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Academic Economists Lead Governments to the Edge of the Abyss

Economics / Economic Theory Sep 19, 2009 - 02:04 AM GMT

By: Nadeem_Walayat

Economics

99.9% of academic economists living in ivory towers lost in world of their own formulae's and theories of what should happen and what could not happen not only did not see the crisis coming but far more dangerously led the government and central bank policy makers down a long winding garden path towards the edge of the financial and economic abyss. It was only after all of the economic theory was binned i.e. that which the academics had worked on and spouted for decades was financial armageddon avoided.


Chief amongst the Academic Economic culprits who unfortunately was for many years the most powerful man in the world is Alan Greenspan. Whilst Academic Economists continued to idolise Greenspan right up until Financial Armageddon, the Market Economists had long since come to to deride Greenspan's reckless actions of ever blowing bubbles that would lead to an even bigger eventual crash.

Wait ? What's that I hear ? What's a Market Economist ?

A Market Economist (such as yours truly) is an analyst who was never born to live in an ivory tower playing with theories and formulae's of what should happen but one who came to economics as a means to reacting to the need to better interpret market price action, and as all successful traders know, where the markets are concerned there are no absolutes, as one is always looking towards the price for relative strength or weakness against the scenario being traded.

A market economist would never put theory before the price action, unlike Academic economists which see nothing but theory even after the theory has long since failed, still they plod along making excuses or stand completely oblivious to the fact that all of their theory and research is worthless. Whereas a market economist is always aware that their analysis could always be negated on x condition, and therefore be completely scrapped, that just does not happen with Academic Economists! Who do NOT have a mechanism to correct inherent errors in their economic models namely PRICE. An market economist's do not have the luxury of sticking to a conclusion that is wrong for they LOSE money, okay some do and they are called perma bears or perma bulls, but successful market economists do not stick to an incorrect scenario as they LOSE MONEY ON THEIR TRADING ACCOUNTS, which tends to act as STRONG CORRECTING MECHANISM.

Back to Alan Greenspan, despite what Greenspan says today about how the derivatives markets should have been better regulated, it is a fact, IT IS A FACT THAT ALAN GREENSPAN went out of his way to PREVENT REGULATION OF THE OVER THE COUNTER DERIVATIVES, namely CREDIT DEFAULT SWAPS as long ago as 10 years ago! The most powerful man in the world FOUGHT TOOTH AND NAIL against attempts by the Commodity Futures Trading Commission to regulate CDS whilst the market was barely a 100th of the $62 trillion it had reached by September 2008. The reasoning behind this was that regulation would hamper Wall Street profits and that the markets were able to self regulate / correct.

Although now Greenspan admits that he was partially wrong, as he stated "I made a mistake in presuming that the self-interests of organisations, specifically banks and others, were such that they were best capable of protecting their own shareholders and their equity in the firms." Instead as we all knew right from the days of Northern Rock going bust that bank officers had proceeded to turn the banks they worked for into hollow shells as they banked billions in bonuses based on fictitious non existant profits.

Have Economic Lessons been learned ?

Not when we see the Keynesian Zombie rise from the grave that looks hell bent on sowing the seeds of a 20 year Economic Depression! Which I I will cover in my next always free newsletter (subscribe now). Academic economists will probably soon come up with a new theory that models and explains the LAST financial crisis, which will be totally useless as the academic economists blindly drift into the NEXT crisis.

By Nadeem Walayat
http://www.marketoracle.co.uk

Copyright © 2005-09 Marketoracle.co.uk (Market Oracle Ltd). All rights reserved.

Nadeem Walayat has over 20 years experience of trading derivatives, portfolio management and analysing the financial markets, including one of few who both anticipated and Beat the 1987 Crash. Nadeem's forward looking analysis specialises on the housing market and interest rates. Nadeem is the Editor of The Market Oracle, a FREE Daily Financial Markets Analysis & Forecasting online publication. We present in-depth analysis from over 300 experienced analysts on a range of views of the probable direction of the financial markets. Thus enabling our readers to arrive at an informed opinion on future market direction. http://www.marketoracle.co.uk

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any trading losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors before engaging in any trading activities.

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