To contact the author of this story: Noah Smith at nsmith150@bloomberg.net, To contact the editor responsible for this story: James Greiff at jgreiff@bloomberg.net. While some allegations can be dismissed as irrelevant or intellectually vulgar (that economists did not foresee the timing of the crisis or that their theories are too abstract), have there been more serious failures? These are important innovations, and they address glaring deficiencies in the pre-2008 models. After the crisis, bashing the economists has become a fashionable sport. The housing bubble that peaked in 2006, the financial crisis of 2008, and the Great Recession that followed constitute another crisis. What economists still don't get about the 2008 crisis. (Bloomberg Opinion) -- Macroeconomics tends to advance — or, at least, to change — one crisis at a time. Another important insight from the Great Recession was that traditional monetary policy isn't always enough to stabilise the economy - when interest rates hit zero, other measures are needed. As New Keynesian pioneer Jordi Gali noted in a recent summary, there has been much work figuring out how New Keynesian models can deal with zero interest rates. They want to impose a very quantitative model on the economy to make it seem more scientific and easier to understand and thus to engineer. Gennaioli and Shleifer explain these patterns by turning to their own preferred theory of human irrationality — the theory of extrapolative expectations. Rouse is a labor economist and head of Princeton University’s School of Public and International Affairs. Gennaioli, Shleifer, and their coauthors have been only one of several teams of researchers to investigate this idea and its implications in recent years. So far, however, it has produced mostly evolution, rather than revolution, in economists' conception of the business cycle. The credit crisis resulting from the bursting of the housing bubble is an important cause of the Great Recession in the United States. @business: What economists still don’t get about the 2008 crisis. Another important insight from the Great Recession was that traditional monetary policy isn’t always enough to stabilize the economy — when interest rates hit zero, other measures are needed. Photo: Bloomberg What economists still don’t get about the 2008 crisis 4 min read. In general, the notion that economic booms cause busts, instead of being random unrelated events — an idea advanced by the maverick economist Hyman Minsky — seems to have much more currency beyond the ivory tower than within it. Another is a 2016 paper by Matthew Baron and Wei Xiong, showing a similar result for bank lending instead of corporate bonds. Save. Jul 30 2018, 4:30 AM Jul 30 2018, 6:23 PM. Voices I was one of the only economists who predicted the financial crash of 2008 – in 2017 we need to make urgent changes. She's based in London, while I'm in New York. But of all the ideas being put forth in the field, this seems like the most interesting to watch. Bookmark. It would represent a triumph for Minsky's ideas, and for those outside the academy who have long urged macroeconomists to pay more attention to debt markets and human psychology. They pile into the asset, pumping up the price even more, and seeming to confirm the idea that the trend will never end. New Scientist asked six leading economists … What Economists Still Don’t Get About the 2008 Crisis. There has also been much work on making the models more realistic by taking into account of the big differences among consumers and companies. But of all the ideas being put forth in the field, this seems like the most interesting to watch. There was immediately a flurry of activity, as economists hastened to shoehorn finance into their standard models. Gennaioli, Shleifer, and their coauthors have been only one of several teams of researchers to investigate this idea and its implications in recent years. A third recent paper, by David Lopez-Salido, Jeremy Stein, and Egon Zakrajsek, adds term spreads to Greenwood and Hanson's list of forecasters, and find that together these indicators give a decent amount of warning about recessions two or three years down the road. There was immediately a flurry of activity, as economists hastened to shoehorn finance into their standard models. So far, however, it has produced mostly evolution, rather than revolution, in economists’ conception of the business cycle. The U.S. economy post-Covid-19 will look a lot like the one that struggled to recover from the 2008-09 financial crisis –- only in some ways worse. To lots of people, it seems obvious that the 2008 crisis was long in the making — the product of years of financial and regulatory folly. It discards two pillars of recent macroeconomic thought — rational expectations, and shock-driven unpredictable recessions. When they inevitably come down, banks collapse, taking the rest of the economy with them. Summary of “What Economists Still Don’t Get About the 2008 Crisis” The stagflation of the 1970s led to the development of real business cycle models, which saw recessions as the efficient working of the economy, and central bank meddling as likely only to cause inflation. How to build a fair and green economic system after covid-19. As the 2008 Global Crisis was unfolding, the public – both general and academic – began criticising economics and finance scholars for failing to anticipate it. The Great Depression discredited the idea that economies were basically self-correcting, and the following decades saw the development of Keynesian theory and the use of fiscal stimulus. She served on the CEA from 2009 to 2011, … But that period of turmoil permanently altered the U.S. economy and the financial system. The stagflation of the 1970s led to the development of real business cycle models, which saw recessions as the efficient working of the economy, and central bank meddling as likely only to cause inflation. If you read through the old monetarist research, you see that change in money supply has a better correlation with … The painful recessions of the early 1980s saw a shift to so-called New Keynesian models, in which monetary policy is the central stabilising force in the economy. To shed further light upon my understanding of the financial crisis, I connected with Piya Sachdeva, an economist at Schroders, where I work. So far, Gennaioli and Shleifer’s story isn’t close to achieving dominance in macro. Opinion. So far, Gennaioli and Shleifer's story isn't close to achieving dominance in macro. What Economists Still Don’t Get About 2008 Crisis - Bloomberg. That fits with the emerging post-crisis wisdom that problems in credit markets are the source of both financial crashes and the ensuing economic slowdowns. One of these is a 2013 paper by Robin Greenwood and Samuel Hanson, showing that when junk bond issuance increases and credit spreads narrow, a credit bust often tends to follow two or three years later. Noah Smith is a Bloomberg Opinion columnist. But they don’t feel like a big break with the status quo. I've been reading through Anna Schwartz's papers on monetary economics and I think they're the real story on what economists still don't get about the 2008 crisis. Bloomberg. 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