J. Bradford DeLong's Blog, page 324

The Nazi explanation for Stalingrad, as of late 1943: it'...

The Nazi explanation for Stalingrad, as of late 1943: it's all the fault of the Rumanians, and the Italians, and the Hungarians: Heinrich Himmler (1943): Posen Speech: The Necessity of Stalingrad: "The winter of 1941-42, with its consequences, was, on the one hand, the work of Fate, which hit us hard for the first time...

...On the other hand, however, it was the work of the political commissars, the "politruks", whose severity and relentlessness, whose fanatical, brutal will drove the raw material of the Slavic, Mongolian mass man to the front, and didn't let him get back out again.

In early 1942 then came our attacks in the Crimea, over the Donetz to the Don and to the Volga. The bow of the German front and its allies was drawn taut. The war could have been brought to a close for Russia in 1942 if all had held out. Since according to all calculations, and in all probability, which must not be left out of consideration in war, with which one must still reckon after all, the Caucasus would have fallen into our hands sooner or later. Russia would have been cut off from its chief sources of petroleum, and hunger would have handled its people even more roughly than is the case today.

Then came the collapse of our allies. First came the breakthrough among the Rumanians, then the breakthrough among the Italian Army, which was already of very little value even then, then the breakthrough and retreat of the Hungarian units: the total loss of approximately 500 km of front.

This loss required the withdrawal of the German front, in order to be able to close it again at all. This loss made the sacrifice of Stalingrad necessary from the point of view of Fate. It is not our intention to reflect upon every detail here today. I am personally convinced that this sacrifice���that sounds dreadfully harsh when I say so now���was necessary, since, without the link-up of enemy forces around Stalingrad, it would no longer have been possible to close the German front. That will, I am convinced, be the finding of military historical research 10, 15, or 20 years after the war. At the same time, a very late consolation...

#shouldread

The very sharp Doug Rushkoff tries to recall tech to its ...

The very sharp Doug Rushkoff tries to recall tech to its utopian aspirations, rather than its current money-making reality. The fascinating thing is that tech is not very good in reality at money-making for anyone who is not the luckiest of lucky people���yet tech is very good at getting consumer surplus to users, who then use it to build utopia... or dystopia... depending: Doug Rushkoff: Survival of the Richest: "There was a brief moment, in the early 1990s, when the digital future felt open-ended and up for our invention...

...Technology was becoming a playground for the counterculture, who saw in it the opportunity to create a more inclusive, distributed, and pro-human future. But established business interests only saw new potentials for the same old extraction, and too many technologists were seduced by unicorn IPOs. Digital futures became understood more like stock futures or cotton futures���something to predict and make bets on. So nearly every speech, article, study, documentary, or white paper was seen as relevant only insofar as it pointed to a ticker symbol. The future became less a thing we create through our present-day choices or hopes for humankind than a predestined scenario we bet on with our venture capital but arrive at passively. This freed everyone from the moral implications of their activities. Technology development became less a story of collective flourishing than personal survival. Worse, as I learned, to call attention to any of this was to unintentionally cast oneself as an enemy of the market or an anti-technology curmudgeon.

So instead of considering the practical ethics of impoverishing and exploiting the many in the name of the few, most academics, journalists, and science-fiction writers instead considered much more abstract and fanciful conundrums: Is it fair for a stock trader to use smart drugs? Should children get implants for foreign languages? Do we want autonomous vehicles to prioritize the lives of pedestrians over those of its passengers? Should the first Mars colonies be run as democracies? Does changing my DNA undermine my identity? Should robots have rights? Asking these sorts of questions, while philosophically entertaining, is a poor substitute for wrestling with the real moral quandaries associated with unbridled technological development in the name of corporate capitalism...

#shouldread

I am provoked by this. The benchmark of constant research...

