A common criticism of economists, and the economics field in general, is that they, the economists, ‘failed to see the crisis’. But is this really important or just a red herring used to sling mud at an important profession? Because they didn’t predict, ergo the models are wrong and economists are wrong. Case closed.
Economists are better at solving and explaining economic problems than predicting or preventing them. A doctor cannot
reliably predict if someone will get cancer or prevent someone from getting cancer, but he can offer treatment for it and an explanation for the biological processes that cause cancer. Does this mean doctors aren’t credible? Absolutely not. Similarly, economists don’t necessity have to be able to predict crisis, but they certainly have demonstrated a knack for keeping them as brief as possible. Economists (Greenspan specifically) helped stem the Black Monday stock market crash by infusing liquidity on Tuesday morning. As treasury secretary, Larry Summers helped engineer the bailout during the 1994 economic crisis in Mexico, the 1997 Asian financial crisis. In 1998, Summers, Robert Rubin, and Greenspan (dubbed The Committee to Save the World, according to Time), engineered the successful Long Term Capital Management bailout. The lesson is that we don’t need to predict crisis; we only need to have the systems in place to sequester problems so the rest of the economy can continue thriving. If there’s a problem it can be fixed in a matter of weeks or months with the coordination of the fed, the executive branch, and congress. The folks that ‘predicted’ the 2008 crisis were blindsided by the huge recovery- a recovery that is still raging to this day as stocks continue to make new highs. It’s safe to say fed policy in 2007-09 was a resounding success, as well as QE 2 & 3. Bernanke’s successor, Janet Yellen, doesn’t need to be an oracle; she only needs to wield the cudgel of monetary policy to nip problems in the bud as they arise.