HOW WE GOT HERE . . .

I think by now most of us realize that the market players involved in creating our financial mess had a stake in the game, and weren't about to blow the whistle on their financial Pot of Gold. We also understand that government agencies were being hacked and bullied into deregulation and lax oversight by a market mentality that had overtaken government bureaucracies. But have you ever wondered why so many experts in the field of economics didn't see the financial train wreck coming? Wonder no more.

The following is from University of Oregon economist Marc Thoma's blog, the Economist's View:

. . . it's becoming a lot easier to understand how financial economists missed the developing bubble and the effect it would have on the macroeconomy. We specialize mightily in academic economics, people will work on very narrow questions for their entire careers and become world class experts on that question, but they tend to forget what they learned in other areas over time, and they can't possibly keep up with developments outside their areas of specialization. So we rely and depend upon the expertise of others to inform us about areas in which we don't normally work.

One thing I've learned from the current episode is not to automatically trust that the most well-known economists in the field have done due diligence before speaking out on an issue, even when that issue is of great public importance, or even to trust that they've thought very hard about the problems they are speaking to. I used to think that, for the most part, the name brands in the field would live up to their reputations, that they would think hard about problems before speaking out in public, that they would provide clarity and insight, but they haven't.

In fact, in many cases they have undermined their reputations and confused the issues. People have been deferential in the past, myself included, and these people have been given authority in the public discourse - even when they are demonstrably wrong their arguments show up in the press as a "he said, she said" presentation. But, unfortunately for the economics profession and for the public generally, the so called best and brightest among us have not lived up to the responsibilities that come with the prominent positions that they hold.

I agree. The experts in academia - and not just economists - became deferential to the experts and politicos in the public square, expecting others to pick up the slack (the Fourth Estate's to blame as well, but that's another post). There are reasons why this happened. It begins with living in the "Dark Ages" of macroeconomics (read Thoma's blog), but deference is the key. My next post will address this point.

And it nails Milton Friedman to the wall.

- Mark