The Minsky tradition had the financial sector nailed: that the circumstances that produce bubbles also produce regulatory forbearance. Ned Gramlich and others were sounding the alarm on the risks created by the housing sector. I have an email exchange with Stan Fischer when he was in the Citbank President’s office in which I expressed my concern about how Citi could not possibly have control over its derivatives book, and that the transformation of investment banking away from its former partnership structure had destroyed their organizational ability to effectively manage risks.
Paul Krugman starting in the early 1990s was spearheading the analysis of how great the risks posed by the zero lower bound were, and how increasing financialization and return this to an area of potentially depression economics.
Third and last, economists had been tracking decreasing competition, increasing financialization, and rising income inequality in real time, and arguing about its sources in the eroding commitment to social democracy—particularly Goldin and Katz on the implications of the decreasing relative public commitment to education. I remember this being a huge deal back in 1992. The only ones surprised were the economists of the right, who had confidently expected high or inequality to unleash an orgy of entrepreneurial growth.
The problem, as Simon Wren-Lewis of Oxford likes to say, is not that the economists did not know what was going on in real time, but rather that they were not listened to. We think we broadly understand the disciplinary malformations and intellectual deformations that meant that smart economists had too little and stupid economists too much voice within academia.
What we do not understand is why smart economists had so little influence in the public sphere—with special reference to Barack Obama’s call for an anti-Keynesian anti-recovery spending freeze in the 2010 State of the Union address. After that I ripped both Peter Orszag and Tim Geithner new ones: But I never got a satisfactory explanation of why the president thought this was a good thing to do.