Predicting the Crisis: A Scorcard

The field of economics should feel chastened for largely missing the predictions of the 2008 global financial crisis. But a few brave (unheard) souls did forecast disaster:

In a 2011 study, Dirk J. Bezemer, of Groningen University in the Netherlands, found a dozen experts who warned publicly about a broad economic threat, explained how debt would drive it, and specified a time frame.
Most, like Nouriel Roubini of New York University, issued warnings in informal notes. But Mr. Godley “was the most scientific in the sense of having a formal model,” Dr. Bezemer said.

via Embracing Economist Who Modeled the Crisis


4 thoughts on “Predicting the Crisis: A Scorcard”

  1. In general, it seems like a bit of a no brainer: when you deregulate you are doing away with the safeguards that have been put in place to keep things from getting out of control. This is generally an unsafe plan. I don’t think you have to have a PhD in economics to understand this point. It must also be mentioned, however, that with every change made to a financial institution, there will always be some voice warning of impending doom. But when these voices constitute a large body of experts, it’s worth listening to. Ultimately, as long as bonuses and bottom lines drive the financial industry we will always be in danger of recreating this situation. Real change, real security, will only happen when it is decided that people matter more than money. Until then, experts will continue to be ignored in the pursuit of greater gain.

  2. Apparently, (according to Phil Pilkington), Mr. Godley’s models were not the source for his predictions; instead, he relied on “a combination of intuition and informal logical reasoning”.

    To explain history, politics, or military strategy, most people don’t create models that rely on incredibly complex mathematics. Instead, they explain what the powerful institutions and ideas and people were, and how they interacted. Economics should be the same way. We don’t need more mathematical models. We need more interesting stories.

    In the case of the 2008 financial crisis, here is the story as I understand it: Economists and bankers and traders at the top financial firms walked freely in the halls of power, assuring the people that had enough wisdom to handle that power safely. When their dark magics blew up in their faces, they used their influence and positions at the top of the government (e.g. Paulson, former CEO of Goldman Sachs) to ensure that none of them would be held responsible and that any damage they had done would be cleaned up by someone else.

    If my story is true, the “chastening” that modern theoretical economics has received is far, far less than the discipline deserves.

  3. “Why does a model matter? It explicitly details an economist’s thinking, Dr. Bezemer says. Other economists can use it. They cannot so easily clone intuition.”(Schlefer)

    I think that these economists along with thousands of other unknown scholars predicted the financial crisis in their minds or in writing. The question then becomes why did no one listen? Well, maybe many were listening and of those who listened perhaps some responded.

    If the field of economists should be chastened, then that means that they all were completed united on all matters that led up to the financial crisis. This of course was not the case. Economics is a social science study. Rarely will there be massive unity in any study of social science.

    We as a society will always look for credentials before we give time for the opinion of those around us. We are scared of scams. We are scared of ignorance. I think we should be scared of ignorance, but I also think that we can be more collective in the pursuit of understanding.

    1. Models don’t reveal intuition. They obscure it.

      If an economist were to say, for example, “The government should never try to help the poor by raising the minimum wage, because anything they do will inevitably make the problem worse. Instead, give corporations more power and it’ll be for the best.”, then everyone would know what they meant.

      But when an economist draws the intersecting lines of supply and demand in the labor market and shades in a little triangle of “dead-weight loss”, it becomes both less clear and more intimidating (because it uses CALCULUS to find the area of the triangle).

      It doesn’t matter how many thousands of economists silently thought there might be trouble, nor is it significant that there were a handful of marginalized economists like Roubini and Taleb who predicted the crisis. They were marginalized (before the crisis) because their predictions were so far outside the academic consensus being cited by “expert economists” on cable news shows and the pages of the New York Times.

      In the run-up to the financial crisis, the collective voice of academic economics was publicly stating that there was no reason to be concerned about the possibility of a financial crisis. See e.g., this paper, which describes a “systemic failure of academic economics”.

      If economics is to be a science, it should have some predictive power. Otherwise, it’s worse than useless.

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