It has taken 40 years, but we have finally arrived at the end of the myth of Economists as technocratic experts.  What the Great Financial Crisis and the policies adopted to respond to it have shown is Astrologers have more technocratic expertise.

Regular readers recall there were only a handful out of the 1,000s of PhD Economists who remotely suggested before August 9, 2007 a financial crisis was possible.  Of this handful, only one remotely suggested the policy response to both the financial crisis and the 2008 Banking Crash was fundamentally flawed.  The remainder of the handful of Economists have offered up any number of excuses for why over the last decade their favored policy response hasn’t resulted in a self-sustaining recovery.

This isn’t a track record that promotes confidence in the idea PhD Economists are technocratic experts.

Of course, it shouldn’t be a surprise that despite their PhDs Economists are not technocratic experts.  A very highly regarded PhD Economist told us this in October 2008.  Anna Schwartz observed that fiscal stimulus and monetary accommodation were not the right policies for addressing an opacity problem in the financial system.

“The Fed,” she argues, “has gone about as if the problem is a shortage of liquidity. That is not the basic problem. The basic problem for the markets is that [uncertainty] that the balance sheets of financial firms are credible.”

So even though the Fed has flooded the credit markets with cash, spreads haven’t budged because banks don’t know who is still solvent and who is not. This uncertainty, says Ms. Schwartz, is “the basic problem in the credit market. Lending freezes up when lenders are uncertain that would-be borrowers have the resources to repay them. So to assume that the whole problem is inadequate liquidity bypasses the real issue.”

So that even PhD Economists wouldn’t miss her point they were dealing with an opacity crisis, she added

Today, the banks have a problem on the asset side of their ledgers — “all these exotic securities that the market does not know how to value.” “Why are they ‘toxic’?” Ms. Schwartz asks. “They’re toxic because you cannot sell them, you don’t know what they’re worth, your balance sheet is not credible and the whole market freezes up. We don’t know whom to lend to because we don’t know who is sound.”

 

Investors know how to value transparent securities that provide them with the disclosure necessary so they can know what they own.  What investors cannot value is an opaque security.

This is one of those facts about investors a technocratic expert in the economy and our financial system should know.  However, it is clear PhD Economists don’t know this very, very, very basic fact (not surprising as they don’t have to take courses focusing on why the financial system is designed the way it is and what problems this solves).

With absolutely no understanding of the problem they were dealing with, PhD Economists have pursued extreme monetary polices in combination with fiscal stimulus. Of course, this hasn’t solved the opacity problem that is undermining the real economy.  It has managed to make the situation worse.  So much worse that even central bankers are beginning to realize their policies might have been a gigantic mistake.

“This broad package of measures, in particular restarting the APP, is disproportionate to the present economic conditions, and there are sound reasons to doubt its effectiveness. The euro area economy is running at full capacity and wages are increasing. Financing conditions for consumers, businesses and governments are highly accommodative and provide no impediment to credit supply, consumption or investment. Meanwhile, there are increasing signs of scarcity of low-risk assets, distorted pricing in financial markets and excessive risk-seeking behaviour in the housing markets.”

Shorter:  their policies broke the financial markets.

Clearly, PhD Economists are unlike doctors.  Doctors take an oath to do no harm.  The broken financial markets stand as testament to the fact PhD Economists don’t take a similar oath.  What kind of expert would break the mechanism by which capital is allocated across the global economy?  No one with even a very, very, very limited amount of expertise would do this.

Given their actions, it is safe to conclude PhD Economists are not technocratic experts.

So how did PhD Economists get to be thought of as experts?  It was useful for the 1% and bankers.  They used the PhD Economists to provide a narrative over the last 40 years that was very friendly to the 1% and the bankers.