PrestoPundit

BLAME TEXTBOOK MACROECONOMICS.

Posted by PrestoPundit on 10/06/2008

Yes, blame textbook macroeconomics.  David Walsh on the embarrassment which is the modern macroeconomic textbook:

How peculiar is it that the leading
introductory economics texts scarcely mention the cycles of manias,
panics and crashes that have been a familiar feature of global
capitalism since its emergence in the seventeenth century?  ..

The
failure to give recurring financial crises a more prominent place in
its undergraduate texts is .. embarrassing, or so it
seems to me. Kindleberger was of the opinion that both Keynesian
orthodoxy and monetarism were incomplete because they left out credit
cycles altogether ..

He was right. Last summer, Olivier
Blanchard, of the Massachusetts Institute of Technology, author of the
leading intermediate macro text .. observed in a survey of
macroeconomics that the New Keynesian orthodoxy that, for the past
twenty years or so had constituted the mainstream textbook view, had,
with respect to asset prices, fallen “short of the mark.” The
conventional view, in which banks are presented as institutions that
have no equity capital and merely perform arbitrage in interest rates,
was misleading. 

It had become vividly clear, he wrote, that financial institutions do matter, and that shocks to their capital or liquidity positions can be potentially seriously damaging to macroeconomic health  .. 

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