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Not All Economists Are Created Equal

By Anonymous

I very much agree with Ezra Klein:

One sidenote of the past few months is that folks turned to economists when what they needed were finance experts. But there are relatively few finance experts who aren't affiliated with financial institutions, and so much of their commentary is tainted. Economics, however, hasn't quite caught up to the size and centrality of the financial industry in the modern economy, and so though economist knew relatively more about what was going on than the median American did, they actually knew much less than people assumed. But it's hard to blame the profession. The growth of finance has been hard to keep up with.

Ezra is wise beyond his years. As a general rule, you should be initially skeptical of any academic economist who purports to provide expert analysis on the workings of the financial markets. The truth is, the financial markets are enormous, wide-ranging, and exceedingly complex, both on the macro and micro levels. The media constantly refer to credit default swaps as "esoteric" instruments, but in the financial world, CDSs are among the simpler instruments. Try getting your head around leveraged super senior (LSS) notes of synthetic CDOs. And that's only one of the thousands of instruments in the global financial system, all of which constantly interact with each other in a dynamic, multi-layered market.

An academic economist who doesn't specialize in finance has likely never heard of quite a few of the securities and derivatives that are commonly used today?or, at least, they hadn't heard of them before the financial crisis. There are certainly some financial economists who are genuine experts, but they're few and far between. It has been funny, though a bit sad, to watch many academic economists weigh in on the financial crisis as if they had any clue what they're talking about. They truly live in their own little bubble, arguing about a model of financial markets that bears very little resemblence to the real-world financial markets.

Full post as published by Economics of Contempt on October 25, 2008 (boomark / email).