When the Queen of England asked Economists (including finance professors too) in 2008 why they had failed to see the financial crisis coming, they responded with a self-serving lie.  The Bank of England’s Sujit Kapadia phrased this lie as:

financial crises were a bit like earthquakes and flu pandemics in being rare and difficult to predict.

The reality is no one expects Economists to predict the exact date a financial crisis will start.  What is expected of them is they are aware of the necessary conditions for a financial crisis to occur and that they will raise an alarm when these conditions are present.

Robert Skidelsky pointed out the problem with the self-serving lie told to the Queen is Economists don’t even know what are the necessary conditions for a financial crisis to occur:

As OECD Chief of Staff Gabriela Ramos said, “The crisis struck at the core of tightly held economic ideas, modules and policy”. I would go further. Crisis struck because of tightly held economic ideas, models and policies. The policy models used pre- 2008 were wrong or seriously flawed; this contributed to the collapse, chiefly by omission.

So what was omitted?

What is omitted from Economics and Finance models is the Blind Betting quadrant of the Information Matrix.  All of their models assume transparency.  The driver of the financial crisis was opacity.

Economic and Finance professors remind me of the people choosing which theatre to attend in the cartoon below.

They are looking for a reassuring lie as the inconvenient truth shows the policies they advocated in response to the acute phase of the financial crisis in 2008 did not address the underlying cause and in fact made the impact of the financial crisis worse for the real economy.

They are looking for a reassuring lie as the inconvenient truth is even a decade after the acute phase of the financial crisis the Economics profession does not have a viable theory or model describing financial crises.  What the profession turns to is a model I have debunked numerous times.  It cites multiple triggers for a financial crisis including sunspots.  The existence of multiple triggers suggests Economists should have looked harder as there is a common element that makes each of these triggers possible.  The common element is opacity.

They are looking for a reassuring lie as the inconvenient truth is they missed the Blind Betting quadrant of the Information Matrix.  There are literally thousands of articles on perfect information and information asymmetry.  The Blind Betting quadrant hasn’t been discovered yet by the Economics profession.

Information Matrix

	Does Seller Know What They Are Selling?
Does Buyer Know What They are Buying?		Yes	No
	Yes	Perfect Information	Antique Dealer Problem
	No	Lemon Problem	Blind Betting

If you haven’t discovered the Blind Betting quadrant, then you don’t understand how the global financial system was redesigned in the 1930s.  The FDR Administration introduced the idea of transparency and made it the government’s responsibility to ensure all public securities were accompanied by the disclosure necessary so investors could know what they own.

Without this understanding, you missed the significance of the Reagan Administration making Wall Street the SEC’s client.  This would lead to Wall Street capturing the process by which disclosure is set.  After all, Wall Street has an incentive to capture this process because it makes more money selling opaque securities than it does selling transparent securities.

If you are an Economist, what you do instead of discovering the Blind Betting quadrant?  You think up and test ideas like the Efficient Market Hypothesis.  Under EMH, opaque securities don’t exist.  EMH assumes every security has insiders who trade on inside information.  As a result, this information is suppose to be reflected in the price of these securities. You then test this hypothesis where the highest concentration of transparent securities are (the stock market) and conclude this hypothesis must be true.

Of course, this completely ignores securities like mortgage-backed deals that are both opaque and have no insiders.  It turns out Wall Street is good at selling these securities where the valuation of the security is based on a story Wall Street tells that investors are unable to verify.  It also turns out these opaque securities which the Economics profession assumes don’t exist were at the heart of the global financial crisis.