nobody ready to crash

Mark Thoma:

I have criticized regulators for not having plans ready to deal with too big to fail institutions.

One thing everyone seems to agree on is that the ad hoc response from regulators made things worse, and we need to be better prepared with plans to dismantle these firms without destabilizing markets next time around (and do our best to prevent problems from developing to begin with, including regulating connectedness). The fact that we were caught without such plans was a big handicap in dealing with the unfolding crisis.

But the same can be said about macroeconomics. We didn’t plan for a big crisis either.

We had no plans on the shelf that we could rely upon when the crisis hit, and what we have seen from macroeconomists is the same kind of ad hoc scramble for an effective response that many of us have criticized regulators for.

But if macroeconomists had taken the possibility of a massive meltdown seriously before it happened and developed the theoretical apparatus we are now calling for now that we have seen that such events are, in fact, possible, then perhaps regulators would have been more inclined to think through this possibility and get ready for it. I don’t think the blame is all theirs.

Paul Volker’s tidbit:

[Laughter] It’s interesting you ask that question because I recently commented to some of my economist friends that I’m not aware of any large contribution that economic science has made to central banking in the last 50 years or so.