Financial crisis - who to blame

Since the beginning of the global financial crises in 2007, there have occurred numerous economic and financial crises around the globe, plunging often prosperous nations into hardship and even near bankruptcy. These crises, typically generated by overlending by the financial sector and crashing housing bubbles, are often blamed upon two parties - governments and banks - with considerable justification.


There is, however, a third villain that bears primary responsibility for these disasters. While politicians, government bureaucrats, financiers, bankers and the real estate lobby have come under withering assault in the eyes of enraged publics, the economics profession has largely escaped the fury. Given the importance of this profession in structuring economic and financial policy, the lack of attention and accountability poses an interesting question as to why this is.


Governments rely upon the advice of economists to implement policies that will advance economies in the conventional terms of growth, stability and productivity, on matters from the important to the mundane. It is these experts, with a wealth of experience, who have the greatest influence on public policy.


It should be predictable that if a particular policy was successfully implemented and incurred the expected outcomes, then the economists in charge will have their careers advanced. If the opposite occurs, then it is expected that the economists responsible should be subject to severe penalties.


Unfortunately, recent outcomes have ensured the former, but not the latter. For instance, the largest bubbles in US history – dot-com and housing – were followed by sharp economic downturns. Both times, the overwhelming majority of economists missed and/or denied the existence of the bubbles.


The aftermath of the tech bubble was a recession, and the collapse of the housing bubble could well have resulted in another Great Depression if not for the record-breaking bailout of the financial system and continued deficit spending.


According to conventional economic theory that the majority of economists advocate (neoclassical economics), these assets bubbles should not be forming. Supposedly, the more market-oriented an economy becomes, through deregulation and privatisation, the more efficient it becomes at pricing assets, resources, goods, services and labor. Thus, there should be little to no bubble activity within a freer market economy. History, however, has revealed the opposite.


One would think that given the wide gulf between theory and reality, the economics profession should have performed some sort of self-assessment. Instead, they seem to have fervently congratulated one another for having saved economies.


There is, of course, some truth to this assertion: economies would likely have been worse off had the government not intervened and allowed the banks to collapse. Clearly, this is not the point being made – the point is that if economists were not asleep at the wheel, economies would not have been driven into a brick wall, requiring bailouts in the first place.


It is outrageous those economists in important policy-making and influential positions even keep their jobs. What comprises these positions is obvious: senior economists within the central bank, treasury, the financial regulator, commercial lenders, investment banks, and supranational organizations.


If a taxi driver was to crash while drunk driving, injuring passengers, they would be fired and can be charged by the authorities. A nurse that continually gives patients the wrong medicines, resulting in suffering or even death, will lose their job in short order. A cook that leaves the stove on after finishing work, burning down the restaurant, will predictably lose their job.


On the other hand, economists who are complicit in the collapse of multi-billion dollar corporations and trillion-dollar economies are still employed, often working in the highest levels of government, industry and academia, while unemployment, bankruptcies, and general misery blows out of all proportion among the public.


Given the extraordinary level of incompetence shown by these economists, one may ask why they are still employed. Surely the economics profession should be treated similarly to other professions: incompetence on the job should result in disciplinary measures and penalties.

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