Sep
12
Best (and most succinct) defense of the Economics profession
Economists have come under a lot of scrutiny for having not predicted the recession and financial crisis (and for not offering useful advice once the panics were underway). Here are some interesting thoughts from Hal:
Many economists recognized that housing prices were out of line. What we didn’t recognize is how screwed up the mortgage market was. If you had ask 100 economists, “what would happen if mortgage lenders based their loans on self-declared income?” I think that 90% of them would say, “mortgage quality would deteriorate.” Similarly if you asked what the consequences would be of investment banks taking on leverage factors of 30+, they would answer, “you would get an increase in asset volatility.” The problem is that few people outside the industries were aware of these practices. As Warren Buffet puts it, “you don’t know who is wearing a bathing suit until the tide goes out.”
Actually, I’m willing to bet that a lot of people who are not economists could have made those same predictions. So the question is: Whose job is it to uncover these basic facts and sound the alarms? Seems like journalists, consultants, counterparties and investors are equally (or more) responsible for this kind of investigation.
