We economists who are steeped ineconomic and financial history – and aware of the history of economic thoughtconcerning financial crises and their effects – have reason to be proud of ouranalyses over the past five years. We understood where we were heading, becausewe knew where we had been.

In particular, we understood that the rapid run-upof house prices, coupled with the extension of leverage,posed macroeconomic dangers. We recognized that large bubble-driven losses inassets held by leveraged financial institutions would cause a panicked flightto safety, and that preventing a deep depression required active officialintervention as a lender of last resort.

Indeed, we understood that monetaristcures were likely to prove insufficient; that sovereigns need to guarantee eachothers’ solvency; and that withdrawingsupport too soon implied enormous dangers. We knew that premature attempts toachieve long-term fiscal balance would worsen the short-term crisis – and thusbe counterproductive in the long-run. And we understood that we faced thethreat of a jobless recovery, owing to cyclicalfactors, rather than to structural changes.

On all of these issues, historically-minded economists were right. Thosewho said that there would be no downturn, or that recovery would be rapid, orthat the economy’s real problems were structural, or that supporting theeconomy would produce inflation (or high short-term interest rates), or thatimmediate fiscal austerity would be expansionarywere wrong. Not just a little wrong.Completely wrong.

Of course, we historically-minded economists are not surprised that theywere wrong. We are, however, surprised at how few of them have marked theirbeliefs to market in any sense. On the contrary, many of them, theirreputations under water, have doubled down on those beliefs, apparently in thehope that events will, for once, break theirway, and that people might thus be induced to forget their abysmal forecasting track record.

So the big lesson is simple: trust those who work in the tradition ofWalter Bagehot, Hyman Minsky, and Charles Kindleberger. That means trustingeconomists like Paul Krugman, Paul Romer, Gary Gorton, Carmen Reinhart, Ken Rogoff,RaghuramRajan, Larry Summers, BarryEichengreen, OlivierBlanchard, and their peers. Just as they got the recent past right, so theyare the ones most likely to get the distribution of possible futures right.

But we – or at least I – have gotten significant components of the lastfour years wrong. Three things surprised me (and still do). The first is thefailure of central banks to adopt a rule like nominal GDP targeting or itsequivalent. Second, I expected wage inflation in the North Atlantic to fall even farther than it has – toward, even if notto, zero. Finally, the yield curve did not steepen sharply for the United States: federal funds rates at zero I expected, but30-Year USTreasury bonds at a nominal rate of 2.7% I did not.

The failure of central banks to target nominal GDP growth remains incomprehensible to me, and I will not write aboutit until I think that I have understood the reasons. As for wages, even withone-third of the USlabor force changing jobs every year, sociological factors and human-networkties appear to exercise an even stronger influence on the level and rate ofchange – at the expense of balancing supply and demand – than I would haveexpected.

The third surprise, however, may be the most interesting. Back in March2009, the Nobel laureate Robert Lucas confidently predicted that the US economywould be back to normal within three years. A normal US economy has a short-term nominalinterest rate of 4%. Since the ten-year US Treasury bond rate tends to be onepercentage point above the average of expected future short-term interest ratesover the next decade, even the expectation of five years of deep depression andnear-zero short-term interest rates should not push the 10-Year Treasury ratebelow 3%.

Indeed, the Treasury rate mostly fluctuated between 3% and 3.5% from late2008 through mid-2011. But, in July 2011, the ten-year US Treasury bond ratecrashed to 2%, and it was below 1.5% at the start of June. The normal rules of thumb would say that the market is nowexpecting 8.75 years of near-zero short-term interest rates before the economyreturns to normal. And similar calculations for the 30-year Treasury bond showeven longer and more anomalous expectationsof continued depression.

The possible conclusions are stark. Onepossibility is that those investing in financial markets expect economic policyto be so dysfunctional that the global economy will remain more or less in itscurrent depressed state for perhaps a decade, or more. The only otherexplanation is that even now, more than three years after the US financialcrisis erupted, financial markets’ ability to price relative risks and returnssensibly has been broken at a deep level, leaving them incapable of doing theirjob: bearing and managing risk in order to channel savings to entrepreneurialventures.

Neither alternative is something that I would have predicted – or evenimagined.