Nothing could have predicted the financial crisis more than economics… the question is where were the economists?

Sir, Martin Sandbu writes: “The economics profession lost a lot of lustre when its practitioners failed, with only a few exceptions, to foresee the global financial crisis of 2008… it also added to the credibility of those who have long argued that economics is a deeply flawed discipline, built on a misrepresentation of people as selfish beings and ideologically constituted to conclude in favour of free-market policies.” “New model economics”, October 31.

That must be because Mr Sandbu is unaware of what happened. Bank regulators allowed banks to leverage much too high on assets that were perceived as safe; and so banks made too high risk adjusted returns on equity holding assets perceived or decreed as safe; and that of course caused, as any economic 101 course teaches, banks to create too large and dangerous exposures to what is perceived as safe… and for the economy equally dangerous scarce exposures to what is perceived or decreed as risky.

And so the problem had nothing to do with economics, it had all to do with economist not looking at regulations…. perhaps they thought that handwork was unworthy of their fine minds.

@PerKurowski ©