In 2009, the Observer (UK newspaper) was leaked a letter to the Queen from an accomplished group of London School of Economics economists explaining some of the factors that resulted in the failure of economists to detect the credit crisis, including the admission of an inability to foresee and respond to systemic risks.
The last quote in particular caught my attention:
Professor Luis Garicano, to whom the Queen directed her question when she visited the LSE in November last year, said: “She seemed very interested, and she asked me: ‘How come nobody could foresee it?’ I think the main answer is that people were doing what they were paid to do, and behaved according to their incentives, but in many cases they were being paid to do the wrong things from society’s perspective.”
We have yet to hear anything similar in the states from prominent economists who were intimately involved in the housing and credit crisis – only from those on the outskirts, such as Herman Daly and Noam Chomsky. I am glad that some academic hubris was humbled by the whole debacle. Perhaps now we in the US can come around to learning some sort of lesson from this? One that extends beyond the philosophical depth of ‘next time, don’t get caught’.
Below is an excellent and entertaining analysis of various narratives that have sprung up to explain exactly what led to the Great Recession: