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Thursday, February 5, 2009

[roeoz] Economists are the forgotten guilty men

Posted by AccGURU

"In the search for the "guilty men" responsible for the near-collapse
of the global economy, one obvious group of scapegoats has escaped
blame: the economists.

By "economists" I do not mean the talking heads (myself included)
employed by the media and financial institutions to "explain",
usually after the event, why share prices or currencies have gone up
or down. Nor do I mean the forecasters whose computers churn out
scientific-looking numbers about what will happen to growth or
inflation, but whose figures are revised so drastically whenever
something "unexpected" happens - as it always does - that their
forecasts are really nothing more than backward-looking descriptions
of recent events.

What I mean by "economists" are the academic theorists who win Nobel
prizes, or dream of winning them.

To see why these seemingly obscure academics deserve to be hauled out
of their ivory towers and put in the dock of public opinion, consider
why the bankers, politicians, accountants and regulators behaved in
the egregious ways that they have. It may be true that all bankers
are greedy, all politicians venal, all regulators blind and all
accountants stupid. But such personal failings do not explain their
behaviour in the past few years. After all, bankers do not like
losing money and politicians do not like losing power. All
these "guilty men" behaved as they did because they thought it made

And why did these greedy bankers and stupid politicians hold beliefs
that, in hindsight, seem so ludicrous and self-destructive? Why, for
example, did they think it reasonable for a bank with just $1 billion
of capital to borrow an extra $99 billion and then buy $100 billion
of speculative investments?

The answer was beautifully expressed two generations ago by John
Maynard Keynes: "Practical men, who believe themselves to be quite
exempt from any intellectual influence, are usually the slaves of
some defunct economist. Madmen in authority, who hear voices in the
air, are distilling their frenzy from some academic scribbler of a
few years back."...