Camp Alphaville, the conference held by the Financial Times' finance and markets blog, bills itself as a Glastonbury for financial-types. There are robots, magicians and transhumanists alongside prominent analysts, economists and short-sellers. So it's little surprise that the day involves dissecting some of the more avante-garde ideas currently percolating through financial markets.
One idea that has featured continuously is the limits of traditional economics as a whole.
Claudio Borio, head of the monetary and economic department at the Bank for International Settlements, and who took the stage early this morning in London, criticized traditional economic theory for failing to predict financial booms and busts that can end up having devastating effects. (The talk was extra timely since the BIS this week released its latest opinion of global financial stability warning, amongst other things, that the world had grown over-dependent on monetary policy.)
In the discussion, Borio took aim at the conceptual framework of economics and its inability to predict financial excesses: "At the end of the day the models that we're using in macroeconomics are particularly deficient because they are unable to take into account the [financial] booms and busts."
He added: "I'm not saying the models are wrong, all I'm saying is that the models are incomplete."
When policymakers do spot potential warning signs, he said, they should deploy all policy tools at their disposal including monetary policy, macro prudential and even fiscal. "These financial cycles, as we call them, are very powerful. We have to bring all the levers of ... policy at play," he said. Otherwise we end up in a situation where monetary policy is "crippled" and central banks run rapidly out of firepower, he added.
That sentiment was echoed by Charlene Chu, of Autonomous Research Asia, who spoke in relation to China, where stock markets have been see-sawing for days. She points out that the Chinese central bank announced extra stimulus measures over the weekend, with little to show for it.
Meanwhile, Steve Keen, of Kingston University and the author of Debunking Economics, argues that capitalism is nearing its biggest ever challenge as we head for another bursting debt bubble in China. He thinks the looming crash is one that economists are completely unprepared for given their reluctance to focus on things like credit and banking. He compares the current economics framework with astronomists who once thought the Sun went 'round the Earth, and were resistant to any opposing ideas.
For added effect, he said that completing an economics degrees as the equivalent of a “£9,000 lobotomy”.
Borio, as one might expect, was much more tactful on the subject.
When asked whether the BIS had made much progress in altering its approach to gauging potential financial bubbles since the 2008 crisis, he replied: "If anyone thinks that it's possible to change some deep-seated intellectual beliefs very quickly, then one is of course deluding him or herself."