Bubbles and Bailouts: Why Some Economists Failed: [M]acroeconomists, as a group, did not see the signs of the disaster that was about to hit the economy. There were a few lonely voices who warned that a dangerous bubble was building in the housing market…. [I]t took macroeconomists longer than it should have to correctly diagnose the problem as a balance sheet recession. But once macroeconomists understood the nature of the difficulties we were experiencing, policies to effectively battle this type of recession were proposed. Unfortunately, the proposals were mostly ignored….
The question is why nobody listened.
For fiscal policy the answer is clear and simple. Congress is broken…. And that dysfunction coupled with the influence of big money interests caused Congress to listen to the wrong voices…. [T]he people who favored deregulation of the financial sector, assured us there was no housing bubble, and told us problems could be easily contained even if there was a bubble are the very same people who brought us the push for austerity, the fear of inflation, the fear of bond vigilantes, and so on, none of which was helpful.
These economists told Republicans and centrist Democrats in Congress what they wanted to hear… given prominence in policy discussions. The economists who got it mostly right disagreed with these policies in no uncertain terms, but Congress didn't want to hear what they had to say and fiscal policy suffered because of it.
But how can we explain the problems with monetary policy?… [T]he Fed has been much too timid and apprehensive in its response to the recession… is presently missing both its inflation and unemployment targets…. [T]he Fed has been sitting on its hands in the “wait and see” mode that has left it behind the curve again and again over the last several years….
The continued push from some economists for austerity, interest rate increases, and other policies that satisfy political and ideological goals but work against the recovery, and the failure of economists in charge of monetary policy to adopt policies consistent with the Fed’s mandate undermine any attempt to fully defend the economics profession.
We can fix our economic models, at least I hope we can, and maybe we can fix our political institutions, we shall see, but how do we fix the economists?…
The failure of many, many people to do their homework and the fact that others who were at least willing to try to do their job got so much so wrong is remarkable.
Even more remarkable is the extraordinary reluctance of those who did get so much wrong to mark their beliefs to market…