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How the 'Experts' Missed the Crash: Philosophical Flaws, No Sense of History

Posted Dec 10, 2008 03:16pm EST by Aaron Task
Related: ^dji, ^gspc, ^ixic, SPY, DIA, QQQQ

The fact most economists, policymakers and Wall Street strategists didn't see the current crisis coming is undeniable. But why? Why did the "experts" drop the ball so badly?

One expert who did predict the crisis, James Galbraith, economics professor at the University of Texas at Austin, says the majority of his peers were blinded by a belief in free-market philosophy and the notion markets are rational.

Alan Greenspan recently admitted to a "flaw" in this philosophy, of which he was the most noted practitioner: "I made a mistake in presuming that the self-interest of organizations, specifically banks and others, was such as that they were capable of protecting their own shareholders," the former Fed chairman said.

A self-described "financial ambulance chaser," Galbraith, the son of famed economist and market historian John Kenneth Galbraith, said two major developments in the mid-2000s tipped him off that something was amiss:

  • The huge expansion in household debt as many Americans funded consumption by borrowing, especially via home equity loans.
  • The "abandonment" of regulatory oversight at the Federal level, which insured the "most aggressive, most abusive" players in the mortgage market would flourish.

Unfortunately, Galbraith doesn't hold much hope that this crisis will change much the outlook for economists, noting they don't study history and many are "still in denial" about what's transpired.

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