New FT economics blog: “The Money Supply”

The FT website now carries a new group blog on economics: the link is here.

Economists and the Crisis

As has been tracked by several previous posts on this blog, there is by now a considerable debate on what the crisis teaches us about the role of economists.

One dimension of this debate has focused on the failure by the economics profession to predict the onset of the crisis.  A second quasi-related dimension relates to the failure to sufficiently appreciate the instability of the pre-crisis financial system.  To some, these failures suggest that those economists who did not accurately predict the crisis should have no role in resolving the crisis and constructing the new post-crisis economic system.    This debate is playing out at the global level and also in relation to the domestic situation.

These are all big issues and I do not attempt to provide a comprehensive set of answers here. Nevertheless, it may be useful to make a few points.  I also mainly focus on the role of academic/research economists and the field of macroeconomics.

How Did Economists Get It So Wrong?

Paul Krugman writes on this topic in a long article for the NYT magazine: you can read it here.

Distributional Characteristics in more detail

A few days ago I gave a ranking of broad aggregates of goods by their distributional characteristic.  As promised here is a link to a more detailed discussion of this issue with an explanation of the methodology etc

Learning from the Financial Crisis: Globally and Locally

Colm McCarthy’s suggestion that an inquiry into what went wrong is gaining some level of support in political circles.  While there is plenty of material to digest in terms of what went wrong locally, there is also a lot of interest in understanding what went wrong in the international financial system.  Part of the debate concerns the role of economists, especially in terms of forecasting such crises.

A reader recommends this blog post which is critical of mainstream macroeconomic models.  Of course, Willem Buiter of the LSE issued a notorious critique a while back.

More recently,  a group associated with the British Academy wrote a letter to the Queen to answer her question to Luis Garicano of the LSE as to “if these things are so large, how come everyone missed it?”, while Robert Lucas defended mainstream macroeconomics in the Economist magazine in this article.

An important dimension of this debate is the relative roles of economists in policy organisations, the financial sector and academia in assessing the risks of a crisis and speaking out on these risks. While some of the debate has focused on the role of academic economists, it is maybe more difficult to evaluate from the outside the performance of economists in policy organisations in providing risk assessment, since their advice is often confidential.   In this regard,  the external evaluations of the performance of the IMF in previous international crises sets an interesting precedent, with the Independent Evaluation Office now playing this role on a regular basis.

In relation to Ireland,  the testimony of Kevin Cardiff of the Department of Finance at a recent Oireachtas Committee hearing is quite interesting in explaining the evolution of the thinking of the Department in the run up to the crisis.  You can read the transcript here.