Retrenching on economists

Keith Hudson

Reflecting this morning about what I wrote yesterday about economists, I rather think now that it was unfair to condemn them for not being able to have anticipated the momentous invisible events which almost brought . . . the Western world to total financial paralysis during late September 2008 — and would have done so had not governments suddenly ‘invented’ lots of new money during that fateful week-end so that banks’ ATMs could continue to dispense cash as usual on the Monday morning.  In this regard, Ghassan Karam’s comment was quite justified.  Even if economists were given years of training in evolutionary biology they still wouldn’t have been able to predict what happened.

So who or what was to blame for the credit crunch?   It wasn’t exogenous — a term fondly used by economists! — such as being struck by an asteroid.  It was entirely endogenous — something within the financial system itself.  The problem here is that there is so much money in so many different places and moving at different velocities between them that we never know about the precise movements of money until years afterwards when all the data is gathered in.  Even then, it may take a great many more years still until a consensus arises as to what exactly were the important factors involved that led to a financial catastrophe.

There’ll always be catastrophes whenever money is concerned, but I can think of two ways in which these can be minimised in future years.  I will discuss these later this morning when I have written my next  blog concerning the latest political scandal which has suddenly hit us today.

One thought on “Retrenching on economists

  1. The problem was political. During the Clinton years the Glass-Steagall act was repealed. This act disallowed banks from engaging in investments other than regular banking (like derivatives). Clinton and then Treas Secty Rubin said the banks should be free to compete at all levels. There were other problems but Clinton “got the ball rolling”…..and set a tone.

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