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