The great financial crisis and minor depression from 2008 - present has played out exactly like macroeconomic models predict when a ginormous asset bubble is allowed to expand and then pop. The problem with macroeconomics is that it is a well-developed academic field with non-intuitive phenomena that the general public does not understand. But yet, the public thinks it understands. Much of the rage surrounding the crisis and the political response to it arises from this conflict between "common sense" and nuanced economic models.
One example of the conflict was the bank bailout. Economists and business leaders of all stripes knew that the worst thing you can do in an asset bubble is allow the banks to fail. This is what happened in the great panics of the 19th and early 20th centuries including the Great Depression. Thus, a counterintuitive plan: bail out the very banks that created the collateralized debt obligations on sub-prime loans and the credit default swaps that caused the bubble. The bailout was particularly hard to swallow for all average Joes, myself included, who were up to date on their mortgage payments and had piled on large amounts of debt in the 2000s with the hopes of getting good jobs and paying it all off.
A second example is our current scenario: the liquidity trap. Now the government has created as much liquidity as it can by setting the Fed funds rate at 0%. The Fed cannot stimulate the economy to grow in the traditional way and unemployment has tripled from levels of before 2008, with millions of workers unemployed or underemployed and not searching anymore. Basic macroeconomics calls for stimulus spending by the government to get the economy growing again and to exit the liquidity trap. Demand has fallen off a cliff and needs to rise before the economy can grow again. Ben Bernanke knows what the solution is, but his life has literally been threatened by a political opponent if he attempts to do what he should.
The problem is that "Common Sense" says the government should have a balanced budget, so the Average Joe is out there calling for spending decreases to match the decreased government revenue caused by the Bush Tax cuts and the activation of the government safety net during the economic crisis. If the government decreases spending, it pulls money out of the economy and perpetuates the liquidity trap and the economy continues to spin its wheels (See Great Britain since the conservatives took over).
Now, another problem is that the two sides of the political spectrum no longer play by the same rules.One side deals with problems by weighing all the possible solutions and listening to the best ideas while the other has its own branch of economics funded by think tanks that billionaires independently fund, that tells the same story all the time: low taxes, small domestic government, and no regulation are the answer to every problem in economics.
A third example of the mismatch between common sense and reality, related to the second, is the great fear of inflation amongst the business class, even though inflation is exactly what we need right now to get out of this liquidity trap. For 3 years, armchair economists have been predicting inflation because "the government is just printing money" and "devaluing the currency." This is actually not true, since printing money and lending it to banks are quite different, but yet, for 3 years, the predicted inflation has not happened despite trillions of bank loans and guarantees - just as predicted by settled academic economics from the 1930s.
I have learned a lot about economics since the great recession started but am still no expert. It just all sounds so familiar to what happens in science when the public doesn't understand a complex phenomenon and doesn't like the reality (geology, evolution, climate change, population growth) so a second, parallel field of "academics" is created that will tell the people what they want to hear. Unfortunately, we now have a political field where one side plays to people's fears and misunderstandings of complex phenomena of all stripes: economics, biology, and even physics, while the other party has politicians that understand enough to know what they should do but can't overcome the barriers to explain to the populace why we should do something unpleasant or counterintuitive.
This stuff is all related to my obsession with climate change, habitat loss, population growth, and other examples of the Tragedy of the Commons. Because it is counterintuitive and goes against "common sense," people want to do exactly the wrong thing.
My dad is a lawyer. He once explained his job to me this way: A client comes to me wanting to do something, I tell him not to do it for this, that, and the other reason, then the client does exactly what I told him not to do, and then I try to help him get out of the mess he created. This is the tragedy of fancy thinking. Society knows we need experts and has spent dearly to create the academic institutions that produces those experts, but we often turn around and ignore those fancy experts because we don't really need them. We have common sense.
One example of the conflict was the bank bailout. Economists and business leaders of all stripes knew that the worst thing you can do in an asset bubble is allow the banks to fail. This is what happened in the great panics of the 19th and early 20th centuries including the Great Depression. Thus, a counterintuitive plan: bail out the very banks that created the collateralized debt obligations on sub-prime loans and the credit default swaps that caused the bubble. The bailout was particularly hard to swallow for all average Joes, myself included, who were up to date on their mortgage payments and had piled on large amounts of debt in the 2000s with the hopes of getting good jobs and paying it all off.
A second example is our current scenario: the liquidity trap. Now the government has created as much liquidity as it can by setting the Fed funds rate at 0%. The Fed cannot stimulate the economy to grow in the traditional way and unemployment has tripled from levels of before 2008, with millions of workers unemployed or underemployed and not searching anymore. Basic macroeconomics calls for stimulus spending by the government to get the economy growing again and to exit the liquidity trap. Demand has fallen off a cliff and needs to rise before the economy can grow again. Ben Bernanke knows what the solution is, but his life has literally been threatened by a political opponent if he attempts to do what he should.
The problem is that "Common Sense" says the government should have a balanced budget, so the Average Joe is out there calling for spending decreases to match the decreased government revenue caused by the Bush Tax cuts and the activation of the government safety net during the economic crisis. If the government decreases spending, it pulls money out of the economy and perpetuates the liquidity trap and the economy continues to spin its wheels (See Great Britain since the conservatives took over).
Now, another problem is that the two sides of the political spectrum no longer play by the same rules.One side deals with problems by weighing all the possible solutions and listening to the best ideas while the other has its own branch of economics funded by think tanks that billionaires independently fund, that tells the same story all the time: low taxes, small domestic government, and no regulation are the answer to every problem in economics.
A third example of the mismatch between common sense and reality, related to the second, is the great fear of inflation amongst the business class, even though inflation is exactly what we need right now to get out of this liquidity trap. For 3 years, armchair economists have been predicting inflation because "the government is just printing money" and "devaluing the currency." This is actually not true, since printing money and lending it to banks are quite different, but yet, for 3 years, the predicted inflation has not happened despite trillions of bank loans and guarantees - just as predicted by settled academic economics from the 1930s.
I have learned a lot about economics since the great recession started but am still no expert. It just all sounds so familiar to what happens in science when the public doesn't understand a complex phenomenon and doesn't like the reality (geology, evolution, climate change, population growth) so a second, parallel field of "academics" is created that will tell the people what they want to hear. Unfortunately, we now have a political field where one side plays to people's fears and misunderstandings of complex phenomena of all stripes: economics, biology, and even physics, while the other party has politicians that understand enough to know what they should do but can't overcome the barriers to explain to the populace why we should do something unpleasant or counterintuitive.
This stuff is all related to my obsession with climate change, habitat loss, population growth, and other examples of the Tragedy of the Commons. Because it is counterintuitive and goes against "common sense," people want to do exactly the wrong thing.
My dad is a lawyer. He once explained his job to me this way: A client comes to me wanting to do something, I tell him not to do it for this, that, and the other reason, then the client does exactly what I told him not to do, and then I try to help him get out of the mess he created. This is the tragedy of fancy thinking. Society knows we need experts and has spent dearly to create the academic institutions that produces those experts, but we often turn around and ignore those fancy experts because we don't really need them. We have common sense.
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