I have stated here already that I have problems with Paul Krugman's analysis of what went wrong with macro, most notably his nearly total ignoring of the analysis made by many heterodox economists. However, the inflamed reply by John Cochrane has been a joke. He presents himself as speaking for "the economics profession" rather than just a narrow group of Chicago-based or inspired economists. He is the expert, and Krugman supposedly makes trivial technical errors such as not distinguishing CAPM from Black-Scholes, etc. So, I decided to see how wise Cochrane is by going back to look at his widely praised (including even by Robert Shiller: "impressive treatise of very high quality" and "can also serve as a textbook in an advanced finance course") 2001 book published by Princeton University Press, _Asset Pricing_. On what has happened in the last few years, it is utterly useless.
In the index I went to find the following words/phrases: "fat tails" "kurtosis" "leptokurtosis." They are not there, even though pretty much all practitioners and a large literature already existed discussing how to explain the ubiquity in practically all asset markets of exactly those phenomena. He has a big fat zero to say about them, nothing.
I did find "bubbles," which he discusses briefly near the end of the book (pp. 399-402). He seems to recognize that they might exist, but his discussion is strictly in terms of "rational bubbles" and cites Peter Garber ("Tulipmania" JPE, 1989) on how they are not econometrically identifiable (and later says they do not explain empirical variations of price/dividend ratios; oh, and Garber). The model of rational bubbles he discusses supposedly must go on forever, which he then sneers at because "Infinity is a long time...The solar system will end at some point." Somehow he ignores the Blanchard-Watson 1983 paper on stochastically crashing bubbles, which indeed crash in finite time after rising at an accelerating rate to provide a risk premium for the ever-rising probability of the inevitable crash. Ironically, this last model lies at the base of the forecasting model used by econophysicist Didier Sornette and his associates, whose not-too-bad recent forecasting record on crashes is ultimately based on estimating the moment that such a process (complicated by oscillations) blows to infinity.
Oh, and Peter Garber is also wrong, see "Complex bubble persistence in closed-end country funds," by Ehsan Ahmed, Roger Koppl, me, and Mark V. White, Journal of Economic Behavior and Organization, Jan. 1997, 32(1), 19-37, although the basic insight that one can identify the fundamental by the net asset value of a closed-end fund and thus can identify increases in price of the fund above its NAV as a bubble had been made by many others prior to us. So, it is simply ridiculous of Cochrane to have ignored this point as well (he does recognize on p. 408 that some such funds trade regularly at discounts but never mentions that some have shown massive increases in price above NAV or that this clearly shows the existence of a bubble).