Economics 101: Everything you know is wrong
Pete McMartin with thge aid of the son of J K Galbraith decides to go after academic economists who failed to predict the size of the crash.
But the he also quotes Alan Greenspan
“I made a mistake,” Greenspan told a congressional committee, “in presuming that the self-interests of organizations, specifically banks and others, were such as that they were best capable of protecting their own shareholders and their equity in the firms.”
I do not see that economics is at fault. I think the problem is, has been and continues to be, the blind pursuit of a political theory that says markets work best when they are deregulated. And that is what Greenspan said too. After the 1931 banking crisis a lot of new regulations were brought in to prevent that sort of thing happening again. The failure of Reagonomics was already apparent in the great Savings and Loan scandal – but exactly the same policy was applied to banking. And it wasn’t just that the academic economists did not understand the extent and complexity of the debt issues – obviously most of the people who were buying and selling them did not understand either. Or, more believably but not yet proven in court, the people who were profiting from this giant Ponzi scheme, knew very well that it was a house of cards and fraudulently went on pumping out worthless financial instruments and vastly enriching themselves.
What I still do not understand is why this behaviour was then rewarded with $700bn of US taxpayers’ money.
In any event, economists in universities were not in charge or even being given much regard in the irrational exuberance of the run up in the bubble. Everybody knows that these things are unsustainable, but cannot resist the opportunity to make a quick killing when it seems that it is easy to buy low and sell high. And the course of economic history is littered with examples of bubbles and what happens when they burst.
And in academia there has long been a debate between “the Chicago boys” and the Keynesians – and it was the latter who have been pointing out that the problem with the right wing policy nostrums was that there was plenty of evidence that they did not work.
By the way, if you did attend Economics 101 and managed to stay awake you would not have heard one word about derivatives. That is study material for graduate students in research programs.