Who Would’a Known?

Sure, we’re in a financial crisis, but who would’ve known this was going to happen? Would economists have known, even a couple of years back? Would the president have known? As students we’re taught to be proactive and to question the experts, so let’s question them.

But how, as students, are we able to question the experts? Let’s start by what we know about the experts. Economists are hired, both in the private and public sectors, to protect financial assets. So if we want to find out what economists are doing, we have to find them in their hideout: the American Economic Association. In their hideout there’s a database called EconLit. As students at UMass Boston, we have full access to EconLit, and therefore full access to what is going on in the economy.

Or perhaps, that’s the question: How aware are economists of what’s going on in the economy? If, in many cases, economists are charged with protecting the economy then how did the current financial crisis occur? Let’s take ownership of these questions and, with that, this financial crisis. Let’s sneak into the economists’ hideout and see what’s going on.

The EconLit database has a user interface similar to other EBSCO databases (there is of course a difference in content). Researching information in EconLit requires entering search terms into fields, which can narrowed down by delimiters. For example, in researching what was happening in the economy between 2003 and 2007, the search term “economy” could be used, and delimited by “subjects” and range of time. Using “economy” alone, however, might not provide useful results (In fact, doing this got me 74, 212 results—that’s too many.)

Search terms really must be narrowed down to something meaningful and particular, such as “derivatives” and “mortgage-backed-securities.” When searching through actual articles, it is useful to have open a dictionary or second browser, as many subject-specific terms come up, and you are sure to get lost. For me, terms that came up were “pro-rata temporis” and “amortization.” Understand definitions can help out in understanding the articles and the research.

EconLit posts current articles addressing the economic meltdown (even using the term itself), so economists are talking about this topic. But were economists aware of the possibility of an economic crisis, say, five or ten years ago? Using search terms like “mortgage-backed securities” and “derivatives” (and limiting the results to the years between 2000 and 2007) I was able to find articles both domestically and internationally that discuss problems with banks and finance markets. To do a search in this manner enter a term into a field and constrict the year to between 2000 and 2007, as shown in the screen capture. Then select a relevant article from the list generated and go to "full text."

These problems being discussed could have led to the current financial crisis and market failures in the US. For example, an article published about a Korean study on derivatives mentions risky bank lending practices, which currently are being associated with the US mortgage crisis. Dong-Hoon Yang et al state, “The shrinkage of traditional banking, together with increased competition, has forced banks to make loans to less creditworthy borrowers or to engage in nontraditional finance activities that promise high returns but carry greater risk (1).”
 

It seems that Economists were talking about possible precursors to the current financial crisis: After all, we found articles in their database that discussed economic problems. So then the answer to the question is, yes economists would have known. But more importantly, would you have known? Now you can say yes!