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The Failure of Academic and Professional Economists
Economic Predictions from the World's Top Economists - Wall Street Most Influencial Economists

Research Questions:

  • Why did the world's top economists fail to predict the financial crisis? Others who missed the crisis, include government leaders, award-winning scientists, market analysts and investors.
  • Was the crisis predictable or was it a Black Swan (unpredictable) event?
  • Are government policy makers competent enough to manage the nation's financial freedom and security?
  • Are economists and their policies helping or hurting our economic growth?
  • Do we need to re-define the education of economic science and the role that economists play in our financial markets, government policies and business regulations?

Who Predicted the Financial Crisis | Housing Bubble| Economic Crisis | Debt Crisis | Currency Crisis

Research Findings:

The most current views on the subject are illustrated by the following news media quotes and research conclusions.

Media Statement I

In an interview (dated Jan 9, 2009) with the Associated Press’s Deb Reichmann, Vice President Cheney repeatedly insisted that no one anticipated the looming U.S. financial crisis. “I don’t think anybody saw it coming,” he said.

REICHMANN: But why, why didn’t you see such a huge downfall in the economy coming?
CHENEY: I suppose because nobody anywhere was smart enough to figure that out. - (Source: Think Progress)

Media Statement II

In an article on Seeking Alpha (July 7, 2009), Cullen Roche, an opinion leader, asks "Why did economist fail to predict the crisis?" He writes: In hindsight, it seems like the crisis was so obvious. The now infamous credit market debt to GDP chart, the parabolic Case/Shiller housing chart, the 40:1 leverage ratios, the subprime problems, etc. Weren't they telltale signs that something was profoundly wrong with the economy? Perhaps not, but it's still astounding that we can count the "experts" who actually predicted the crisis on two hands. And many are even skeptical of this small sampling of prescient economists and analysts. Statistically speaking you could easily make the argument that most of these "experts" who got it right were anomalies or lucky. So why were so few investors prepared for the declines in the markets?  (Source: Seeking Alpha)

Who Predicted the Financial Crisis | Housing Bubble| Economic Crisis | Debt Crisis | Currency Crisis

Research Conclusions:

Financial Crisis Inquiry Commission

In May of 2009, the Financial Crisis Inquiry Commission was created to "examine the causes, domestic and global, of the current financial and economic crisis in the United States." The Commission was established as part of the Fraud Enforcement and Recovery Act (Public Law 111-21) passed by Congress and signed by the President. This independent committee released its conclusion as follows:

 "The Commission concluded that this crisis was avoidable—the result of human actions, inactions, and misjudgments. Warnings were ignored. The greatest tragedy would be to accept the refrain that no one could have seen this coming and thus nothing could have been done. If we accept this notion, it will happen again.” -  (Source: FCIC.GOV )

Our research findings confirm FCIC conclusion.
U.S. Vice President, Dick Cheney was incorrect when he said "I suppose because nobody anywhere was smart enough to figure that out." As you will later see, our research found at least three people, who were smart enough to predict the economic crisis, and more importantly, they issued public warnings, but were ignored by the government, Wall Street and most of the financial media.

Mr. Cullen Roche is partially correct in writing that "statistically" speaking you could easily make the argument that most of these "experts" who got it right were anomalies or lucky. We agree with Mr Roche that statistically the number of experts who predicted the crisis appear to be incredibly small when compared to the rest of the the global financial and academic communities. They do qualify as anomalies. However, our research findings concluded that those few experts who predicted the financial crisis were not lucky and knew exactly what they were talking about. Their conclusions were based on data sets that were ignored or dismissed by the rest of the world.

In order to overcome the luck factor and ensure credibility, we had to eliminate generic predictive statements and we looked for specific statements linking the subprime, the housing bubble and the economic crisis together; This eliminated hundreds of experts; some of them are prominent economists who saw risks of recessions based on other reasons or insiders who saw troubles in housing sector but did not foresee their impact on the financial markets and the economy.

The date of the prediction statements were also taken into consideration. We only considered statements that pre-dated the public warning made on September 18, 2007 by former Federal Reserve Chairman, Alan Greenspan in which he warned about the housing bubble and reversed his long-held position on the issue (Source: PBS ). Unfortunately, even after Greenspan's warning most investors and economists did not take necessary actions to protect their investments or the economy. It is safe to say that the whole world, except for a few were taken by surprise by the banking crash on Wall Street in September of 2008 and the impact it had on the US economy.

Who Predicted the Financial Crisis | Housing Bubble| Economic Crisis | Debt Crisis | Currency Crisis

Conspiracy Theory

Like everyone else, we wondered how could the world's leading economy and its top economists, including the Federal Reserve Chairman, Ben Bernanke - a man who is surrounded by a network of smartest investors, scientists, and think tanks - miss the financial crisis and its impact on the US Economy?

Was it a conspiracy? Contrary to the suggestions by some, we believe that it was not a conspiracy. Our research revealed that government officials and many of the top Wall Street banks did miss the signs and ignore the warnings until it was too late. We also believe that if they foresaw the crisis they would have profited from it financially or by way of reputation.

