The Economics profession is still without an explanation for why the Great Financial Crisis occurred that doesn’t leave out inconvenient facts. Specifically, the inconvenient fact the financial crisis occurred along the opacity fault line in the global financial system and not in the transparent parts of the system.  The Economics Profession also does not know what are the sufficient conditions for financial instability.  Specifically, opacity is the necessary condition for a financial crisis.  Why a decade after the acute phase of the crisis are either of these still true?

They shouldn’t be true.

Since the beginning of the acute phase of the crisis, I have explained to too many Economists to count why the crisis occurred and why it spread the way it did across the global financial system.

My explanation isn’t complicated.  Heck, even a six-year old can understand transparency and opacity when I use a physical securities model involving a clear plastic bag and a paper bag.  My explanation doesn’t leave out any inconvenient facts.  I am able to do this because I use the Information Matrix.  It shows how our financial system is designed and why opacity is the necessary condition for a financial crisis to occur.

So why hasn’t the Economics profession adopted my explanation or at least a variation using the Information Matrix?  After all the Information Matrix is the foundation for Information Economics and therefore virtually every theory in Economics/Finance.

I can only conclude the Economics profession prefers its choice of ignorance.

This isn’t the first time I have seen a PhD Economist choose ignorance.  In 2009, I met with two PhD Economist professors (one from MIT and the other from Stanford).  They had taken it upon themselves to be the academic champions for higher bank capital requirements.

I told them about my background.  I qualify as an expert in bank capital regulation and management.  Not only was I trained in bank examination, but I worked in the capital management area of a Too Big to Fail bank.  While there, I helped to write what became the Basel I capital requirements.

Based on this expertise, I explained there were two reasons higher bank capital requirements were for all intents and purposes irrelevant.  First, bank capital is an easily manipulated, meaningless accounting construct.  Bank capital is so easy to manipulate even the regulators get in on the act (think ‘extend and pretend’ on loans borrowers cannot repay).  Second, capital requirements are regulations.  Banks understand how to deal with their captive regulators to get the requirements they want.

Effectively, the two PhD Economists brought less than nothing to the discussion about bank capital other than the reputation of their employers.  A reputation that assured they would have access to many conferences to talk at and would be quoted frequently by the mainstream media.  A decade later the two PhD Economists have moved on to other issues.

As for bank capital regulations, the Committee to Save the Banks used them as a shield to prevent banks recognizing the losses on their bad debt exposures.  By protecting the creditors, the Committee undermined the real economy and the social contract while paving the way for the rise of populism (Trump/Brexit).

The Economics profession’s choice of ignorance wouldn’t be a problem if we were talking about an academic discipline with no impact.  Unfortunately, the profession has a sizable impact through its influence on monetary and fiscal policies.

Despite the lack of an explanation for the Great Financial Crisis, the profession championed many crisis related monetary and fiscal policies.  It could be argued the vast majority of these policies made the situation worse (after all, when you don’t know what you are doing it would be pure luck to pursue the right policies).  In fact, the BIS appears to be in the process of confirming exactly this argument.  It recently called into question quantitative easing (QE).

I am fascinated by the fact a lack of an explanation has not completely discredited the Economics profession.  If you want to see a macroeconomist get upset, simply ask the question the Queen of England asked:  why did they not see the financial crisis coming.  Thin-skinned macroeconomists appear to think repeating in indignant tones a BS-laden response a million times makes their response true.  Unfortunately, the listener knows the response isn’t true as the macroeconomists still don’t have a coherent explanation for why the crisis occurred the way it did.

It is also clear there are no sanctions on the Economics profession when it comes to opening one’s mouth and offering an opinion when an economist doesn’t know what the economist is talking about.  If there were sanctions, the profession would still be silent on the Great Financial Crisis.  After all, it still doesn’t have a narrative that includes all the facts about the crisis and hence, any statement an economist makes is highly likely to be wrong.

In many ways, I understand the profession’s preference for ignorance.  How can we hold them responsible for what they say when they don’t know what they are talking about?

However, why exactly anyone wants to hear from someone who has chosen ignorance is a bit of a mystery.