Tuesday, July 31, 2012

Bank of England's Andy Haldane admits economists share blame for financial crisis and recession

In a must read Telegraph article, Andy Haldane, the Bank of England's executive director for financial stability, admits that economist in both academia and the government share in the blame for both the financial crisis and the ongoing recession.

Regular readers know that the Queen of England pointed out this simple fact with her question of how if everything was going so well did the economics profession not see the financial crisis coming.

Mr. Haldane's statement confirmed what your humble blogger has said (see the Queen's question) about why the economics profession failed to see the crisis coming and in fact contributed to the crisis and the ongoing recession.
Andy Haldane ... said economists misled policymakers in the years before the crisis by promoting a “blinkered” view of the world based on the assumption their theories were unfailingly correct. 
The academic establishment, including central bankers, needs to own up to its mistakes, he added....
Please note that in the case of central banks, the economists were the policymakers.  Therefore the economists dominated and still dominate monetary, fiscal and regulatory policy.
In an interview with OurKingdom, the UK arm of openDemocracy, Mr Haldane said: “It’s right that it should shoulder some of the blame [for the financial crisis]. In part, this is because thinking within the wider academic economic community did start to shape and influence public policy in important ways.” 
He added: “I think looking ahead, central banks – this isn’t remotely just about the Bank of England – are going to need ... to say when they’ve got it wrong, to admit to mistakes when they’ve been made.” 
The profession’s mistake was to allow “a rather restricted and blinkered view of the dynamics of social and economic systems [to be] carried across into how public policy was thought about and executed”. 
He said the error was not driven by economists seeking financial gain but “the quest for certainty”. But their error was to think of the assumptions used to build economic models as cast-iron laws. 
“A concept gets formalised and then gets socialised and then believed as an almost theological doctrine,” he said. "The notion of not knowing, of imperfect information, of uncertainty, got lost from economics and finance for the better part of 20 or 30 years.
Please re-read Mr. Haldane's comment on imperfect information.  Your humble blogger has been saying since the beginning of the financial crisis that it was the result of imperfect information.  Imperfect information that was brought about by Wall Street as it capitalized on building opacity into the financial system.
“I think one of the great errors we as economists made was that we started believing the assumptions of economics, and saying things that made no intellectual sense. 
We started to believe that what were assumptions were actually a description of reality, and therefore that the models were a description of reality, and therefore were dependable for policy analysis. 
“With hindsight, that was a pretty significant error.”
The major assumption being that there was transparency in the financial system when in fact Wall Street was creating vast opaque areas (think banks and structured finance securities).

I thought that readers might find the following NY Times' Economix column interesting as it expands on the idea of economists believing that their assumptions are facts.
An economist's mea culpa

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