The great financial crisis of 2007–9 was no end of a lesson for the economics profession. Prior to it, hardly any economist drew attention to the global imbalances that had built up in the early 2000s and are now seen as a crucial element in the meltdown. Nor, with a few notable exceptions, did economists spot that the vertiginous growth in financial transactions and in leverage would leave markets highly vulnerable to a downturn triggered by a drop in US house prices.
Economists were not alone in their failure, of course. There has been much heart-searching among bankers and regulators, and even occasionally among the politicians who were cheerleaders for the boom. But for the dismal science it was certainly a wake-up call. The so-called ‘Queen’s Question’ has reverberated around senior common rooms on both sides of the Atlantic. While opening a new building at the LSE, Her Majesty was treated to a short presentation on the crash by Professor Luis Garicano. After listening politely she asked, ‘Why did no one see it coming?’ The British Academy convened a working group in an attempt to provide an answer and wrote at length to the palace. Garicano subsequently defrocked himself and is now leader of the Spanish liberal group in the European Parliament, where he seeks redemption. The rest of the economics profession continues to debate what went wrong.