Paul Krugman (2014): Why Weren’t Alarm Bells Ringing?: “Almost nobody predicted the immense economic crisis…

…If someone claims that he did, ask how many other crises he predicted that didn’t end up happening. Stopped clocks are right twice a day, and chronic doomsayers sometimes find themselves living through doomsday. But while prediction is hard, especially about the future, this doesn’t let our economic policy elite off the hook. On the eve of crisis in 2007 the officials, analysts, and pundits who shape economic policy were deeply, wrongly complacent. They didn’t see 2008 coming; but what is more important is the fact that they even didn’t believe in the possibility of such a catastrophe. As Martin Wolf says in The Shifts and the Shocks, academics and policymakers displayed ‘ignorance and arrogance’ in the runup to crisis, and ‘the crisis became so severe largely because so many people thought it impossible.’…

Focusing, as Martin Wolf does, on the measurable factors—the ‘shifts’—that increased our vulnerability to crisis is incomplete…. Intellectual shifts—the way economists and policymakers unlearned the hard-won lessons of the Great Depression, the return to pre-Keynesian fallacies and prejudices—arguably played an equally large part in the tragedy of the past six years. Say’s Law… liquidationism… conventional economic analysis fell short…. But when policymakers rejected orthodox economics, what they did by and large was to reject it in favor of doctrines like ‘expansionary austerity’—the unsupported claim that slashing government spending actually creates jobs—that made the situation worse rather than better. And this makes me a bit skeptical about Wolf’s proposals to avert ‘the fire next time.’ The Shifts and the Shocks… Wolf’s substantive proposals… are all worthy and laudable. But the gods themselves contend in vain against stupidity. What are the odds that financial reformers can do better?