The Economics Profession Congratulates Itself

A self-congratulatory article by economists

Wendy Edelberg and Greg Feldberg write,

the US Congress created the Financial Crisis Inquiry Commission (FCIC) to conduct an independent investigation of the causes of the crisis.

… Our empirical and investigative work ultimately concluded that housing policy had not been a leading cause of the crisis, and nine out of ten Commissioners agreed with that conclusion.¹

This article appears in the Spring 2024 issue of The Journal of Economic Perspectives, an official journal of the American Economic Association. For me, it illustrates how mainstream economics operates as a closed club. In short:

1. The authors of the article, which has nothing but praise for the FCIC staff, were both on the staff of the FCIC. Apparently the journal has no problem treating their views as objective.

2. I worked on an analysis of the financial crisis that was published by Mercatus in September of 2009, during the period when the FCIC staff was working. This analysis was ignored by the FCIC.

3. The authors write as if the FCIC was created to produce an objective report. My feeling at the time, which was reinforced by how things played out, was that its true purpose was to ensure that blame for the crisis was placed on the private sector and not on Congress or policy makers. In contrast, my analysis, titled Not What They Had in Mind², was subtitled A History of Policies that Produced the Financial Crisis of 2008.

Self-congratulation

Edelberg and Feldberg conclude that

the report the Commission produced was valuable, and future Commissions will no doubt produce similarly useful reports.

They are entitled to their opinion. But if the Journal of Economic Perspectives were interested in an objective perspective on the FCIC, they might have someone who was not a participant write an article about it.

Most economists who spend time in Washington come to understand that economic analysis rarely drives political behavior. Most often, it is the other way around. Politicians seek out economic analysis to support their policy positions.

But Edelberg and Fredberg write,

The leaders of the Financial Crisis Inquiry Commission hoped to meet the challenge of partisanship through independent and disinterested analysis. The week of his appointment in July 2009, FCIC Chair Phil Angelides told the press that he believed “the mission is so important that it can and must transcend” partisanship

But Angelides would not have been chosen in the first place if the purpose of the FCIC had been pure economic inquiry. He had no background in economics or finance. He was a politician, who had successfully run as a Democrat for state treasurer of California before embarking on a losing campaign for governor.

My Own Qualifications

My own analysis of the crisis came from a perspective of experience. I spent several years working at Freddie Mac, which was at the heart of the mortgage finance industry and—several years after I left—became one of the prominent failed enterprises.

One of my early roles was developing sophisticated option-pricing models to handle pricing of mortgage cash flows and derivatives. A later role was working on projects to improve the way that we dealt with the incentive problems in buying loans from mortgage originators who had no skin in the game once they sold mortgages into mortgage securities.

Also, part of that experience was earlier in my career, at the Federal Reserve, studying the “plumbing” of money markets, including the repurchase agreements which played such an important and poorly-understood role in the crisis. Before the crisis, I would have been one of the few Ph.D economists who even knew what a “repo” was.

I had not kept up with the latest developments in mortgage finance. For example, I did not understand the subtleties of the role played by AIG insurance. But despite such gaps, I was in a better position than most economists to combine theoretical knowledge and institutional experience. And my views seem to have held up.

The FCIC staff never contacted me. As far as I know, they ignored my work, including the Mercatus paper.

Edelberg and Fredberg write,

the Commission invited 17 economists to participate, including “roundtable discussions” in October and November 2009 and a two-day “Forum to Explore the Causes of the Financial Crisis” in February 2010.

I would bet that few, if any, of these economists brought with them an institutional and theoretical background as relevant as mine. The FCIC seems to mostly have solicited advice from economists with very general backgrounds in financial research, rather than those with knowledge of mortgage finance, financial derivatives, or the institutional details of money markets.

Narrative Control

The establishment narrative for the financial crisis was already set two years before the FCIC report. My Mercatus paper cited a Treasury study that—of course—said that increasing the power of regulators was the solution, rather than the cause, for the calamity. If you let government control the narrative, it will always say that problems come from the private sector, and the answer is to make government bigger and stronger.

From a narrative perspective, the Edelberg-Fredberg paper hits a nerve with me for two reasons. One is the sheer smugness of it, with no mention of any mistakes made or lessons learned about economic policy analysis from their experience. It is as if the performance of the FCIC staff was flawless. The other problem is that substantively I disagree with their characterization of the what the FCIC produced. It did not give the most accurate explanation for the crisis. I see the FCIC as a purely political project from the outset, resulting in analysis that was somewhere in between inadequate and misleading.

I am not saying that economic analysis for policy purposes is useless. But I do think that economists should be careful not to over-estimate both their skills at it and their significance for it. Thomas Sowell’s phrase “self-congratulation as a basis for social policy” comes to mind.

Ultimately, I see the appearance of this particular paper in this particular journal as an example of what I call status-driven syndrome. That is, an institution (in this case, the American Economic Association) selects for people with strong status-seeking inclinations. Status seekers home in on the desired political consensus, which pleases the prominent officials regardless of whether it reflects the best assessment of the facts. And finally, the status seekers are ruthless in using any means available to control the narrative. In this case, the narrative is that the FCIC produced good analysis and that economists are able to make great contributions to the policy process.

1. The lone dissenter was Peter Wallison, who no one can accuse of telling people what they want to hear. I would bet that if you gave him the five-factor personality test, on agreeableness he would get the lowest possible score. His is not the personality of a status-seeker. I guess he slipped through, somehow, for a while. It’s not like this makes his views consistent with mine. Two disagreeables don’t make a consensus.

2. I still owe readers an essay summarizing that work.