I am provoked by this. The benchmark of constant research productivity" defined as the same real dollar expenditure on research produces the same proportional increase in output? I have heard people say that the benchmark should be that the same share of national product spent on R&D should produce the same proportional increase in output. I have heard people say that the benchmark should be that the natural growth in the share of national product spent on R&D should be such as to produce the same proportional increase in output. I have never heard anybody say that the benchmark is that the same real dollar expenditure on research produces the same proportional increase in output: Nicholas Bloom, John Van Reenen, Charles I. Jones, and Michael Webb: Are Ideas Getting Harder to Find?: "One of the key drivers of economic growth during the last half century is Moore���s Law: the empirical regularity that the number of transistors packed onto an integrated circuit serving as the central processing unit for a computer doubles approximately every two years...

...Figure 3 shows this regularity back to 1971. The log scale of this figure indicates the overall stability of the relationship, dating back nearly fifty years, as well as the tremendous rate of growth that is implied. Related formulations of Moore���s Law involving computing performance per watt of electricity or the cost of information technology could also be considered, but the transistor count on an integrated circuit is the original and most famous version of the law, so we use that one here.

A doubling time of two years is equivalent to a constant exponential growth rate of 35 percent per year. While there is some discussion of Moore���s Law slowing down in recent years (there always seems to be such discussion!), we will take the constant exponential growth rate as corresponding to a constant flow of new ideas back to 1971. That is, we assume the output of the idea production for Moore���s Law is a stable 35 percent per year. Other alternatives are possible. For example, we could use decadal growth rates or other averages, and some of these approaches will be employed later in the paper. However, from the standpoint of understanding steady, rapid exponential growth for nearly half a century, the stability implied by the straight line in Figure 3 is a good place to start. And any slowing of Moore���s Law would only reinforce the finding we are about to document.

If the output side of Moore���s Law is constant exponential growth, what is happening on the input side? Many commentators note that Moore���s Law is not a law of nature but instead results from intense research effort: doubling the transistor density is of- ten viewed as a goal or target for research programs. We measure research effort by deflating the nominal semiconductor R&D expenditures of all the main firms by the nominal wage of high-skilled workers, as discussed above. Our semiconductor R&D series includes research spending by Intel, Fairchild, National Semiconductor, Motorola, Texas Instruments, Samsung, and more than two dozen other semiconductor firms and equipment manufacturers. More details are provided in the notes to Table 1 below and in the online data appendix.

The striking fact, shown in Figure 4, is that research effort has risen by a factor of 18 since 1971. This increase occurs while the growth rate of chip density is more or less stable: the constant exponential growth implied by Moore���s Law has been achieved only by a massive increase in the amount of resources devoted to pushing the frontier forward. Assuming a constant growth rate for Moore���s Law, the implication is that research productivity has fallen by this same factor of 18, an average rate of 6.8 percent per year. If the null hypothesis of constant research productivity were correct, the growth rate underlying Moore���s Law should have increased by a factor of 18 as well. Instead, it was remarkably stable. Put differently, because of declining research productivity, it is around 18 times harder today to generate the exponential growth behind Moore���s Law than it was in 1971...

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Event studies are very dangerous tools if you truly seek ...

Event studies are very dangerous tools if you truly seek robust identification for policies that operate through expectational channels: Joseph Gagnon: QE Skeptics Overstate Their Case: "David Greenlaw, James Hamilton, Ethan Harris, and Kenneth West... argued that the consensus of previous studies overstates the effects of quantitative easing (QE) on long-term interest rates...

...conclude that (1) the lasting effect of QE1 was perhaps half as large as some prominent estimates, and (2) the effects of the remaining rounds of QE were either transient or negligible. Their paper relies on the "event study" methodology for measuring the effects of QE.... Arguably, the assumptions are not unreasonable for major news events concerning QE1, but they are clearly violated for subsequent rounds of QE...

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Unfogged

Ogged (2017): We Will Lie Down And Wait For Death To Overtake Us: "What is it with Drum and AI? Even aside from his fervent belief in its imminence, this list is nuts...

