Is an Impending Financial Crisis Unforeseeable?
Federal Reserve, Wall Street bankers, deal-makers, banking regulators are just part of the
string of professions that cannot foresee a brewing financial crises in the horizon. Should I
say even journalists, real estate agents
and mortgage lenders can join the
Ever wonder if economists are capable
of detecting a looming economic
disaster? After all, of the mentioned
professions above, economists seem to
be the best-equipped among the group.
Some had been honest enough that they
might miss a call along the way. Others
did their job by telling that home prices
are currently forming a bubble, some
confessed that they are simply a failure
when it comes to foreseeing the bubble
and failed to foresee the damage the bubble would cause once it burst. But others had been
adamant with their shortcomings and reasoned out that outdated analytical tools had
caused their failure.
Ed Butowsky, a famed financial analyst said that there is possibility that it is not just a
warning or sign missed; they simply denied the fact that financial crisis is inevitably coming.
The financial analyst disputed the part of the failed economists who uses mathematical
models. Banks and other financial institutions play a huge part in the economy and some
economists just don’t accept that fact.
For the last 30 years, the economy had been ruled by an orthodox way of thinking stating
that economic cycles are created by the key players in the economy such as the producers
and consumers. Banks and other financial institutions had given meager importance. In fact
most economics degree is barely incorporated with any banking courses.
As the use of computers had been prevalent for the last decades, economists had to rely on
mathematical models to decipher how other economic elements interact with each other.
But those mathematical models used for analysis are lacking unlikely factors such as human
psychology and people’s expectations about the future had been simply singled out, adds
One of the most common overlooked reasons that caused most of economists’ failure was
their failure to acknowledge the common sense fact that home prices could not rise faster
than American household incomes.
It is a given fact that not all economists had foreseen the housing bubble. And the reason of
that is they failed to fully understand its implications. One of the overlooked sign is the peril
brewing in the repo market. Securities backed up by mortgages and other assets were
utilized as collateral for loans. Due to collateralization, loans were labeled as safe and
securities emerged as riskier as opposed to what lenders and borrowers had initially
Economists had been unaware of the looming financial crisis and greatly underestimated its
impact. The loophole was due to research efforts misallocation. While other attributed it to
overly relying on the decade-old mathematical models with mind that market and economy
are constant and stable. Other factors must be considered such economic players, social
factors and of course modifying economists’ forecasting methods. As what Ed Butowsky
further said, economic analysis failed due to dependence of emerging financial products that
is not fully tested and understood.