Harvard Business Publishing

Keep in mind, it were the economists' models (based on historical data) that predicted this crisis hook, line and sinker, but the Street wasn't interested in all of that "academic research". Perhaps the MBA's will start listening to us more closely next time.

“In my youth it was said that what was too silly to be said may be sung. In modern economics it may be put into mathematics.” Ronald Coase

"Keep in mind, it were the economists' models (based on historical data) that predicted this crisis hook, line and sinker, but the Street wasn't interested in all of that "academic research"."

In fact, most economists were very bullish on the economy, using their typical straight-line extrapolation to forecast the future. The minority that now dominates the headlines were actually few and far between, and it will still be debatable as to whether they have true understanding or they're just contrarians that happened to be right because of the broken clock theorem.

Economists have been useless relics for some time now, and the naivete of Bernanke's ZIRP policies is a reflection of the fact that models based on historical realities do not work in a dynamic environment that appears to be more closely related to complexity theory. A friend of mine argued that Paulson's stimulus package would work based on the Flow of Funds models. Not being educated about that model, I looked it up and I can't validate the model what-so-ever. I'm pretty sure it's an anachronism from a bygone era that I'm not sure really ever existed. What I do know is that if there aren't any good credits in the form of consumers or businesses, then pumping additional capital into banks to lend will not do any good. We need jobs and we need companies to have upward trending projections and then there will be demand for goods and credit. Right now we have neither of those and therefore we will not be able to "relever" our way out of this mess.

I don't think you can really say most economists were bullish on the markets, just as I can't say most were bearish. I do know, however, that there was no shortage of papers and published opinions stating that we were nearing an era of extreme volatility and that a bubble was forming around many of the derivative products that had emerged in recent years, and it was near bursting. Further, there was no shortage of economists showing how fundamentals were completely off in the housing sector and how that bubble forming would result in significant systemic threats. But, either way you look at the crisis, we all really missed it. I agree that there were really only a few people who came out "predicting" the crisis, but even at that, no one predicted it would be this bad. However, I don't think you can say economists are useless relics. Perhaps many economic models are more theoretical in nature and cannot effectively predict in a dynamic environment, but trust me when I say that goes for *any and all* models! That's one of the largest contributors to the high amount of volatility we're experiencing in current markets - too many traders and asset managers relied far too heavily on quantitative models that could not take into consideration all of the variables present in the marketplace at the time. A model is only as good as the variables and assumptions it includes. So, based on what you're saying, if economists are useless, than so are quants, financial engineers, and essentially anyone who relies on *any* financial models to guide their investment strategies. The catch 22 here, though, is that operating without any models most likely means you are operating blindly, without fully taking into consideration the variables at hand. Better to have a model that accounts for 90% of the variables rather than operating blindly. Either way, in this crisis, the variables that were missed were enough to lead to widescale systemic failures. But the unique thing is that the things everyone missed were not unique, hidden or even difficult to spot. They just ignored them. Things were too good for too long. So, economists aren't useless; they just can't be expected to do everything, nor can traders, investors, or otherwise market stakeholders.

Hi Mark,
Yes, I really can say most economists were bullish on the markets. Just because you can find exceptions speaks to selection bias, not the general population at the time. And with regards to severity, Nouriel Roubini not only predicted this level of economic destruction, he's on the record for much worse.
Regarding financial models, some are better than others. My main beef with economists is that they're kind of like quantum physicists -- they've got everyone convinced they're smart, but no one has any idea what they are talking about and the evidence shows that their work isn't applicable. Economic models generally seek "The Grand Equation" that can explain how our economic systems work. However, the simplifying assumptions generally destroy the real predictive power because the science is in the details, not a cute summary equation that gets you a Ph.D. I think it's amusing that the best recent economic work has been done by people showing how the general economic assumptions are false (e.g. rational actors v. behavioral finance theory).
Also this idea that "our models aren't really supposed to predict anything" is bunk. I've created bankruptcy models of companies that were extremely effective at demonstrating not only when but how a company would fail. This was because I spent a great deal of time incorporating the necessary detail required to achieve this. The simplification assumptions that exist in general economic models generally destroy their effectiveness.
I think what you're getting at is that they help to identify the major mechanisms at work and can be effective education tools. I agree, but they shouldn't be in the front lines as economics doesn't get close enough to the front lines of the data and business to be effective.
The recent pointing towards the disconnection between rents and prices is a red herring. The disconnection isn't why prices are coming back down, the lack of extremely loose credit underwriting standards are. There are significant reasons why the price of owning an asset should be much greater than the price of renting it. And I could argue that those reasons have only increased significantly over time. While relative pricing is one variable, it's not the only one and it's certainly not the reason for the current real estate price deflation.
I apologize for the rambling nature of this response, but I don't have time today to edit this.

Looks like someone else is calling into question the value of economists...
http://www.nakedcapitalism.com/2009/01/why-so-little-self-recrimination-among.html

Jeremy Grantham eloquently illustrates the fallacies of modern economic thinking, with another nod to weak assumptions of actor rationality.
http://www.gmo.com/websitecontent/JGLetter_4Q08.pdf