Recession: A Failure of Econometric or Over Reliance on it.

16th September, 2008 the Lehman Brothers' went bankrupt triggering one of the severest economic recession comparable in magnitude and losses to the great depression of 1930s. When the situation is being compared to great depression definitely the recovery and the recession time economics will also be drawn parallel to.The question that has been asked since then is why weren't economists' able to predict it and why was macro economics standing dumbstruck when recession struck.

The problem is that with the advent of econometric economics has gradually drawn parallel with the physical sciences and econometric models assume rationale market where all elements behave in a mechanical pattern. However, in reality economics isn't an exact science and when we deal with market forces we actually deal with individual behaviors at the micro level and these behaviors can be irrational at times. Economics still is more of a behavioral science.

It is true that econometric models were unable to give enough weight to the error components and no model was devised to take into account the trade cycles. When there is a boom all that the market remembers is a boom despite of the fact that the great depression of 1930 hadn't even completed a century. It got over completely only during the second world war with the aid of the boost war provided to US economy. We haven't forgot the Second World War but. we forgot the Great Depression and here it was in 2008 to remind us of the dreaded phenomena.

At the outset it may appear that failure of econometric models allowed Recessions to come unnoticed. However, if we look into the dynamics of economics the fault lies in the fact that economists' excessive reliance on econometric made them believe that it can take care of everything when in reality econometric models aren't meant to be exact as they are dealing with a dynamic environment. Hence, it was on part of economists' to include cyclical and behavioral elements into study. Econometric was never meant to predict recession it was Economics as a subject with its extended domain into history and other interdisciplinary studies, that should have taken care of it.

Thus, it is true that Econometric failed but only because it was bound to fail. However Economics failed because it over relied on one of its components neglecting all other interdisciplinary tools.