Monday, July 09, 2012

Economists who have tended to get things right

Brad DeLong makes the not-exactly-modest but reasonable observation that economic observers might do well to pay more attention right now to economists like himself that have had a good record since 2007 in analyzing the course of the depression than to economists that have consistently racked up a bad record in that period. (The Perils of Prophecy Project Syndicate 06/27/2012)

He lists several of those who have built up good records:

So the big lesson is simple: trust those who work in the tradition of Walter Bagehot, Hyman Minsky, and Charles Kindleberger. That means trusting economists like Paul Krugman, Paul Romer, Gary Gorton, Carmen Reinhart, Ken Rogoff, Raghuram Rajan, Larry Summers, Barry Eichengreen, Olivier Blanchard, and their peers. Just as they got the recent past right, so they are the ones most likely to get the distribution of possible futures right.
And he gives us a sobering look at what information the low interest rates right now on US 10-year Treasury bonds may be giving us:

... the Treasury rate mostly fluctuated between 3% and 3.5% from late 2008 through mid-2011. But, in July 2011, the ten-year US Treasury bond rate crashed to 2%, and it was below 1.5% at the start of June. The normal rules of thumb would say that the market is now expecting 8.75 years of near-zero short-term interest rates before the economy returns to normal. And similar calculations for the 30-year Treasury bond show even longer and more anomalous expectations of continued depression.

The possible conclusions are stark. One possibility is that those investing in financial markets expect economic policy to be so dysfunctional that the global economy will remain more or less in its current depressed state for perhaps a decade, or more. The only other explanation is that even now, more than three years after the US financial crisis erupted, financial markets’ ability to price relative risks and returns sensibly has been broken at a deep level, leaving them incapable of doing their job: bearing and managing risk in order to channel savings to entrepreneurial ventures.

Neither alternative is something that I would have predicted – or even imagined.

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