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As I walked away from the podium after being roundly criticized by a number of luminaries (with a few notable exceptions), I felt some unease. It was not caused by the criticism itself, for one develops a thick skin after years of lively debate in faculty seminars: if you took everything the audience said to heart, you would never publish anything.
A much wider cast of characters shares responsibility for the crisis: it includes domestic politicians, foreign governments, economists like me, and people like you. Furthermore, what enveloped all of us was not some sort of collective hysteria or mania. Somewhat frighteningly, each one of us did what was sensible given the incentives we faced. Despite mounting evidence that things were going
wrong, all of us clung to the hope that things would work out fine, for our interests lay in that outcome. Collectively, however, our actions took the world’s economy to the brink of disaster, and they could do so again unless we recognize what went wrong and take the steps needed to correct it.
Responsibility for some of the more serious fault lines lies not in economics but in politics. Unfortunately, we did not know where all these fault lines ran until the crisis exposed them. We now know better, but the danger is that we will continue to ignore them. Politicians today vow, “Never again!” But they will naturally focus only on dealing with a few scapegoats, not just because
the system is harder to change, but also because if politicians traced the fault lines, they would find a few running through themselves.
We have long understood that it is not income that matters but
consumption.
Cynical as it may seem, easy credit has been used as a palliative throughout history by governments that are unable to address the deeper anxieties of the middle class directly.
But when easy money pushed by a deep-pocketed government comes into contact with the profit motive of a sophisticated, competitive, and amoral financial sector, a deep fault line develops.
Excessive rural credit was one of the important causes of bank failure during the Great Depression.
the ability of these countries to supply the goods reflects a serious weakness in the growth path they have followed—excessive dependence on the foreign consumer. This dependence is the source of the second fault line.
essentially, their own financial systems were based on fundamentally different principles from those of their financiers, and the incompatibility between the two, the source of the fault line, made it extremely risky for them to borrow from abroad to support investment and growth.
propinquity,
In politics, economic recovery is all about jobs, not output, and politicians are willing to add
stimulus, both fiscal (government spending and lower taxes) and monetary (lower short-term interest rates), to the economy until the jobs start reappearing.
that although quarrels are more likely in an unequal society, striving to
rectify the inequality may precipitate the very conflict that the citizenry wants to avoid.
Among the institutions it created initially were the Home Owner’s Loan Corporation (HOLC) and the Federal Housing Administration (FHA).
It could well be that voters shaped political action (much as markets shape corporate action) rather than the other way around.
But the gap between government intent and outcomes can be very wide indeed, especially when action is mediated through the private sector.
Before the dramatic increase in spending during the Great Depression,
