TAP's Tim Fernholz has an outstanding profile of former IMF economist and administration critic Simon Johnson today. You should really read the whole thing, but this in particular is a critical point:
Unfortunately, Johnson posits, the economic specialty that deals with business cycles and recessions -- short-run macroeconomics -- hasn't yet acquired the tools to assess the influence of political interests on their policy proposals. Perhaps unsurprisingly, finance specialists have.Incentives-wise, this makes a lot of sense. Finance types need to take political considerations into account. If they don't they lose money. Academic economics, on the other hand, puts a premium on clean, elegant models, which messy things like interest groups politics only serve to muddy up.'"If you walk into a finance seminar with data pertaining to power and influence, the kind of things we're talking about, they will take you very seriously," Johnson says. "The short-run macro people, not so much."
And this makes for unfortunate policy. Economic policymakers, be they IMF or World Bank economists or CEA chairs or Fed chairs, tend to have cut their teeth in economics PhD programs, where the cult of elegance holds sway. Bankers, by contrast, occasionally have PhDs in economics or physics or other fields that value clean models, but more often than not learn their tricks on the job. They have to; it's a brutal business, and if they aren't taking political factors into account, they aren't going to be maximizing profits for the firm, and they're not going to survive. Even if they go in thinking of politics as some exogenous factor they needn't concern themselves with, they lose the delusion out of necessity.
So you have a setup in which the banks are politically sophisticated and the policy advisors are political naïfs. That's a really easy situation for financiers to exploit to their advantage. And as Johnson has explained, they've done so with relish.
