Some Controversial Aspects of the Financial Meltdown of 2008
Abstract: History repeated itself in 2008. As so many times in the past from 1637 onward a combination of gullibility, greed, and strong ideological commitment that limited insight into developments in the financial sector a major crisis swept over the advanced economies of the world. Why can’t we avoid making the same mistakes over and over again? The Great Meltdown happened at a time when most macroeconomists (including Nobel Prize winner Bob Lucas as well as none other than the current Fed Chairman Ben Bernanke) were writing about the “Great Moderation,” i.e., that business cycles have vanished for all practical purposes. They were obviously dead wrong along with thousands of their colleagues. The Queen of England famously asked why those responsible for financial stability failed to see such a big bubble coming. This the talk focuses on four aspects of the crisis that are often skirted in formal presentations: 1) the role of ideology in why Greenspan and Bernanke overlooked the coming of the crisis; 2) who were the Cassandras whose warnings were disregarded; 3) the counterfactual policy that would have done a better job of rescuing not only Wall Street but also Main Street and would have avoided what according to Paul Krugman has become a “sour economy” six years into the crisis; and 4) what are the prospects for the U.S. economy for the foreseeable future.
