1. “We can’t predict the next crisis...” As political gridlock in Washington threatens to stall a U.S. economic recovery, investors are once again turning to economists for guidance on what the future holds. But a Ouija board may serve them just as well. From Federal Reserve chairman Ben Bernanke on down, most economists failed to predict the 2008 financial crash. In his 2011 paper, “An Award for Calling the Crash,” Mason Gaffney, a professor of economics at the University of California, Riverside, offers this postmortem: “The crash of 2008 surprised most of us. The episode has led many to ask how economists could have been so in the dark.” And this wasn’t an isolated event. The majority of economists have been surprised by everything from the Great Depression and the spike in oil prices during the 1970s to the bursting of the dotcom bubble in 2000 and 2001, says Laurence Ball, a professor of economics at Johns Hopkins University. What made it difficult to predict the mortgage crisis was that “subprime mortgages did not really exist 15 years ago,” he says. Economists look at past events to figure out what’s coming next, but some events are without precedent. “The world changes quickly,” Ball says. Such explanations provide little solace for regular investors, many of whom look to economists as bellwethers. “You can’t create a model for the world. Even in projecting interest rates, income and inflation, too much can go wrong,” says Robert Schmansky, founder of Clear Financial Advisors in Bloomfield Hills, Mich. And when economists don’t forewarn others, he says, investors suffer. In late 2008 as stocks were free-falling, Schmansky says, many of his clients were scrambling to liquidate their stock portfolios because they too were caught by surprise. In their defense, economists tend to make decisions based on publicly available information just like everyone else, says Ken Simonson, current president of the National Association for Business Economics, an international association for applied economists, strategists, academics, and policy-makers. Still, he admits, before the financial crisis, “The majority of economists did take way too rosy a view of what was happening in the economy.”
Posted on: Thu, 20 Nov 2014 08:23:10 +0000
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