Abstract
Dominant economic theories were too confident on the efficiency of markets to guide and discipline the private sector, thus they concentrated on providing Governments with advice and rules on how to impose fiscal and monetary prudence. In most developed economies, the lessons paid off: inflation was checked, public debt was put under control and investment flourished. The collapse of communism led to further integration of international markets and a new era of global growth and prosperity seemed to be dawning. Some speculative bubbles appeared and disappeared, but were capable neither of destroying the big moderation of fluctuations nor undermining the prospects of further growth. In such exuberance, explosive external imbalances between over-saving and over-consuming nations went unnoticed for a long time. The global crisis of 2008 was soon reverberated as a crisis in economic theories and several questions on how our understanding of inherent instability can be improved are still pending.
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Notes
- 1.
Their dissemination was facilitated by the publication of Oliver Blanchard’s and Stanley Fisher’s book Lectures in Macroeconomics, in 1989, which became the standard textbook for postgraduate economics programs.
- 2.
The Public Sector Borrowing Requirement (PSBR) set the ceiling for the maximum budget deficit of each fiscal year. Later, PSBR targets were consolidated into a medium term budget policy.
- 3.
These are known as the Maastricht criteria. They required governments to achieve low budget deficit and debt levels (below 3 % and 60 % of GDP respectively), low interest rates and inflation, as well as stable exchange rates. Only inflation is indirectly related to the private sector’s behavior regarding price setting and wages.
- 4.
Some public commentators rushed to exonerate banks and turn the blame on governments by arguing that “this crisis was not caused on Wall Street—it was caused in the White House”; The Spectator (2008, article by D. Sewell). Similar views were expressed by Austrian School economists; see, for example, Balcerowicz, Polish central banker and politician (2010).
- 5.
Alan Greenspan had used the memorable phrase “irrational exuberance” during the dot-com bubble, when he was the chairman of the Federal Reserve.
- 6.
Until the great walls are built, one proposal to mitigate market speculation is to impose a financial transaction tax, as economist James Tobin (NLE 1981) had suggested during the 1970s. The EU Commission recently presented details about the proposed tax.
- 7.
When the expected value of error is not zero, the expectations mechanism is considered problematic and the expectations biased.
- 8.
- 9.
- 10.
This meeting is described in Beinhocker, The Origin of Wealth: Evolution, Complexity, and the Radical Remaking of Economics (2006, p. 45).
- 11.
Quoted by The New York Times, February 18, 1992.
- 12.
Quoted by Mandelbrot, The (mis)Behavior of Markets: A Fractal View of Risk, Ruin and Reward (2008, p. 107). The firm dissolved after the collapse of the Russian bond markets in August 1998. Federal authorities spent 3.6 billion dollars to prevent a fallout.
- 13.
From the word “quantitative”.
- 14.
Patterson, The Quants (2010, p. 138) describes how a band of Quants developed a trading robot aptly called “Midas”. Within 5 years, it had made one billion dollars for the bank hosting it. Competitors lost and accepted the fatal advice “always trust the machine”.
- 15.
Mandelbrot (2008), op. cit., p. 105.
- 16.
Taleb’s book (2010) on the economic consequences of improbable events is aptly titled The Black Swan.
- 17.
Kindleberger, Manias, Panics and Crashes (1978, p. 32).
- 18.
For an account of the impact of procyclical leverage in the recent crisis see Beccalli et al., Leverage Pro-Cyclicality and Securitization in US Banking (2014).
- 19.
For an informative exposition of the 2008 oil and commodity bubble see Khan, The 2008 Oil Price “Bubble” (2009).
- 20.
- 21.
For example, Krugman, The Return of Depression Economics and the Crisis of 2008 (2009).
- 22.
In the words of Cochrane, Lessons From the Financial Crisis (2010).
- 23.
For example, Hanusch and Wackermann, Global Financial Crisis: Causes and Lessons: A Neo-Schumpeterian perspective (2009).
- 24.
For example, by the leader of the third party in Germany (Die Linke); see The Economist (“What would Marx say?”, 15 October 2008).
- 25.
The sense of having learnt from the mistakes of the 1930s was epitomized in 2002 by Fed’s then Governor famous remark “we won’t do it again”. Though finally the 2008 crisis was not avoided, Fed’s policy was way more effective in containing the crisis effects; see Bernanke, On Milton Friedman’s Ninetieth Birthday (2002).
- 26.
Mundell, A Theory of Optimum Currency Areas (1961).
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Christodoulakis, N. (2015). Post 2008: Challenging the Foundations of Orthodoxy. In: How Crises Shaped Economic Ideas and Policies. Springer, Cham. https://doi.org/10.1007/978-3-319-16871-5_14
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