Financial Stability News

Flashing news about financial stability and central banking

Rational irrationality

John Cassidy has a nice story of what we have learned form the crisis in the last issue of the New Yorker. It’s a follow up on a previous article on JM Kenyes which is also now available on line. Really worthwhile reading! According to Cassidy there hasn’t really been any new theories emerging after the crisis, although we certainly have learned some important lessons. These are:

1. Finance matters.

2. Credit busts are different from ordinary recessions.

3. Positive feedback and multiple equilibria have to be taken seriously.

4. Especially in financial markets, self-regarding rational behavior isn’t necessarily socially optimal.

5. Monetary policy doesn’t always work very well.

6. Fiscal stimulus programs don’t provide a panacea for deep recessions, but the alternatives—do-nothing policies or austerity—are much worse

 

 

 

Advertisements

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

%d bloggers like this: