Crisis Economics

“Crisis Economics” Replaces the “Efficient Markets Hypothesis”

If you think the “Great Recession” of 2008 and 2009 was unique, think again. It was strikingly similar to a long list of financial meltdowns, from the South Sea Bubble of 1720 and the crash of 1825 to the Great Depression, the 1980s US savings and loan debacle, and the Japanese Lost Decade of the 1990s.

While the details change from crisis to crisis, the broad outlines are the same. In the run-up, easy credit abounds. Consumers, investors and business owners embrace optimism and leverage themselves recklessly. Negligent regulators, asleep-at-the-wheel central bankers and enabling politicians prime the pump of speculative excess as financial innovation creates new ways to invest in the craze of the moment. After the most recent crisis, details emerged about bankers’ and traders’ outsized paychecks as well as about arcane derivatives, imprudent securities backed by subprime mortgages. Believing that Wall Street greed has reached new levels is tempting, but, in fact, the greed level hasn’t changed. Instead, a new breed of bonuses based on short-term profits raised greed’s payoff. The more-interconnected nature...