LizardBreath: I think Drum is generally very sensible and I take most of what he says very seriously. On AI, I think he was terribly frightened by a toaster or something as a child���he seems so convinced that everything is maximally terrible for no terribly good reason...

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Nikita Sergeyevitch Khrushchev to John Fitzgerald Kennedy...

Nikita Sergeyevitch Khrushchev to John Fitzgerald Kennedy (1963): "We and you ought not now to pull on the ends of the rope in which you have tied the knot of war, because the more the two of us pull, the tighter that knot will be tied. And a moment may come when that knot will be tied so tight that even he who tied it will not have the strength to untie it, and then it will be necessary to cut that knot, and what that would mean is not for me to explain to you, because you yourself understand perfectly of what terrible forces our countries dispose..."

#history
#moralresponsibility
#strategy

N.S. Khrushchev (1962): Letter to President Kennedy, October 26, 1962: "Dear Mr. President: I have received your letter of October 25. From your letter, I got the feeling that you have some understanding of the situation which has developed and (some) sense of responsibility. I value this... <!���more���>

...Now we have already publicly exchanged our evaluations of the events around Cuba and each of us has set forth his explanation and his understanding of these events. Consequently, I would judge that, apparently, a continuation of an exchange of opinions at such a distance, even in the form of secret letters, will hardly add anything to that which one side has already said to the other.

I think you will understand me correctly if you are really concerned about the welfare of the world. Everyone needs peace: both capitalists, if they have not lost their reason, and, still more, Communists, people who know how to value not only their own lives but, more than anything, the lives of the peoples. We, Communists, are against all wars between states in general and have been defending the cause of peace since we came into the world. We have always regarded war as a calamity, and not as a game nor as a means for the attainment of definite goals, nor, all the more, as a goal in itself. Our goals are clear, and the means to attain them is labor. War is our enemy and a calamity for all the peoples.

It is thus that we, Soviet people, and, together with US, other peoples as well, understand the questions of war and peace. I can, in any case, firmly say this for the peoples of the Socialist countries, as well as for all progressive people who want peace, happiness, and friendship among peoples.

I see, Mr. President, that you too are not devoid of a sense of anxiety for the fate of the world understanding, and of what war entails. What would a war give you? You are threatening us with war. But you well know that the very least which you would receive in reply would be that you would experience the same consequences as those which you sent us. And that must be clear to us, people invested with authority, trust, and responsibility.

We must not succumb to intoxication and petty passions, regardless of whether elections are impending in this or that country, or not impending. These are all transient things, but if indeed war should break out, then it would not be in our power to stop it, for such is the logic of war. I have participated in two wars and know that war ends when it has rolled through cities and villages, everywhere sowing death and destruction.

In the name of the Soviet Government and the Soviet people, I assure you that your conclusions regarding offensive weapons on Cuba are groundless. It is apparent from what you have written me that our conceptions are different on this score, or rather, we have different estimates of these or those military means. Indeed, in reality, the same forms of weapons can have different interpretations.

You are a military man and, I hope, will understand me. Let us take for example a simple cannon. What sort of means is this: offensive or defensive? A cannon is a defensive means if it is set up to defend boundaries or a fortified area. But if one concentrates artillery, and adds to it the necessary number of troops, then the same cannons do become an offensive means, because they prepare and clear the way for infantry to attack. The same happens with missile-nuclear weapons as well, with any type of this weapon.

You are mistaken if you think that any of our means on Cuba are offensive. However, let us not quarrel now. It is apparent that I will not be able to convince you of this. But I say to you: You, Mr. President, are a military man and should understand: Can one attack, if one has on one's territory even an enormous quantity of missiles of various effective radiuses and various power, but using only these means. These missiles are a means of extermination and destruction. But one cannot attack with these missiles, even nuclear missiles of a power of 100 megatons because only people, troops, can attack. Without people, any means however powerful cannot be offensive.

