The opening of a 25 page paper from Paul Krugman (draft of his lecture for the Picciotto Prize):
What Have We Learned From The Crisis? Paul Krugman September 2016: According to most chronologies, the global financial crisis began in July 2007, when BNP Paribas closed withdrawals from two of its funds, the modern equivalent of a bank shutting its doors. By early 2008 the financial panic had translated into a global recession; in September 2008 the failure of Lehman turned it into a free fall. And the aftershocks are still very much with us: although the free fall ended in mid-2009, growth rates thereafter were generally lower than growth pre-crisis, so the world economy has never made up the lost ground.
At this point, then, we’re talking about an 8- or 9-year and counting episode, which is longer than the famous era of stagflation in the 1970s and early 1980s. The costs of the crisis and post-crisis slump were also much larger than those of the stagflation era, with steeper and more prolonged drops in income, more unemployment, more social and political disruption.
But here’s a funny thing, striking to those of us of a certain age – that is, old enough to have already been studying or doing economics in the 70s. Stagflation had a huge impact on economic thinking, both at the level of academic research and on conventional wisdom among policymakers. The global financial crisis and the recession/stagnation that followed seem to have had much less impact. To a remarkable extent, economists and economic policymakers are still saying the same things in 2016 that they were saying in 2007. For some reason, there doesn’t seem to be a clear consensus about what, if any, lessons we should draw from years of terrible economic performance.
Yet I would submit that there are some very important lessons for those willing to see them, and those lessons are what I want to talk about in this lecture.
I was tempted, when I began writing up my thoughts here, simply to present a checklist of things we have learned or should have learned since 2007. It seems to me, however, that it’s helpful to put some more structure on the discussion, and I ended up with three main categories of things we should have figured out by now given the past 9 years’ events.
First, we’ve seen a lot of vindication for old, unfashionable ideas – oldies but goodies that got deemphasized, and in some cases effectively blackballed, in the decades following the 1970s, but have turned out to be remarkably useful practical guides to policy and its effects in the post-crisis world.
Second, there have been some revelations about financial markets, especially the role of liquidity and the failure of arbitrage when you need it most, that have definitely changed how I see the world, and have important policy implications.
Third, we’ve made some important and uncomfortable discoveries about the politics and sociology of economics itself – about the resistance of both the economics profession and public officials to changing their views in the face of contrary information. As you might expect, I will end this lecture with a plea for doing better. But let that wait; right now, I want to get into the substance of what went down, how that compared with what we should have expected, and what we should learn from the difference. ...[continue]...