The primary reason that most economists missed the economic crisis is the debacle involves issues peripheral to the way they view the world, according to Robert Samuelson, a contributing editor to The Washington Post and Newsweek Magazine.
On a daily basis, working economists are focused on issues such as consumer spending and business spending, and government deficits, rather than complex securities and derivatives, Samuelson wrote in his weekly syndicated column. As the world has discovered during the last 18 months, "if you de-emphasize financial markets and financial markets are decisive, you're out to lunch," Samuelson wrote.
"Financial markets pumped up the real estate bubble,’’ he wrote. “Greater housing and stock market wealth inspired a consumer spending boom; losses on subprime mortgage securities triggered a collapse of confidence."
Recently, Samuelson said, the economics profession has grudgingly conceded that it had erred.
"A study by the International Monetary Fund, called Initial Lessons of the Crisis, admits there was an under-appreciation of systemic risks coming from financial sector feedbacks into the real economy. That's an understatement," he said.
Economists made another major blunder, Samuelson wrote. They underestimated history.
"By and large, most economists don't care much about history," he wrote. "Introductory college textbooks spend little time exploring business cycles of the 19th century. The emphasis is on principles of economics. Economists focus on constructing elegant financial models. Theorists have held the high intellectual ground."
Hubris was a factor as well. With their fancy mathematical models, beginning in the 1960s, economists thought they could control the world. By the Greenspan era at the Federal Reserve, they actually thought they did bypass the past pattern of business cycles of boom and bust. The arrogance is now gone.
"Markets became more complex; more money crossed national borders; people became complacent," Samuelson wrote. "History moved on, but economists didn't."
Others agree, and they say the financial crisis isn't over yet. The global economic outlook remains uncertain, Hong Kong Monetary Authority Chief Executive Joseph Yam said Thursday.
"I have an uncomfortable feeling that the factors underlying that uncertainty have not been adequately reflected in the performance of financial markets," Yam said in his weekly column.
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