Wednesday, August 1, 2012

Central Bankers Share Some Of The Blame For Financial Crisis

Andy Haldane offers a response to a question asked by the Queen.  She wanted to know why economists were unable to see the problems in the financial system.  Haldane's answer is that central bank economists were blinded by false confidence in the assumptions that are built into their economic models of the economy.  The assumptions are false, and therefore, the models failed to reflect reality.

This is not discussed in the article, but the period of  "great moderation" in the economy contributed to the false confidence in the models used by central bankers.  They had successfully used these models to contain inflation, and to moderate business cycles for 30 years.  One of the reasons why central bankers allowed the real estate bubble to inflate was that they were confident that could manage any economic problems that might occur.  They were wrong.

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