In the world of PhD Economists, it is sudden exogenous “shocks” that cause a financial crisis.  What does this mean?

To find out, I had to look up the definition of exogenous.  When used as an adjective, exogenous means “relating to or developing from external factors”.  So let me substitute this definition into the PhD Economists’ statement:  it is sudden shocks related to external factors that cause a financial crisis.

Of course, if you are like me, you wonder what are these external factors.  What would be an external factor to the global financial system?

It is at this point it occurs an external factor doesn’t refer to the global financial system, but rather the models used by the PhD Economists.  The causes of a financial crisis are external to their models.  This explanation explains why PhD Economists can not predict a financial crisis.

Of course, this raises more questions.  If the cause of the financial crisis is not internal to the PhD Economists’ models, why should anyone trust their model-driven policy recommendations?  Other than pure luck, why should anyone think their model-driven policy recommendations will actually address the underlying causes of the financial crisis?

The answer is policymakers shouldn’t.