Magazine article New Zealand Management

Economics : Blaming the Tools

Magazine article New Zealand Management

Economics : Blaming the Tools

Article excerpt

Byline: Bob Edlin

James Galbraith, son of the late American economist John K Galbraith and a noted economist in his own right, was asked by a New York Times reporter in October if he found it odd that so few economists foresaw the credit disaster. Some did, Galbraith replied -- he credited a Washington economist, Dean Baker, with having the most serious claim for seeing it coming. He himself saw it coming "in general terms".

Skip to next paragraph. But the US had at least 15,000 professional economists, the interviewer pointed out, "and you're saying only two or three of them foresaw the mortgage crisis?" Ten or 12 would be closer than two or three, Galbraith rejoined. But even that was a small minority, so what did it say about the field of economics, which claims to be a science? "It's an enormous blot on the reputation of the profession," Galbraith acknowledged. "There are thousands of economists. Most of them teach. And most of them teach a theoretical framework that has been shown to be fundamentally useless."

While President Reagan's economists had worshipped "the market", he went on, George W Bush's didn't. He simply turned over regulatory authority to his friends. "It enabled all the shady operators and card sharks in the system to come to dominate how we finance."

Then there was the role of Alan Greenspan, long-serving chairman of the Federal Reserve (the American central bank). Galbraith added his voice to the many economists who were blaming him for the financial crisis that was nudging the world's biggest economy towards recession. The critics accuse Greenspan of encouraging the bubble in housing prices by keeping interest rates too low for too long and for failing to rein in a burgeoning of risky mortgage lending.

His belief was you can't really regulate and discipline the market and you shouldn't try," Galbraith complained. "I think Greenspan bears a high, high degree of responsibility for what has happened."

It's a fair cop, at least partially, a chastened Greenspan remarkably conceded. Almost three years after stepping down from his powerful post at The Fed, he admitted putting too much faith in the self-correcting power of free markets and failing to anticipate the self-destructive power of wanton mortgage lending. "Those of us who have looked to the self-interest of lending institutions to protect shareholders' equity, myself included, are in a state of shocked disbelief," he told the House Committee on Oversight and Government Reform in Washington. …

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