We found no evidence that the financial crisis was designed by a consorted effort of a group of people who profited from it. On the other hand, we cannot say the same thing about deregulations, the bailout and the protection of the culprits on Wall Street. We believe that these actions were, in fact, a consorted effort by a group of the top investment banks and their lobbyists in Washington. However, that is not the subject of our research and we are confident that more researchers will investigate their actions and reveal the truth about the bailout.  (See section: Who is to blame for the financial crisis?

Who Predicted the Financial Crisis | Housing Bubble| Economic Crisis | Debt Crisis | Currency Crisis

Why did the government, financial institutions, and academia ignore these early warnings?

The following analysis by academic research institutions and economic think tanks were the best answers we found on the subject:

International Institute of Management

According to Med Jones, the president of IIM, and one of three think tanks that warned about the crisis, there are two main reasons that caused mainstream economists and Wall Street media to miss the financial crisis of 2008.

The first is the NIH (Not Invented Here) bias, which is an organizational phenomenon manifested as an unwillingness to adopt an idea because it originates from unknown outsiders. It is a form of social cognition bias that leads to errors in group judgments, such as missing out on new opportunities or risks.

The second reason is a cognition bias known as the Confirmation Bias, which is the tendency to search for, filter, or interpret information in a way that confirms existing preconceptions. The Confirmation Bias is recognized as an individual cognition bias, but when met with NIH bias it appears to develop into a social bias very similar to the Groupthink syndrome. - (Source: CEO Quarterly).

What is surprising is the persistence of this counterproductive psychological and social phenomena in government institutions, the academic community and Wall Street. Many of the investors who lost money because they ignored the previous housing bubble warnings, continue to ignore other warnings about national debt, trade deficit, inflation and currency risks. As for the academia and government, the policy makers rationalize their ideological decisions in ways to continue to ignore the warnings rather than engaging the experts who predicted the crisis in objective policy debates.

Who Predicted the Financial Crisis | Housing Bubble| Economic Crisis | Debt Crisis | Currency Crisis

Research Comment:

It can be seen why those who failed in their jobs to warn their investors and their governments would be quick to discredit those who predicted the financial crisis as lucky. It is difficult on the ego of the person in charge to acknowledge that there are other people who could be that smart. This also demonstrates how rare the intellectual honesty is among the policy makers. We would like to see more academic and research papers that either give credit to these warnings from the experts or present credible arguments against them. If you have access to such papers, please email us at research {at} economicpredictions.org . We will cite your paper and provide a web link to it.

Who Predicted the Financial Crisis | Housing Bubble| Economic Crisis | Debt Crisis | Currency Crisis

Keil Institute for the World Economy

In a paper titled The Financial Crisis and the Systemic Failure of Academic Economics

A group of researches wrote: "While we did not think the crisis could have been predicted, we did severely fault the economics profession for failing to develop and analyze models that, at least, had the possibility of such a failure occurring...The economics profession appears to have been unaware of the long build-up to the current worldwide financial crisis and to have significantly underestimated its dimensions once it started to unfold. In our view, this lack of understanding is due to a misallocation of research efforts in economics. We trace the deeper roots of this failure to the profession’s insistence on constructing models that, by design, disregard the key elements driving outcomes in real-world markets. The economics profession has failed in communicating the limitations, weaknesses, and even dangers of its preferred models to the public. This state of affairs makes clear the need for a major reorientation of focus in the research economists undertake, as well as for the establishment of an ethical code that would ask economists to understand and communicate the limitations and potential misuses of their models." - Researchers - David Colander, Hans Föllmer, Armin Haas, Michael Goldberg, Katarina Juselius, Alan Kirman, Thomas Lux, and Brigitte Sloth - (Source - The Failure of Academic Economics)

Who Predicted the Financial Crisis | Housing Bubble| Economic Crisis | Debt Crisis | Currency Crisis

Research Comment:
The researchers' statement: "While we did not think the crisis could have been predicted" is clearly wrong. Could this be an example of Groupthink bias and NIH bias?

Who Predicted the Financial Crisis | Housing Bubble| Economic Crisis | Debt Crisis | Currency Crisis

Wharton School

On May 13, 2009, a panel of Wharton Economists published a paper titled Why Economists Failed to Predict the Financial Crisis. The paper concluded: 

"There is a long list of professions that failed to see the financial crisis brewing. Wall Street bankers and deal-makers top it, but banking regulators are on it as well, along with the Federal Reserve. Politicians and journalists have shared the blame, as have mortgage lenders and even real estate agents. But what about economists? Of all the experts, weren't they the best equipped to see around the corners and warn of impending disaster? Indeed, a sense that they missed the call has led to soul searching among many economists.

Although many economists did spot the housing bubble, they failed to fully understand the implications, says Richard J. Herring, professor of international banking at Wharton

It's not just that they missed it, they positively denied that it would happen," says Wharton finance professor Franklin Allen.

Wharton management professor Stephen J. Kobrin said he believes many academics share "an ideological fixation with free markets and lack of regulation" that should be reexamined. "Obviously, people missed the boat on a lot of the risks that a lot of financial instruments entailed," he says. "We need to think about what changes are needed in the curriculum."