How can one, consequently, give such a completely incorrect interpretation as you are now giving, to the effect that some sort of means on Cuba are offensive. All the means located there, and I assure you of this, have a defensive character, are on Cuba solely for the purposes of defense, and we have sent them to Cuba at the request of the Cuban Government. You, however, say that these are offensive means.

But, Mr. President, do you really seriously think that Cuba can attack the United States and that even we together with Cuba can attack you from the territory of Cuba? Can you really think that way? How is it possible? We do not understand this. Has something so new appeared in military strategy that one can think that it is possible to attack thus.

I say precisely attack, and not destroy, since barbarians, people who have lost their sense, destroy.

I believe that you have no basis to think this way. You can regard us with distrust, but, in any case, you can be calm in this regard, that we are of sound mind and understand perfectly well that if we attack you, you will respond the same way. But you too will receive the same that you hurl against us. And I think that you also understand this. My conversation with you in Vienna gives me the right to talk to you this way.

This indicates that we are normal people, that we correctly understand and correctly evaluate the situation. Consequently, how can we permit the incorrect actions which you ascribe to us? Only lunatics or suicides, who themselves want to perish and to destroy the whole world before they die, could do this. We, however, want to live and do not at all want to destroy your country.

We want something quite different: To compete with your country on a peaceful basis. We quarrel with you, we have differences on ideological questions. But our view of the world consists in this, that ideological questions, as well as economic problems, should be solved not by military means, they must be solved on the basis of peaceful competition, i.e., as this is understood in capitalist society, on the basis of competition. We have proceeded and are proceeding from the fact that the peaceful co-existence of the two different social-political systems, now existing in the world, is necessary, that it is necessary to assure a stable peace. That is the sort of principle we hold.

You have now proclaimed piratical measures, which were employed in the Middle Ages, when ships proceeding in international waters were attacked, and you have called this "a quarantine" around Cuba. Our vessels, apparently, will soon enter the zone which your Navy is patrolling. I assure you that these vessels, now bound for Cuba, are carrying the most innocent peaceful cargoes. Do you really think that we only occupy ourselves with the carriage of so-called offensive weapons, atomic and hydrogen bombs? Although perhaps your military people imagine that these (cargoes) are some sort of special type of weapon, I assure you that they are the most ordinary peaceful products.

Consequently, Mr. President, let us show good sense. I assure you that on those ships, which are bound for Cuba, there are no weapons at all. The weapons which were necessary for the defense of Cuba are already there. I do not want to say that there were not any shipments of weapons at all. No, there were such shipments. But now Cuba has already received the necessary means of defense.

I don't know whether you can understand me and believe me. But I should like to have you believe in yourself and to agree that one cannot give way to passions; it is necessary to control them. And in what direction are events now developing? If you stop the vessels, then, as you yourself know, that would be piracy. If we started to do that with regard to your ships, then you would also be as indignant as we and the whole world now are. One cannot give another interpretation to such actions, because one cannot legalize lawlessness. If this were permitted, then there would be no peace, there would also be no peaceful coexistence. We should then be forced to put into effect the necessary measures of a defensive character to protect our interests in accordance with international law. Why should this be done? To what would all this lead?

Let us normalize relations. We have received an appeal from the Acting Secretary General of the UN, U Thant, with his proposals. I have already answered him. His proposals come to this, that our side should not transport armaments of any kind to Cuba during a certain period of time, while negotiations are being conducted���and we are ready to enter such negotiations���and the other side should not undertake any sort of piratical actions against vessels engaged in navigation on the high seas. I consider these proposals reasonable. This would be a way out of the situation which has been created, which would give the peoples the possibility of breathing calmly. You have asked what happened, what evoked the delivery of weapons to Cuba? You have spoken about this to our Minister of Foreign Affairs. I will tell you frankly, Mr. President, what evoked it.

