In Transparency Games, I get to discuss how the economics profession reacted to the Queen of England asking why, if everything was so wonderful, did the economics profession not see the financial crisis coming.

The Queen’s question is marvelous as it effectively also asks why, if the economics profession didn’t see the financial crisis coming, we should think the economics profession has anything worthwhile to say about how to recover from the financial crisis.

Not surprisingly, the economics profession treated her question as criticism.  Rather than say the question was reasonable given what had happened, the profession expressed surprise at her audacity to question the high lords of economics and why they might have anything valuable to contribute to the conversation on how to recover from the financial crisis.

Next, the economics profession tried to say it had predicted the financial crisis.  As confirmation, they pointed to Rajan, White and Borio.  What the economics profession didn’t mention is that when these individuals suggested there might be a problem, the economics profession went out of its way to publicly say they were wrong.

Finally, the economics profession simply reframed her question. Specifically, they restated her question and asserted what she really wanted to know was why didn’t the economics profession predict the financial crisis would start on September 15, 2008.  By restating the question in this way, the economics profession could point out it is unreasonable to expect anyone to predict the exact date a future event like a financial crisis will occur.

Of course, this was not the question the Queen asked.

In Transparency Games, I discuss the reason the economics profession failed to “predict” the financial crisis is it lost sight of the fact the proper functioning of the invisible hand of the market requires transparency.  Both buyer and seller must have access to all the useful, relevant information in a timely manner so they know what they are buying and selling.  If this is not true, then the invisible hand of the market doesn’t work.

Unfortunately, by losing sight of the need for transparency, the high lords of economics also missed the opportunity to make a positive contribution to responding to the financial crisis.

At this point in time, it is difficult to say whether the damage caused by the recommendations from and policies pursued by economists trained and/or practicing in Cambridge, both in Massachusetts and the UK, exceeds the damage caused by the bankers using opacity to loot the banks and then the taxpayers.