Research Comment:

We believe this is an honest intellectual assessment of the problem. We hope to find more high quality research work and researchers.

Who Predicted the Financial Crisis | Housing Bubble| Economic Crisis | Debt Crisis | Currency Crisis

The Chronicles of Higher Education

On October 3, 2010, Charles Ferguson wrote an article on Larry Summers and the Subversion of Economics, describing the role of lobbying and how few people with powerful connections can bring down the US financial system.

He wrote: The Obama administration recently announced that Larry Summers is resigning as director of the National Economic Council and will return to Harvard early next year. His imminent departure raises several questions: Who will replace him? What will he do next? But more important, it's a chance to consider the hugely damaging conflicts of interest of the senior academic economists who move among universities, government, and banking. Summers is unquestionably brilliant, as all who have dealt with him, including myself, quickly realize. And yet rarely has one individual embodied so much of what is wrong with economics, with academe, and indeed with the American economy. For the past two years, I have immersed myself in those worlds in order to make a film, Inside Job, that takes a sweeping look at the financial crisis. And I found Summers everywhere I turned.

Over the past decade, Summers continued to advocate financial deregulation, both as president of Harvard and as a University Professor after being forced out of the presidency...After the resulting outcry forced him to resign, Summers remained at Harvard as a faculty member, and he accelerated his financial-sector activities, receiving $135,000 for one speech at Goldman Sachs....During this time, Summers became wealthy through consulting and speaking engagements with financial firms. Between 2001 and his entry into the Obama administration, he made more than $20-million from the financial-services industry. (His 2009 federal financial-disclosure form listed his networth as $17-million to $39-million.). Summers remained close to (Robert) Rubin and to Alan Greenspan, a former chairman of the Federal Reserve. (Source: The Chronicle Review)

Who Predicted the Financial Crisis | Housing Bubble| Economic Crisis | Debt Crisis | Currency Crisis


On July 8, 2009, Christopher Westley blogged a paper titled The Financial Crisis and the Systemic Failure of the Economics Profession published in Critical Review, by Colander, Goldberg, Haas, Juselius, Kirman, Lux, and Sloth with the following abstract:

Economists not only failed to anticipate the financial crisis; they may have contributed to it–with risk and derivatives models that, through spurious precision and untested theoretical assumptions, encouraged policy makers and market participants to see more stability and risk sharing than was actually present. Moreover, once the crisis occurred, it was met with incomprehension by most economists because of models that, on the one hand, downplay the possibility that economic actors may exhibit highly interactive behavior; and, on the other, assume that any homogeneity will involve economic actors sharing the economist’s own putatively correct model of the economy, so that error can stem only from an exogenous shock. The financial crisis presents both an ethical and an intellectual challenge to economics, and an opportunity to reform its study by grounding it more solidly in reality. (Source: Ludwig von Mises Institute)

Who Predicted the Financial Crisis | Housing Bubble| Economic Crisis | Debt Crisis | Currency Crisis

On Marginal Revolution, a blog entry by CK on November 3, 2008 stated:

Dating from the publication of “Freakonomics,” economics has had a star turn, “15 minutes of fame,” if you will. Nowadays, any talk of money or assets or securities leaves people with a bad taste in their mouths. Economists, with their images as eminently logical, semi-Spock types who cut to the core of problems, are out of favor. Now it seems like sophistry and false wisdom. The pendulum probably swung to far in favor of economists before, now it’s going to go too far in the other direction. In other words, the bursting of the world economic bubble will NOT lead to the inflation of a bubble in academic economics.

Who Predicted the Financial Crisis

Other research questions and findings:

  1. Why did the world's top economists fail to predict the financial crisis? (Others who missed the crisis, include government leaders, award-winning scientists, market analysts and investors). Was the crisis predictable or was it a Black Swan (unpredictable) event? Are government policy makers competent enough to manage the nation's financial freedom and security? Are economists and their policies helping or hurting our economic growth? Do we need to re-define the education of economic science and the role that economists play in our financial markets, government policies and business regulations? 
  2. Who is to blame for the financial crisis?  Who contributed to the creation of the crisis? Can they be held responsible for their actions or inactions? Was there a conspiracy by some Wall Street executives and government officials? Do investors have legal cause to seek compensation for damages caused by Wall Street firms?
  3. Who predicted the financial crisis and the ensuing economic crisis? Is there a documented evidence supporting their claims? Were those who warned about the crisis lucky or did they have a clear logic behind their predictions? Can we use their knowledge to predict future crises? What are their future predictions? How do their predictions compare with each other? Where do the experts agree and where do they disagree? How accurate are their economic predictions? Can they be relied on for investment decisions?
  4. Who are the top winners and losers of the financial crisis? Top investors, economists, intellectuals, government officials, think tanks, and universities that lost or won because of the crisis.
  5. What are the lessons we can learn to avoid future crises? What the the economic policy lessons? What are the investor's lessons? Do we need more or less financial regulations?

 

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