Economists are one of the mainstream culprits blamed for the 2007/2008 financial crisis and the ensuing problems that followed. I find this tendency both frustrating and one sided.

Firstly, the Economics profession is by no means perfect and as in most fields has many areas that can be approved upon. However, discrediting Economics as a whole and equating “Economics” and “Economist” to solely consist of “Financial Economics” or “Macroeconomics” is not an accurate description. Whilst these sub-disciplines may be very prominent in the media, there are various other sub-disciplines that make-up Economics.

Secondly, distinction needs to be drawn between “predicting” and “causing” the crises.

Lionel Robbins defined economics as: “the science which studies human behaviour as a relationship between ends and scarce means which have alternative uses”. It follows that Economics is not solely concerned with “predictions” but also with “explanations”.

The main argument is that Economics “failed” to predict the financial crises. However, there were economists who raised concerns, for example the behavioural economist Robert Shiller gave early warnings of the overvalued US housing market and in the 1990s expressed concerns about the “bubbliness” of the stock market. When these examples are mentioned, it is argued that such economists did not do enough to outweigh those who were ignorant to it.

I find it hard to believe the field of Economics, in “failing” to predict the crises, was the root cause of the crises and can be blamed for it. Is it not more likely related to financial engineering, insufficient regulation and “aggressive” or “creative” accounting practices?

Conclusion: faulty financial engineering & creative accounting
In conclusion, there are a number of examples were financial engineering and “aggressive” accounting practices led to chaos, particularly with the securitisation of risky assets. I recommend reading the book Billion Dollar Lessons (Carroll & Mui 2008). The book provides a valuable discussion of [applicable] lessons that can be learned from business failures and how NOT to emulate them. For example, the case of Green Tree which provided long-term loans on short-term assets, increasing the mortgage period for mobile homes (with a lifespan of 10 to 15 years) to up to 30 years whilst using gain on sales accounting. A further example is Amerco who used SPEs (Special Purpose Entities) to keep debt off of their balance sheets. Amerco’s SPEs passed more than 60 audits over a number of years but with the collapse of Enron, such SPEs came under increasing scrutiny and auditors required Amerco to report the SPE debt on its balance sheet with dire consequences.