Finance Economics And The Economic Crisis
Can politicians, policymakers and corporate executives trust finance economics experts? This is the million-dollar question. Or rather the multi-billion dollar question. Given the current recession, the legitimacy of many top analysts has been called into question. Some of this damaging slander is overstated, since there are a number of businesses with their own economists that seem to be faring just fine. One could also argue the government is taking the necessary steps to get the economy back on track, according to numerous theories of macro economics. However, the blinders were on for many of the nation’s most respected economists and it’s going to take some progressive solutions to bring redemption to this tarnished profession.
Nobel prize winning economist Myron Scholes argues that it’s not the models of financial economics that failed us here, but rather, the improper practices of Wall Street and the legislators who allowed them to run too far. Financial firms plugged in data reflecting “a view of the world that was far more benign than it was reasonable to take, emphasizing recent inputs over more historic numbers,” explained Scholes. He said a lot of the models were dead-on and most derivatives and securities performed exactly as predicted, but a few of the exceptions proved disastrous. Since 1998, Scholes had been warning his colleagues about the risk that liquid markets could dry up suddenly and without warning and that individual decisions made in the financial sector could have a great impact on the larger economy as a whole.
One of the criticisms of finance economics and macro economics theories is that it never considers how the inner-workings of financial institutions can impact the larger economy. “That’s the view of microeconomics theorists,” they scoff. In turn, micro-economists are looking at how financial institution decisions affect consumer spending and behavior, rather than scaling up. In 2000, Franklin Allen, president of the American Finance Association, asked the question, “Do financial institutions matter?” He quickly added that most people would be surprised to learn “that institutions play little role in financial theory.” At the time, his assumptions may have been correct, but today the banking system and financial economics are inextricably linked. Even questions as small as “How much should bankers be paid” can affect the loans available to consumers, which in turn affects consumer spending, which in turn can inflate or deflate the American economy.
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This entry was posted on Thursday, October 29th, 2009 at 1:59 am and is filed under Business and Management. You can follow any responses to this entry through the RSS 2.0 feed. You can skip to the end and leave a response. Pinging is currently not allowed.
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