Niall Ferguson (who is trying his hand at economic history now), points out the obvious trends that don't seem to gain traction in much of what we regard as economic analysis. Much of this sounds familiar to trends I've been pointing to:
Systems thinking:
From the 1980s until 2007, the world economy had enjoyed higher, more widespread growth and fewer, less severe crises – hence Federal Reserve chairman Ben Bernanke’s hubristic celebration of a “great moderation” in 2004. On the other hand, the more the world came to resemble an intricate, multi-nodal network operating at maximum efficiency – with minimal inventories and just-in-time delivery – the more vulnerable it became to a massive systemic crash.
On the potential failure of outdated theory:
“We assumed that we economists had learned how to combat this kind of crisis,” admitted one of President Barack Obama’s “dream team” of economic advisers, shortly after his return to academic life in September 2009. “We thought that if the Fed injected enough liquidity into the financial system, we could avoid deflation. We thought if the government ran a big enough deficit, we could end a recession. It turned out we were wrong. So much for [John Maynard] Keynes. So much for [Milton] Friedman.”
A nod to the solvency crisis and the paradox of debt/thrift:
With total debt above 350 per cent of US gross domestic product, the excesses of the age of leverage proved difficult to purge. Households reined in their consumption. Banks sought to restrict new lending. The recession deepened. Unemployment rose towards 10 per cent, and then higher. The economic downward spiral seemed unstoppable. No matter how hard they saved, Americans simply could not stabilise the ratio of their debts to their disposable incomes. The paradox of thrift meant that rising savings translated into falling consumer demand, which led to rising unemployment, falling incomes and so on, ever downwards.
Hiding loses (preventing markets from working):
The crux of the problem was the fundamental insolvency of the major banks, another reality that policymakers sought to repress. In 2008, the Bank of England had estimated total losses on toxic assets at about $2.8 trillion. Yet total bank writedowns by the end of 2008 were little more than $583bn, while total capital raised was just $435bn. Losses, in other words, were either being massively understated, or they had been incurred outside the banking system.
The rest of article is an interesting prediction (with a EOY 2009 time horizon) of American resurgence. Fairly sure it's not supported by the trends (cited above), but hey, it is a good read regardless.
Ferguson started as an economic historian ( see his 2 vol. Rothschilds bio that covers the evolution of European finance - great book) and switched to diplo. Econ history is not a great topic for book sales though it's often vital for getting the diplo history right
Posted by: zenpundit | January 01, 2009 at 12:21 PM