The First Great Recession of the 21st Century

The First Great Recession of the 21st Century

Competing Explanations

Edited by Óscar Dejuán, Eladio Febrero and Maria Cristina Marcuzzo

The 2008–10 financial crisis and the global recession it created is a complex phenomenon that warrants detailed examination. The various essays in this book utilise several alternative paradigms to provide a plausible explanation and a credible cure. Great detail is given to this important analysis from different theoretical perspectives, presenting a clearer understanding of what went wrong and expounding misinterpretations of current theories and practices.

Chapter 5: Did Economic Analysis Fail in the Current Financial Crisis?

Julio Segura

Subjects: economics and finance, financial economics and regulation, history of economic thought


1 Julio Segura 5.1 INTRODUCTION Crises are the proper moment to reflect on the inadequacies of analytical and policy instruments that should help us to detect problems and defects in the legal framework in advance, in order to face and avoid crisis in advance. The debate about the errors of the regulatory and policy measures implemented to tackle the crisis, which started in the fall of 2007, has been, and still is, very intense. However, the academic debate on possible errors in the approach and the type of economic analysis prevailing in the decades prior to the crisis has been slower. The aim of this paper is to try to answer two questions. First, what went wrong with the economic analysis that prevailed in the decades prior to the crisis? Second, how have we, the economists, failed? I will start by pointing out that some widespread and vulgar criticisms do not disturb me. I will give a couple of examples. The first one puts the blame on economists for not being able to foresee the crisis. As we shall see later, this is not true, but in the end, due to the crucial role that expectations play in the financial world, if a model existed that could foresee a crisis with a high degree of accuracy, the effect would be to bring the crisis about at an earlier date. The second example is the criticism of economic analysis because it uses simplified models that do not take into account all...

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