We were very grieved by the fact���I spoke about it in Vienna���that a landing took place, that an attack on Cuba was committed, as a result of which many Cubans perished. You yourself told me then that this had been a mistake. I respected that explanation. You repeated it to me several times, pointing out that not everybody occupying a high position would acknowledge his mistakes as you had done. I value such frankness. For my part, I told you that we too possess no less courage; we also acknowledged those mistakes which had been committed during the history of our state, and not only acknowledged, but sharply condemned them.

If you are really concerned about the peace and welfare of your people, and this is your responsibility as President, then I, as the Chairman of the Council of Ministers, am concerned for my people. Moreover, the preservation of world peace should be our joint concern, since if, under contemporary conditions, war should break out, it would be a war not only between the reciprocal claims, but a world wide cruel and destructive war.

Why have we proceeded to assist Cuba with military and economic aid? The answer is: We have proceeded to do so only for reasons of humanitarianism. At one time, our people itself had a revolution, when Russia was still a backward country. We were attacked then. We were the target of attack by many countries. The USA participated in that adventure. This has been recorded by participants in the aggression against our country. A whole book has been written about this by General Graves, who, at that time, commanded the US Expeditionary Corps. Graves called it "The American Adventure in Siberia."

We know how difficult it is to accomplish a revolution and how difficult it is to reconstruct a country on new foundations. We sincerely sympathize with Cuba and the Cuban people, but we are not interfering in questions of domestic structure, we are not interfering in their affairs. The Soviet Union desires to help the Cubans build their life as they themselves wish and that others should not hinder them.

You once said that the United States was not preparing an invasion. But you also declared that you sympathized with the Cuban counter-revolutionary emigrants, that you support them and would help them to realize their plans against the present Government of Cuba. It is also not a secret to anyone that the threat of armed attack, aggression, has constantly hung, and continues to hang over Cuba. It was only this which impelled us to respond to the request of the Cuban Government to furnish it aid for the strengthening of the defensive capacity of this country.

If assurances were given by the President and the Government of the United States that the USA itself would not participate in an attack on Cuba and would restrain others from actions of this sort, if you would recall your fleet, this would immediately change everything. I am not speaking for Fidel Castro, but I think that he and the Government of Cuba, evidently, would declare demobilization and would appeal to the people to get down to peaceful labor.

Then, too, the question of armaments would disappear, since, if there is no threat, then armaments are a burden for every people.

Then too, the question of the destruction, not only of the armaments which you call offensive, but of all other armaments as well, would look different.

I spoke in the name of the Soviet Government in the United Nations and introduced a proposal for the disbandment of all armies and for the destruction of all armaments. How then can I now count on those armaments?
Armaments bring only disasters. When one accumulates them, this damages the economy, and if one puts them to use, then they destroy people on both sides. Consequently, only a madman can believe that armaments are the principal means in the life of society. No, they are an enforced loss of human energy, and what is more are for the destruction of man himself. If people do not show wisdom, then in the final analysis they will come to a clash, like blind moles, and then reciprocal extermination will begin.

Let us therefore show statesmanlike wisdom. I propose: We, for our part, will declare that our ships, bound for Cuba, will not carry any kind of armaments. You would declare that the United States will not invade Cuba with its forces and will not support any sort of forces which might intend to carry out an invasion of Cuba. Then the necessity for the presence of our military specialists in Cuba would disappear.

Mr. President, I appeal to you to weigh well what the aggressive, piratical actions, which you have declared the USA intends to carry out in international waters, would lead to. You yourself know that any sensible man simply cannot agree with this, cannot recognize your right to such actions.
If you did this as the first step towards the unleashing of war, well then, it is evident that nothing else is left to us but to accept this challenge of yours.

