Many people did foresee the crisis. However, the exact form that it would take and the timing of its onset and ferocity were foreseen by nobody. What matters in such circumstances is not just to predict the nature of the problem but also its timing. And there is also finding the will to act and being sure that authorities have as part of their powers the right instruments to bring to bear on the problem.

Please note, the Queen did not ask why macro economists didn’t see the Great Financial Crisis beginning on August 9, 2007.  Nor did she ask why macro economists did not see how the crisis would explode across the opacity fault line in the global financial system from subprime securities to the special purpose vehicles investing in these securities to the banks who originated and held some of these securities.  Nor did she ask why the macro economists marginalized the handful of economists (like William White and Rajan) who warned trouble was brewing in the subprime mortgage sector of the economy.

She asked why macro economists as a group did not see an elevated risk of a financial crisis.

By the way, I was featured in a 2007 Bloomberg article discussing what it would take to prevent the acute phase of the crisis.  The focus of the article was how the tools necessary to stop the acute phase of the financial crisis were readily available.

The Queen’s Question also raised another critical issue.  By asking why the macro economists hadn’t seen the crisis coming, she also was asking why there was any reason to think they knew how to respond to the crisis.

This important point was missed by the macro economists.  Without taking a nano second to think about why they missed seeing the financial crisis coming and marginalized the few economists who did, they raced to tell us they and they alone were the experts in crafting the policies to respond to a financial crisis.  They raced to tell us the recovery from a financial crisis takes a long time.  They raced to tell us the actions we had to take to prevent a second Great Depression included bailing out the banks, pursuing low interest rate policies, embracing quantitative easing and increasing fiscal spending.  They raced to tell us preventing another recurrence of the financial crisis required macro economists to have responsibility for macro prudential regulations.  They raced to tell us the response to the financial crisis could have been different if only banks had higher capital requirements.

Of course, the question of why anyone would think macro economists who excluded banks from their models knew what they were doing when it came to a financial crisis involving banks wasn’t missed by non-macro economists.  We expected macro economists would demonstrate they didn’t know what they were doing and they did not disappoint us.  First, we had the spreadsheet error in the study telling us it should take a long time to recover (this was the smallest of the errors in the study; a much larger error was not understanding the financial system was designed to support the Swedish Model for responding to a crisis and the speed of the ensuing recovery).  Second, we had the simple fact we weren’t facing a second Great Depression (Paul Krugman found it was the automatic stabilizers that kicked in and prevented this happening).  Third, their monetary policies undermined capitalism by distorting pricing in the capital markets (this drove inequality).

I could go on with this list, but readers get the point despite their hubris the macro economists’ recommendations weren’t helpful.  In fact, history will make the case their suggestions and the way they drowned out the policy recommendations of anyone who wasn’t a PhD Economist was actually harmful and made the Great Financial Crisis far more damaging to the real economy than it should have been.

By the way, from the fall of 2008 on, I have said the macro economists’ policy recommendations would prove ineffective at best.  This wasn’t brilliance on my part.  I understood their policy recommendations didn’t use the tools that would have prevented the acute phase of the financial crisis in the first place.  I also understood they didn’t know the first thing about banks or the financial system.

Almost ten years have passed since the Queen asked her question and macro economics is no closer to being able to see a financial crisis coming than it was then.  This is not surprising.  The fact is this ongoing failure to understand financial crises was confirmed in April 2018 when the Financial Times’ Martin Wolf observed:

Macroeconomics needs to grapple with three linked questions. First, what causes financial crises? Second, what policies would best reduce the risks of such crises? Third, what should the policy response be to crises once they have happened?

This is true despite macro economists telling the Queen:

If macro economists are so “bright”, how come they haven’t been able to answer Mr. Wolf’s three questions in a decade?

I was able to answer these questions using a physical model of a security comprised of plastic and paper bags.  This physical model demonstrates the important features of transparency and Wall Street phishing for fools with opaque securities.  The physical model directly maps to the quadrants in the Information Matrix.  And these quadrants directly map to how the global financial system is designed, what causes financial crises, how to reduce the risk of such crises and how to respond to crises once they happen.

If I was able to answer all these questions in an early 2009 speech, these “bright” macro economists should have been able to answer Mr. Wolf’s questions in a decade.  The fact they haven’t surely says something about macro economists.

As for the rest of the economics profession, I am sorry to tell you the performance of your macro economic peers has discredited your work.  Prior to the crisis, non-economists trusted professional economists with PhDs to do their analysis correctly.  Part of doing the analysis correctly involves making the right assumptions.  In their letter to the Queen, the macro economists said they didn’t make the right assumptions due to a “failure of the collective imagination”.  How does any non-economist know your work doesn’t suffer from this same flaw?

So until your macro brethren can get their act together and demonstrate they can answer Mr. Wolf’s questions, you and they should be begging forgiveness from the non-economists for undermining the global economy. [You might also consider asking your macro brethren why after a decade they are still unwilling to listen to the ideas of non-economists, but of course that would require a level of humility the Economics profession does not appear to possess.]