The Economic profession’s and the financial regulatory community’s illusion of technocratic competence is like Dracula.  It refuses to die.

Wouldn’t you have expected the acute phase of the Great Financial Crisis to have put a stake through the heart of this illusion?

First, there was the failure by the Economics profession to see the acute phase approaching.  When asked by the Queen of England in late 2008 why they hadn’t seen the crisis coming, the profession responded despite all their technical brilliance they didn’t think it could occur.

Second, there was the financial regulatory community that literally let all of the major global banks fail under its watch.  Who could have known the technocratically set risk weights used to calculate bank regulatory capital ratios allowed banks to take on larger exposures to risky assets than they could afford to lose?

Despite this dismal performance we believe in letting people have a second chance.  They punted this chance into the tall grass too.

First, the Economics profession had spent the 40 years preceding the Great Financial Crisis carefully removing the financial system and the causes of financial crises from their models.  This was necessary to make their models mathematically solvable.  Unfortunately, when the crisis hit this meant their models were useless as guides to what should be done.

So, did the Economics profession shut up?  No.  Without bothering to pause and try to understand the cause of the Great Financial Crisis, it proceeded to argue for its favored solutions.  A decade later, the profession still does not know what caused the crisis or have a narrative that doesn’t omit a massive amount of inconvenient facts.

What the profession does know is the policy responses it argued for didn’t actually produce the favorable results they expected.  This isn’t surprising.  When you don’t know why something is happening, the only way random responses are going to be effective is luck.

Perhaps the financial regulatory community performed better.  Unfortunately, no.  They too managed to take a bad situation and make it worse.  They cemented in place future taxpayer funded bailouts of the Too Big to Fail banks they oversee.

They did this by clinging to the myth they could prevent a financial crisis.  This myth isn’t even true in theory.  In reality, this myth is dangerous to the financial health of the taxpayers.

Consider for a moment bank regulators do not approve or disapprove of any exposure a bank puts on or off its balance sheet until after the exposure is put on or off the bank’s balance sheet.  This leaves the bank regulators trying to control the risk of these exposures using 100s of regulations.  Naturally, the result is the banks all begin to pursue the same strategy in managing their exposures.

When banks are all pursuing the same strategy for managing their exposures, the financial system becomes dramatically more fragile.  If something goes wrong with one part of the strategy, everyone has a problem.

Yet the illusion of technocratic competence for either Economists or the financial regulatory community persists to this day.  Amazing.