Wednesday, August 05, 2009

The Queen Asked: Why Did Economists Fail to Predict the Crisis?

British economists gave her a three page answer. The Guardian wants to see if its readers can answer it in three sentences. Here's my attempt:

Predictable financial crises do not occur because it is profitable for private businesses to act on any information that may lead to a financial crises. Whether it's recognizing there is a surplus of housing or that borrowers and lenders are overburdened, the lack of information is what caused today's problems. Governments can remove the uncertainty they bring and economists can improve their ability to predict market crises, but then again if they did prevent anything you would never notice.


  1. The way I'm reading your answer is "an unpredicted crisis occurred because it was unpredicted - if it was predicted, you wouldn't know about it."

    That's a good point but hardly an answer to the question. Or maybe I misunderstand. I was expecting you to point out that your buddy Peter Schiff did in fact predict the crisis - but then again when you constantly predict doom I don't know if you can be called a prophet when it happens.

  2. This was kind of a wink and nod answer. I guess I was trying to say that market actors regularly see imbalances and correct them (for selfish reasons) all the time. So they missed one in two decades. When you think about the complexity of the global economy, that's not too bad.

  3. By some measures they missed the biggest one in almost 80 years. That's pretty bad.

  4. Hey look, someone smart agrees with me:

    First, Your Majesty, economists did something even better than predict the crisis. We correctly predicted that we would not be able to predict it.


You are the reason why I do not write privately. I would love to hear your thoughts, whether you agree or not.