If, however, you have not lost your self-control and sensibly conceive what this might lead to, then, Mr. President, we and you ought not now to pull on the ends of the rope in which you have tied the knot of war, because the more the two of us pull, the tighter that knot will be tied. And a moment may come when that knot will be tied so tight that even he who tied it will not have the strength to untie it, and then it will be necessary to cut that knot, and what that would mean is not for me to explain to you, because you yourself understand perfectly of what terrible forces our countries dispose.

Consequently, if there is no intention to tighten that knot and thereby to doom the world to the catastrophe of thermonuclear war, then let us not only relax the forces pulling on the ends of the rope, let us take measures to untie that knot. We are ready for this.

We welcome all forces which stand on positions of peace. Consequently, I expressed gratitude to Mr. Bertrand Russell, too, who manifests alarm and concern for the fate of the world, and I readily responded to the appeal of the Acting Secretary General of the UN, U Thant.

There, Mr. President, are my thoughts, which, if you agreed with them, could put an end to that tense situation which is disturbing all peoples.

These thoughts are dictated by a sincere desire to relieve the situation, to remove the threat of war.

Respectfully yours,

[s] N. Khrushchev

We really do not know what effect a trade war would have ...

We really do not know what effect a trade war would have on the global economy. All of our baselines are based off of what has happened in the past, long before the age of highly integrated global value chains. It could be small. It could be big. The real forecast is: we just do not yet know: Dan McCrum: Trade tension and China : "The war on trade started by the Trump administration is percolating through the world's analytical apparatus.... Tariffs could be bad for the global pace of economic activity, but only if the economic warfare escalates...

...So think in terms of a toddler taking the shine off a sunny day out, rather than forcing everyone to pack up the picnic and go home. Here's the IMF, from Monday's update to the World Economic Outlook, which still pegs global growth at 3.9 per cent this year and next, but...

The balance of risks has shifted further to the downside, including in the short term. The recently announced and anticipated tariff increases by the United States and retaliatory measures by trading partners have increased the likelihood of escalating and sustained trade actions.��

And:

In the baseline forecast, the direct contractionary effects of recently announced and anticipated trade measures��are expected to be small, as these measures affect only a very small share of global trade so far. The baseline forecast also assumes limited spillovers to market sentiment, even if escalating trade tensions are an important downside risk....

Escalating trade war is bad, in large part due to the let's-wait-and-see effect...

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It has always seemed to me that the sharp Josh Bivens is ...

It has always seemed to me that the sharp Josh Bivens is engaging in some motivated reasoning here: "[1] Putting pen-to-paper on trade agreements contributed nothing to aggregate job loss in American manufacturing. This is almost certainly true.... [2] The trade agreements we have signed are mostly good policy and have had only very modest regressive downsides for American workers. This is false." How am I supposed to reconcile [1] and [2] here?: Josh Bivens (2017): Brad DeLong is far too lenient on trade policy���s role in generating economic distress for American workers on Brad DeLong (2017): NAFTA and other trade deals have not gutted American manufacturing���period: "I could rant with the best of them about our failure to be a capital-exporting nation financing the industrialization of the world...

...our reluctance to properly incentivize the creation and maintenance of the global treasures that are our communities of engineering practice.... A community of engineers, technicians, and businesses that have seen the problems and methods of an industry up close and who know how to solve them is an incredibly valuable and difficult-to-create economic resource. We should not ���protect��� such communities regardless of cost, but we should nurture them.... The US should be running not a trade deficit but a trade surplus, as do the other two leading industrial powers, Japan and Germany.... And in order to run that trade surplus, the US should be facilitating manufacturing production and exports by following not a strong-dollar policy but an appropriate-dollar policy.... But the never-to-be-implemented TPP? NAFTA? And China-WTO? They are not big parts of any picture. They are not a big part of the long-run decline in the manufacturing job share. Indeed, they barely register.... We have not done our proper job in cushioning the incomes of and providing opportunities to those people and communities that have found themselves behind the eight-ball, in sectors flooded by imports as other countries industrialize (especially China). But NAFTA and China-WTO look, to me, like things that have been broadly good for the American economy...

