Meta-Theorem 1: When situations seem ridiculous they probably are.
Last year I asked:
'Despite the attempts of my macroeconomic colleagues to convince me all is fine I still find it hard to understand how Australians can be in a sound credit position when 16 years into an economic expansion our credit aggregates are growing at 15.9% annually and our money stocks are growing at 15.4%. This is during a phase where inflation looks like peaking at around 3%'.I have still not heard anything like a sensible answer to this question but I will 'stick my neck out' and make the bold prediction that the answer to this question will, in the medium-term, determine Australia's fate in the current financial crisis. Who needs economists and finance experts? Give me astute taxi drivers anyday. The RBA told us that our low savings rates were an illusion because our investments in the stock market and the capital gains were were earning on our debt-financed love-affair with housing made us, in fact, one of the highest savings countries in the developed world - only the US beat us!
It is not only private sector heads who should roll in the current crisis. The comforting noises made by the RBA were misleading.
Update: To be fair there were many misleading voices. James Galbraith estimates only 2 or 3 out of 15,000 economists in the US foresaw the mortgage crisis. Gregory Mankiw estimates about 10 or 12. we all need to eat a bit of humble pie over this one but macroeconomists should be assigned large slices.