of England's Mervyn King,
King's persistent stubborness in refusing to accept any degree of responsibility for what went wrong in the banking crisis.
Denial of culpability in the libor scandal – basically on the grounds that the Bank of England was not the responsible regulator – mirrors a similar more general refusal to accept the Bank did anything wrong either in the lead up to or during the banking crisis.Why is it that economists have so little ability to say 'we screwed up and we are not going to offer any advice or take any extreme actions until we understand why we screwed up and missed predicting the greatest financial crisis since the 1930s?'