Wednesday, November 12, 2008

Why couldn’t the theories predict the current crisis?

Manas Chakravarty writes in the Mint “Is something seriously wrong with economics? After being cold-shouldered by the model-building, regression-fitting economist fraternity for long, Keynesian and other less orthodox economists are getting a bit of their own back”.

Not surprisingly what I find from his following paragraph was loathingly fallacy that is he writes “In an interview to The New York Times, economist James Galbraith, who has steadfastly stayed loyal to the liberal theories of his celebrated father John Kenneth Galbraith, said that the failure to foresee the mortgage crisis was “an enormous blot on the reputation of the profession”. He went on to say: “There are thousands of economists. Most of them teach. And most of them teach a theoretical framework that has been shown to be fundamentally useless.”

He also says that “he policies currently being implemented by Federal Reserve chairman Ben Bernanke and his ilk. In a speech in 2002 at a conference to honour economist Milton Friedman’s 90th birthday, Bernanke said: “Regarding the Great Depression. You’re right, we did it. We’re very sorry. But thanks to you, we won’t do it again.” He was referring to a famous book on the Great Depression by Friedman and Anna Schwartz which essentially said that the depression was the result of mistakes committed by the monetary authorities of the time. Said Bernanke, “Because of institutional changes and misguided doctrines, the banking panics of the Great Contraction were much more severe and widespread than would have normally occurred during a downturn…” Bernanke has been a scholar of the Great Depression and his present policy of throwing vast amounts of liquidity at banks and recapitalizing them is based on the premise that not doing so in time is what allowed the crash of 1929 to morph into the Great Depression”.

Manas not only report misleadingly but make reader confused. Of course, I ma not but let’s grasp the An Open Letter to my Friends on the Left by Professor Steven Horwitz.

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