Monday, July 20, 2009

Oh Really?

Mark Gertler, economics professor at New York University writes this in response to the articles in The Economist documenting the failure of economics:

"Here I think, though, that both the mainstream media and the blogosphere have been confusing a failure to anticipate the crisis with a failure to have the research available to comprehend it. Predicting the crisis would have required foreseeing the risks posed by the shadow banking system, which were missed not only by academic economists, but by just about everyone else on the planet (including the ratings agencies!)."

Oh really, I think I did predict it, without considering the effects of the shadow banking system. The reason for that was that the shadow banking system had, at most, only a trivial role in the crisis, as is illustrated by the great boom in official bank lending in America, and the fact that many other countries without a significant shadow banking system experienced similar bubbles.

Austrian business cycle theory was quite sufficient to predict the crisis. The fact that most economists instead focus on obviously irrelevant red herrings like the "shadow banking system" only further illustrates how failed their paradigm is.


Blogger Eric Dennis said...

The shadow banking system (securitization), is not irrelevant to the current crisis. It is a new mechanism by which newly created money flows into the economy and by which investors were able get in on the same lend-long-borrow-short game that the banks have always been playing.

Austrian theory doesn't predict the detailed financial mechanisms that are spawned by credit expansion, but these mechanisms, like securitization, fit squarely within and are made comprehensible by the framework of this theory.

11:47 PM  
Anonymous Anonymous said...

Unfortunately it seems most newspaper economists don't even understand heterogeneous capital, much less ATBC. The failure of the mainstream stems from all sorts of systematic errors, most of which are just formalizations of classical economic errors.

7:17 PM  

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