Thoma on Why Economists Missed the Crisis

Mark Thoma presented a paper at this year’s ASSA meetings in which he pointed to the importance of economic history:

But why did so few economists warn about the bubble? And more importantly for the model presented in this paper, why did so many economists validate what turned out to be destructive trend-chasing behavior among investors?

 

One reason is that economists have become far too disconnected from the lessons of history. As courses in economic history have faded from graduate programs in recent decades, economists have become much less aware of the long history of bubbles. This has caused a diminished ability to recognize the housing bubble as it was inflating. And worse, the small amount of recent experience we have with bubbles has led to complacency. We were able to escape, for example, the stock bubble crash of 2001 without too much trouble. And other problems such as the Asian financial crisis did not cause anything close to the troubles we had after the housing bubble collapsed, or the troubles other bubbles have caused throughout history.

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