Ezra Klein and Dean Baker are wondering why so few economists saw the crisis coming. I think it’s a two part question.

I think it’s understandable, though not entirely forgivable, that economists didn’t see the risks of a broad financial breakdown. We’re accustomed to thinking of banks as big marble buildings with “member of the FDIC” signs in the window; besides, those are the institutions on whom the standard data series report. (Indeed, some economists still fixate on those data, which is why there are still economists denying that there’s a credit crunch.) So neither the size nor the vulnerability of the “shadow” or parallel banking system were widely understood.

The big mystery is the failure to see the housing bubble. The data screamed “bubble”, even in real time. And there was no excuse for believing that such things don’t happen in efficient markets, not with the dead body of the dot-com bubble still warm.

So why did so few people point out the obvious? One answer may be that macroeconomists, in particular, didn’t want to go up against bubble denier Alan Greenspan, which might get them blackballed from Jackson Hole and all that. But overall, the failure to see the most obvious bubble of my lifetime remains a puzzle.