A Widespread Disappointment With Economists Now Because We Did Not Forecast or Prevent the Financial Crisis of 2008, Article Review Example

According to the article, the financial crisis of 2008 was a greater disappointment for the economists due to lack of forecasting. Throughout the article, the author has demonstrated on how some economists developed models in forecasting crises and how to move forward to deal with such situations. The macroeconomists during this time were criticized as a lost generation educated in use of valueless mathematical models. This kind of education in accordance to the author of the article did not help in sensible economic policy. The author responds to this caricature as having no value in thinking of what is expected of the specialists by the public during the financial crisis.

The article is a well written since the author has shown that there is a need for setting up of models which will enable to forecast on sudden falls of financial assets. According to him, this has been implicated by Eugene Fama “efficient market hypothesis (EMH)” which focuses on all the relevant information. The author speculates on the reliability that would arise if there was a formula implemented to forecast any given financial crisis in advance. He carefully demonstrates the usage of the term efficient used in EMH as not to be confused with socially desirable pricing but rather the usage of the information for one’s own interest.

The article also demonstrates on how Mr. Fama arrived at the hypothesis by the usage of simple theoretical examples. He has appreciated on Mr. Fama’s test upon the EMH and the behavior of its actual pricing as being empirical and carefully executed (Ellis 2006). According to the economists’ briefing, it was a macroeconomic failure when the “reassuring” simulations were presented in summer 2007 by the Federal Research Governor, Fredrick Mishkin. In a way that they forecasted on what could be expected conditions if the crisis occurred rather than giving assurance of the possibility that it could not occur. The recession that was underway and according to Mishkin’s forecast estimated what was likely to follow if the housing decline had continued as the only factor in economic down turn. The author has only failed since he has only sown the importance of the models without including monetary policies to prevent an unnecessary drawn-out downturn in growth and the need for market regulation (Ignazio 209).

Different models should be combined with new information resulted in having of accurate estimate of reduction in private spending after the bankruptcy of Lehman. The author has also shown how the situation was altered after the collapse of Lehman which was the potential for a crisis, following this, Mr. Bermamke Began pumping money into the banking system and through him the treasury had to do the same. People viewed that there was no interest on the treasury bills and that the only stimulus available that the monetary policy was exhausted was interest-rate reduction. He has shown how the reserves of commercial bank grew from $50 billion to $800 billion by the end of year during the time of Lehman Failuret.

The author has given his own view that the policies were central in liquidity and alleviated the need for consumers to reduce spending. To the critics, Mr.  Mishkin and Mr. Bermamke were creative in building models during the Dark Age of macro-economics. They and their colleagues made contingency plans which will be used during the occurrence of shocks. They have focused on the developing theoretical models.

References

Ellis. R.  New Forecast: Financial Crisis. Oxford: Basil Blackwell, 2006.

Ignazio V. The Financial Crisis and Economists’ Forecasting. vol. 3. Oxford: Oxford University Press, 2009.