Since the acute phase of the Great Financial Crisis erupted, we have been treated to macro economists confidently putting forth their policy recommendations for how to respond to the crisis and how to regulate the financial system.

When asked why we should follow their recommendations, macro economists say we should because they are the experts.  After all, they have PhDs, teach at prestigious universities and are really good at creating/manipulating mathematical models.

When asked about the fact the macro economics profession did not see the financial crisis coming, macro economists say that is not true as there were a handful of economists who did see the crisis coming.  Of course, these handful of economists were marginalized by the bulk of the profession prior to the crisis starting.

When asked about the fact the economics profession doesn’t have a theory of why financial crises occur or where they come from, macro economists say this is not true and go look at the work of Diamond/Dyvbig.  What those economists had to say is sunspots trigger financial crises (they actually had more to say and I debunk the rest of it here).

Sunspots?

Economist Lars Syll offers his opinion of the idea sunspots drive financial crises:

I would say the recent economic and financial crises and the fact that mainstream economics has had next to nothing to contribute in understanding them, shows that mainstream economics is a degenerative research program in dire need of replacement.

It is hard to argue with his conclusion.

A non-economist like myself can see the economics profession focused on the information asymmetry quadrants of the Information Matrix.  They totally ignored the Blind Betting quadrant and with it the explanation of where financial crises come from and how to end them.  When you realize the driver of the financial crisis is opacity which prevents anyone from valuing the securities in the Blind Betting quadrant, you know what policies to adopt and what policies to avoid.

Of course, ignorance of the Blind Betting quadrant did not stop macro economists from confidently offering up their favored policy recommendations.

When asked about the fact the economics profession doesn’t have a theory that supports adoption of monetary policies that violate Walter Bagehot and John Maynard Keynes’ 2% minimum, macro economists ask for evidence they said 2% was a minimum.  When it is shown to them, they defend zero interest rate policies and quantitative easing claiming they were and are a great success.  Recently, the BIS found neither has had a positive impact outside of the brief period during which they were introduced and in fact these policies are currently having a negative impact (my interpretation, on balance, Bagehot/Keynes were right and these policies should never have been pursued).

Then there was the fundamentally flawed work offered up by Harvard economist Ken Rogoff.  Before the error in his Excel spreadsheet was uncovered, Mr. Rogoff told everyone public debt over 90% of GDP would constrain economic growth and this should be factored into how the financial crisis was responded to.  Oops.

The fact these policy recommendations were knowably wrong before being adopted is troubling.  There has been no professional downside to any of the economists who supported these flawed policies.  In fact, they have all made out very well financially (simply look at Rogoff and Bernanke earnings from sale of their books).  Unfortunately, the same cannot be said for the real economy.

Andrew Baker highlights the reality of most macro economists’ fiscal and monetary policy recommendations.