More on describing the crisis

Rates blog posted another article by me, this time talking about why the GFC persisted.  So in the first one I laid down Fed actions as the catalyst, and in the second one I’ve primarily laid the blame on institutional confusion in Europe.  I’m not sure anyone will find this article, by itself, particularly enlightening.  These first two are both simply descriptive (although with a background structure guiding what I talk about), and their only purpose is to illustrate that the “crisis” itself was kicked off by a sudden change in the expected actions of policy makers, and uncertainty about that action.  This isn’t to say that even with perfect policy we wouldn’t have had a recession – but it is to say that the depth and length of the slowdown that has occurred is related to such policy inconsistency.

So if we live in a world where we have decided that a lender of last resort is required in the case of such a crisis, what does that mean for the rest of the time.  After all such a commitment leads to moral hazard.  I’ll be covering that next week in the conclusion article.

The reason I’ve tied these three articles together as I have is because I wanted to create a clear narrative, and then work out what that suggests from policy – that requires answering a bunch of stylised facts (the timing in the crisis, the length of the crisis) with a central story.  The world is not that simple, and so every movement and every “bad thing” that occurred cannot be explained by such a clear narrative.  But it does allow us to help identify an issue and then understand what this means.

3 replies
  1. Kimble
    Kimble says:

    Wow, Kevin Smith has trimmed down lately!

    But seriously, powerdownkiwi has a good point in comments that you might want to address. He said, and I am paraphrasing here, what does economics matter when the heat-death of the universe is imminent?

    • Matt Nolan
      Matt Nolan says:

      Haha, very good.

      The heat-death of the universe is imminent? Hmm, if only I had been paying proper attention to the physical sciences I could have put this all in perspective! After all, games with long but finite horizons do have very different equilibrium properties to games with infinite horizons.

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