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Nils Gilman:" A largely hereditary elite: "A largely here...

Nils Gilman:" A largely hereditary elite: "A largely hereditary elite is anathema to the principles of meritocracy. But this much must be said: an elite that is secure in its prerogatives has a strong incentive to focus on the care and feeding of the system...

...The old WASP elite, the one @nytdavidbrooks celebrates, felt confident and secure in their privileges. They understood that the system worked well for them, which made many of them prepared to put personal effort into maintaining that system. Pace Brooks, this wasn���t noblesse oblige or the result a wonderful ���culture.��� It was self-interested, but self-interested in a context where there wasn���t much distance between personal interests and societal interests as they understood them. ���Good for General Motors���, QED. One effect of the rise of (partial) meritocracy has been to make incumbent elites feel much less secure about their positions within the system, and especially about their ability to ensure a similar position for their children. This elite insecurity, combined with vastly increased inequality that makes falling out of the elite a desperately bad outcome, makes it locally rational for elites to focus relentlessly on gaming the meritocratic system in order to secure their own position and that of their families. Given the choice of working in ways that create positive externalities for system maintenance, or local optimization for them and theirs, the latter seems like a much wiser choice to many elites.

In a way, this shift can be seen as nastily inverted version of the meritocracy, where the sort of ���merit��� that gets rewarded consists not so much in gaining and applying productive skills, as in a ruthless willingness to commit ���the necessary crimes���. In game theory terms, it���s a prisoner���s dilemma at a systemwide scale���every individual elite has an incentive to game the system for him and his, even though all would be better off if they invested in making the system as a whole better.

In a different theoretical idiom, we can follow Gramsci���s line that this is the central internal contradiction of capitalist reproduction: elites eventually self-deal to the point where they bring the system crashing down around their heads. This is the underlying logic of #PlutocraticInsurgency: personally maximizing even if it means screwing the system. Which naturally creates massive elite irresponsibility toward their fellows. The result is a push toward what we may call a ���Devil Take the Hindmost��� State...

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I would say: "policy was fantastic between Lehman and the...

I would say: "policy was fantastic between Lehman and the trough, grossly subpar after the trough, and ���if you believe the Fed���criminally negligent before Lehman": Niccola Gennaioli and Andrei Shleifer: A Crisis of Beliefs: Investor Psychology and Financial Fragility: "Instability from Beliefs...

...1. Excess optimism, excess lending and investment. 2. Correction of expectations (due to bad news or waning of optimism)/ 3. Recession (impaired intermediation or excess pessimism). Crises are due to non-rational beliefs, which may be amplified by traditional mechanisms. See Minsky (1977), Kindleberger (1978)....

Why was Lehman so pivotal? ��� Tail risks neglected by both investors and policymakers. ��� Liquidity interventions, but no aggressive attempts to get banks to raise capital. ��� Markets learn the system was more interconnected���through derivative contracts and fire sales���than believed. ��� Lehman was a huge dislocation because markets and
regulators learned they were wrong. Alternative Theory I: Moral Hazard ��� Banks are too big to fail and knowingly took risks of housing exposure. Alternative Theory II: Bank Runs ��� Lehman crisis was the result of a Diamond-Dybvig bank run. In a 2015 speech at the National Bureau of Economic Research,
Bernanke stated that ���the Diamond-Dybvig model describes what
happened in the financial crisis extremely well.���...

Hard to see Lehman as a non-fundamental sunspot. ��� Need more sophisticated theories like Goldstein-Pauzner. ��� But then the question of policy passivity comes back. ��� The fragility of the financial sector cannot be surprising in the summer of 2008. ��� Errors in expectations are critical.

Extrapolative expectations central to the housing bubble. ��� Continued neglect of downside risks central to understanding 2007-2008. ��� Policy was fantastic after Lehman, behind the curve before Lehman. ��� Hard to tell the story of the crisis without beliefs.

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