Understanding the Crisis - Markets, the State and Hypocrisy
About 10 years ago there was an important book called Global Finance at Risk, by two well-known economists John Eatwell and Lance Taylor. In it they refer to the well-known fact that there are basic inefficiencies intrinsic to markets. In the case of financial markets, they under-price risk. They don't count in systemic risk — general social costs. So for example if you sell me a car, you and I may make a good bargain, but we don't count in the costs to the society — pollution, congestion and so on. In financial markets, this means that risks are under-priced, so there are more risks taken than would happen in an efficient system. And that of course leads to crashes. If you had adequate regulation, you could control and prevent market inefficiencies. If you deregulate, you're going to maximize market inefficiency.
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"Had I Gone Crazy or Had They Gone Sane?"
Whether it was right or wrong, "Reaganomics" had a logic. Each policy would aim at one problem. Tight money would cure inflation. Low taxes would stimulate saving and work effort. Small government would "crowd in" investment. Free trade would make us efficient. Smart people believed this and they had the authority of respected economists like Milton Friedman and Friedrich von Hayek to back them up.
But now those ideas are dead, buried, abandoned. Deregulation brought us miseries in finance, transport, energy and the climate. Free trade agreements dole out favors to big farmers and big pharma. The financial crisis finished off what was left of monetarism, the idea that the Fed should only worry about inflation. And everyone has given up on waiting for low taxes to unleash the creativity of the ultra rich.
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Economist's View: "The Only Way to Keep the Economy Going Over The Long Run is to Increase the Wages of the Bottom Two-Thirds of Americans"
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